When auditing accounts receivable, auditors must show that financial statements are prepared under GAAP, or Generally Accepted Accounting Principles, and in accordance with applicable financial accounting standards issued by the Financial Accounting Standards Board (FASB). Auditors will seek evidence that debtors are recoverable, there are bona fide amounts at issue due from independent third parties and that sales are recorded in the correct period. Auditors undertake a number of pre-designed tests to demonstrate that the amounts receivable are materially correct as stated or will seek to adjust the value.
Verification of After-Date Cash Receipts
Auditors will spend considerable time looking at after-date cash receipts. After-date in this context refers to after the balance sheet date. Auditors will be looking at monies received and the allocation of these funds. Analyzing cash received after the balance sheet date serves to confirm the value and recoverability of the debt receivable as of the balance sheet date. Materiality will be in use here as the auditor wants to demonstrate that he has verified a certain percentage of the debt as recoverable. Materiality is subjective and is set by the auditor himself.
After-Date Sales Credit Note Review
Auditors will examine the sales credit notes issued after the balance sheet date. Again, materiality will be a factor. Auditors must identify any after-date sales credit notes that relate to invoices raised on or before the balance sheet date. The total sum of these credit notes will be netted off, or used to reduce, accounts receivable balances as stated in the financial statements and against turnover if the amounts are material in value.
Testing of General/Sales Ledger Accounts
Sales ledger accounts are also subject to testing. Auditors will be looking for any unusual transactions showing up on the accounts. Unusual, in this context, include large value items when compared with the average value of transactions, customer accounts that have a high volume of transactions, entries that are repeatedly entered and reversed, and new customer accounts with a high value of trading. The audit trail will be studied to ensure that the double entry for the transactions is correct.
Auditors will pick a sample of sales invoices to test. The test will involve verifying the items listed on the sales invoices and checking the additions and cross-casts. A selection of delivery notes will be checked for delivery confirmation and to ensure that sales and debts are recorded in the correct period. Auditors will use financial ratios/analytical review. The level of debts recoverable versus annual sales will be measured and compared to the previous year’s results. Any substantial movement in the percentage of debt to turnover will be questioned with management and may warrant further investigation should explanations prove unsatisfactory.
Verdon Sims is a professional writer whose work can be seen on Accounting Software Zone, PPI Claims and a number of other specialist websites. Sims loves to write about technical topics. He is a Fellow of the Association of Chartered Certified Accountants based in the U.K.