Substantive Audit Procedures for Accounts Receivable

Audits are internal and external reviews of a company’s financial information. Companies use audits to ensure that their financial information is accurate and represents the true nature of financial transactions. Accounts receivable is the money client and consumers owe to a company. Auditors use substantive audit procedures to test the balances of accounts receivable. Substantive audit procedures are direct tests using specific information from a company’s accounting system and financial statements.

The first step in auditing a company’s accounts receivable process is to examine the original information. Auditors usually pull a sample of clients or customers from a company’s account receivables ledger and review the original information that resulted in the current balance. This is an important step because a company can easily create fraudulent accounting balances by simply adding fake clients and receivables balance to bolster its financial statement. Reviewing the original sales information will prove to the auditors that a sales on account actually occurred, resulting in the accounts receivable balance.

Auditors will usually interview the employees who handle customer accounts to determine how well the company operates. Accounting employees may have to verify the receivables information and ensure that the customer’s paperwork includes sufficient backup. Interviewing these employees can also help auditors determine how much training they receive in the accounts receivable process. A lack of employee training may indicate the potential for errors to occur in the accounts receivable process.

Another important audit procedure is contacting the company’s major clients and requesting the client to verify their accounts payable amounts owed to the company. Auditors match this external information to the company’s internal information. Variations in the dollar amounts require further tests or more information to determine why the variations occurred. Auditors will usually review several months of accounts receivable transactions to determine how well the company operates over an extended period of time.

Testing the payoff process for accounts receivable is another important part of the auditing process. Auditors review when the company was paid for goods and services and how long it took the company to apply the receipts to the open accounts receivable balance. Variations between the amount paid and the amount owed must be justified by the company. Auditors may need to review the company’s bank statements to completely source check deposits.