Manual of Procedure for Conducting an Accounts Receivable Audit in a

Merchandising Business with Installment Sales

Introduction

 Purpose: This manual outlines the procedures for auditing accounts receivable in
a merchandising business that sells products on an installment basis.
 Scope: The audit will cover the evaluation of the accounts receivable process,
installment sales agreements, collections, and related internal controls.

1. Pre-Audit Planning

 Understanding the Business: Gain a comprehensive understanding of the

business, its credit policies, and the nature of its installment sales.
 Risk Assessment: Conduct a preliminary risk assessment focusing on areas such
as credit risk, collection processes, and revenue recognition.
 Document Request List: Prepare a list of documents needed for the audit
including sales ledgers, installment agreements, collection records, and aging
reports.

2. Examination of Installment Sales Agreements

 Verification of Agreements: Examine a sample of installment sales agreements

for completeness and compliance with internal policies.
 Terms and Conditions: Review the terms, interest rates, and payment schedules
of the agreements.
 Authorization: Verify that all agreements have been properly authorized.

3. Verification of Accounts Receivable Ledger

 Reconciliation: Reconcile the accounts receivable ledger with the general ledger.
 Aging Analysis: Perform an aging analysis to identify overdue accounts and
assess the adequacy of the allowance for doubtful accounts.
  Sample Testing: Select a sample of accounts for detailed testing to verify the
accuracy of balances.

4. Review of Revenue Recognition

 Compliance: Ensure revenue from installment sales is recognized in accordance

with applicable accounting standards.
 Deferred Revenue: Examine the treatment of deferred revenue and its
appropriateness.

5. Assessment of Collection Process

 Collection Policies: Evaluate the effectiveness of collection policies and

procedures.
 Follow-up Procedures: Review the process for following up on overdue
accounts.
 Write-off Procedures: Assess the policy and procedure for writing off
uncollectible accounts.

6. Internal Control Evaluation

 Control Environment: Review the control environment surrounding accounts

receivable and installment sales.
 Segregation of Duties: Assess the segregation of duties between billing,
collections, and recording transactions.
 Authorization Controls: Evaluate controls over credit approvals and adjustments
to accounts receivable.

7. Testing for Irregularities

 Fraud Detection Procedures: Apply procedures to detect any fraud or

manipulation within accounts receivable.
 Unusual Transactions: Investigate unusual or large transactions, particularly
those occurring near period-end.

8. Compliance with Accounting Standards

 GAAP or IFRS: Verify that accounts receivable and revenue recognition comply
with Generally Accepted Accounting Principles (GAAP) or International Financial
Reporting Standards (IFRS).
  Disclosure Requirements: Review the adequacy of disclosures related to
accounts receivable and installment sales.

9. Reporting

 Drafting the Audit Report: Prepare a detailed report of findings, including any
discrepancies, weaknesses in internal controls, and non-compliance with policies.
 Recommendations: Provide recommendations for improvements.
 Discussion with Management: Discuss the findings and recommendations with
management.

10. Post-Audit Follow-Up

 Action Plan: Develop an action plan with management to address findings.

 Review of Implementation: Schedule a follow-up review to assess the
implementation of recommended changes.

Appendices

 Sample Forms and Templates: Include sample audit forms, checklists, and aging
report formats.
 Legal and Regulatory Framework: Outline relevant legal and regulatory
requirements affecting accounts receivable and installment sales.