Running a business comes with many challenges, and one of the biggest is ensuring you get paid on time. Late payments, incorrect records, and overlooked opportunities to improve cash flow can lead to serious problems, such as financial stress, report errors, and legal risks. These are issues no business wants to face.
But there’s a solution: a thorough audit of accounts receivable. By performing an audit of accounts receivable, you can make sure your records are correct, find out if there are any risks, and improve how your business runs.
In this guide, we’ll explain the steps in auditing accounts receivable, why it’s so important, and how it can help your business.
Overview of Accounts Receivable Audit
An accounts receivable audit is a process where businesses check and verify the money their customers owe them. When a company sells something on credit, the customer can pay later. The business will record this amount as accounts receivable in their books. The audit ensures that the business correctly tracks this money and that customers will pay it.
During the audit, an accountant will carefully review the records of all the payments the company expects to receive. They will also check whether the business has followed all the correct account management procedures. This includes making sure the right amounts are listed and that no mistakes or fraud have happened.
Why Audit of Accounts Receivable Matters
Auditing accounts receivable is vital for a few key reasons. A thorough AR audit helps:
- Spot Mistakes: The audit helps ensure your records match the actual payments you’ve received. If there’s a mistake, it can be found and fixed.
- Improve Cash Flow: When you spot customers who haven’t paid or are late, you can act quickly to get the money they owe. This helps keep the business’s cash flow healthy.
- Ensure Accuracy: The audit makes sure the numbers in your financial records are correct. This way, you know exactly how much money people owe your business.
- Strengthen Processes: An audit can show if there are any weak points in how you bill customers or collect payments. Once you know where the problems are, you can fix them and make things run more smoothly.
Important Aspects of Auditing Accounts Receivable
When auditing accounts receivable, there are a few essential steps to follow. Let’s break them down:
Understanding the Accounts Receivable Cycle
The accounts receivable cycle includes selling products or services to customers and receiving payment for those sales. It starts when a business sells something on credit (meaning the customer will pay later) and ends when the customer pays the bill.
Here’s how it works:
- Sales Order: The business makes a sale and creates an order.
- Delivery or Service: The product is delivered, or the service is provided to the customer.
- Invoice: The business sends an invoice to the customer, asking them to pay within a specific time.
- Payment: The customer sends the money they owe, completing the cycle.
Auditors need to understand this cycle because it helps them check if every step is compliant. They will look at records to make sure each step is properly followed and that the amounts owed by customers are accurate.
Assessing Internal Controls and Risk Management
Internal controls are the rules and procedures a business uses to make sure everything is done right, and risk management is how a company tries to avoid problems. When auditing accounts receivable, it’s important to check if the business has strong internal controls to protect its finances.
The auditor will look at things like:
- How bills are sent: Are invoices sent to customers on time and correctly?
- Who handles payments: Are the people responsible for collecting payments following the rules and not making mistakes?
- How records are kept: Is the business keeping accurate records of the money owed and the payments received?
Auditors also assess risk management, which means checking if the business is ready for any problems that could happen. These involve customers not paying on time or the business being unable to collect debts.
How do you Perform an Audit of Accounts Receivable?
Performing an audit of accounts receivable means checking the records to see if everything is correct. Here’s how auditors do it, step by step:
1. Review the Accounts Receivable Records
First, the auditor will review all the records of the money the business expects to receive. These records typically appear in the accounts receivable ledger. The auditor will check if the amounts listed match the customer invoices. They’ll make sure the amounts and the dates are accurate.
2. Verify the Invoices
The next step is to check the business’s invoices to customers. The auditor will make sure:
- The right amount is listed on each invoice.
- The invoice matches the sales order (this shows that the goods or services were delivered).
- The payment terms are clear (like when the customer needs to pay).
- If everything matches, the business has a good record of what customers owe.
3. Check for Payments Received
After checking the invoices, the auditor will look at the payments the business has received from customers. They will check the bank statements or cash receipt records to make sure the payments are correctly recorded. The auditor will flag if the company has received money but still needs to update its records.
4. Look for Unpaid or Late Accounts
Next, the auditor checks if there are any unpaid or overdue accounts. If some customers haven’t paid for a long time, the auditor will ask why. Are these customers likely to pay soon? Or is there a risk they won’t pay at all? Auditors may recommend that the business set aside money for debts that might never be collected (an inadequate debt provision).
5. Test Internal Controls
The auditor will also test the internal controls—the business’s rules and processes to manage its accounts receivable. For example, they might check:
- Who is responsible for sending invoices and collecting payments?
- If there’s a system to make sure payments are collected on time.
- If there are checks in place to prevent errors or fraud (like someone else reviewing payments before recording them).
6. Confirm Balances with Customers
Sometimes, the auditor will send letters to customers to confirm how much they owe. This is called confirmation. The customer will check the amount they owe, and if everything matches, it proves that the records are correct.
7. Review the Aging Report
The aging report shows how long customers have owed the money. The auditor will review this report to see if any accounts are overdue. Accounts overdue for a long time might be risky so the auditor will note any issues affecting the business’s finances.
By following these steps, the auditor can check if the business’s accounts receivable are accurate, whether customers are paying on time, and if the company is managing its finances well. This process helps the industry ensure they don’t lose money and that everything runs smoothly.
Procedures for Evaluating Accounts Receivable
When auditors evaluate accounts receivable, they check if a business’s money yet to be received is accurate and if the company is likely to get paid. Here’s how they do it:
Verification of Receivables
Verification means checking if the amounts the business expects to receive are correct. Auditors will review the accounts receivable records to make sure everything adds up. They’ll look at the list of customers who owe money and check if the amounts are properly recorded.
To verify the receivables, auditors may:
- Check invoices: They make sure the invoices match the sales records.
- Confirm payments: They’ll also look at bank statements or payment records to see if customers have already paid.
- Send confirmations: Sometimes, auditors will send letters to the customers asking them to confirm how much they owe. This helps make sure the numbers are correct.
Assessing Allowance for Doubtful Debts
Not all customers will pay their bills on time—or at all. Some debts might be problematic to collect, so businesses create an allowance for doubtful debts. This amount of money is set aside to cover debts that may never get paid.
The auditor will check if the business has enough money for doubtful debts. They’ll review:
- How old the debts are: If a debt has remained unpaid for a long time, it’s less likely to be paid, so the business may need to set aside more money.
- The customer’s payment history: If a customer does not pay on time, the auditor may suggest the business set aside more money for that account.
- The overall amount of doubtful debts: The auditor checks if the business is realistic about how much money it might not collect.
The goal is to ensure the business expects only a little money from customers who might never pay. By assessing the allowance for doubtful debts, the auditor gives the company a realistic view of its finances.
Improving Accounts Receivable Processes
After an accounts receivable audit, auditors often advise on how a business can improve its processes. Here are some important areas they focus on to help a business run better and make sure everything is in order:
Audit Findings and Recommendations
After the audit, the auditors will share audit findings. These could be things like:
- Mistakes in the records.
- Customers who haven’t paid on time for too long.
- Weak points in the process of collecting payments.
The auditors will also give recommendations. These are suggestions for how the business can fix these problems. For example, they might suggest better ways to track payments or new rules for following up with customers who are late to pay. By following these recommendations, the business can make sure everything works smoothly.
Enhancing Operational Efficiency
Operational efficiency means making sure that the business is doing things in the most effective way possible. If a business spends too much time or money on managing accounts receivable, it can hurt its profits.
To improve efficiency, auditors might suggest things like:
- Automating the billing process: Using software to send out invoices automatically can save time and reduce mistakes.
- Streamlining the collection process: Setting up reminders for customers to pay on time or offering discounts for early payments can help the business collect money faster.
- Training staff: Teaching employees the best ways to manage accounts receivable can help reduce errors and improve customer service.
By improving operational efficiency, businesses can save time and money.
Regular Reconciliation and Documentation
Reconciliation is the process of checking if the records in the accounts match the actual payments received. Businesses should regularly compare their accounts receivable records with bank statements to make sure everything matches. If there are any differences, the company can fix them right away.
Documentation is also necessary. The business should keep clear and organized records of all invoices, payments, and customer communications. Good documentation helps prevent mistakes and is essential if the company ever needs to prove that a customer owes money.
Auditors will recommend that the business reconcile its accounts regularly, at least once a month so they can catch any problems early. Keeping proper documentation is key to having accurate records.
Staying Compliant with Financial Reporting Standards
Businesses need to follow specific rules called financial reporting standards. These rules ensure that financial information is clear and accurate so everyone (from customers to investors to the government) can trust the business’s records.
The auditor will check if the business follows these rules and complies with the proper accounting practices. If the business is not following the standards, the auditor will recommend changes to make sure the company’s financial statements are accurate and reliable.
Common Challenges in Accounts Receivable Audits
During an accounts receivable audit, auditors often encounter challenges that can make the process harder. Here are some of the most common issues they find:
- Overstated Receivables or Unreported Liabilities
Overstated receivables happen when a business records more money owed to it than it should be. This can make the business look healthier than it is. For example:
- A business might mistakenly include a payment that has yet to be received.
- They could forget to account for a customer who won’t pay because they are in financial trouble.
Unreported liabilities occur when the business fails to document debts properly or amounts it owes. For example, if a business owes money to a supplier but hasn’t recorded it, it could make it seem like it has more money than it does.
These issues can make it hard for the business to get a clear picture of its financial health. Auditors must find and fix these problems to ensure the business has accurate records. The company might make decisions based on incorrect information if it overstates receivables or leaves out liabilities.
- Discrepancies Between Financial Statements and Customer Statements
Another common challenge in accounts receivable audits is discrepancies (or differences) between the business’s financial statements and what customers say they owe. This can happen for a few reasons:
- The customer may have already paid, but the business hasn’t recorded the payment in its accounts.
- There could be an error in the way the business calculates how much the customer owes.
The business and the customer must resolve these differences to agree on the amount owed. If the company doesn’t catch these discrepancies, it could lead to confusion and even customer disputes.
How Peakflo Helps with Audits for Accounts Receivable
Peakflo helps businesses manage their accounts receivable more easily. When it comes time for an audit, Peakflo can make the process faster, more accurate, and less stressful. Here’s how it helps:
Automates Invoice Creation and Sending
One of the first steps in managing accounts receivable is creating and sending customer invoices, which can be time-consuming if done manually. Peakflo helps businesses by automatically creating and sending invoices. No invoices get lost or forgotten, and the business can track who owes them money. When it’s time for an audit, all the invoices are in one place, making it easier for auditors to verify the amounts owed.
Tracks Payments in Real-Time
Peakflo tracks payments in real-time and keeps a record of when customers pay their bills. It is helpful for an audit because auditors can quickly check if payments have been received and matched to the correct invoices. If customers miss any payments or record them incorrectly, Peakflo makes it easy to spot and fix the issues quickly.
Centralized Financial Data
Peakflo organizes all financial data in one place. This includes the amounts customers owe, when payments are due, and which customers have paid or are overdue. With everything in one place, businesses can see their accounts receivable at a glance, simplifying the audit process. Auditors can quickly check whether the business’s records match the payments received and ensure they track the correct amounts.
Track Audit Trails with Timeline
Peakflo makes tracking audit trails easy by automatically recording every action taken with accounts receivable. Someone can quickly find the information if they want to check how a payment was processed. The audit trail shows a clear history, so there are no surprises. It helps businesses stay transparent and accurate during an audit.
Helps with Managing Overdue Accounts
When customers pay late, tracking who owes money and for how long can be tricky. Peakflo automatically sends reminders to customers about overdue payments and helps businesses stay on top of the customers’ pay, making resolving issues during an audit easier. Auditors can see which accounts are overdue and whether the company is taking the necessary steps to collect payments.
Improves Financial Reporting
Peakflo helps businesses generate precise and accurate financial reports. These reports can be easily shared with auditors, showing exactly how much money the company is yet to receive, what payments the business has received, and what accounts remain outstanding. Accurate reports make it easier for auditors to review the business’s accounts receivable and check if everything is correct.
Cash Application
Peakflo helps businesses automatically match payment remittances with bank statements and invoices. This way, payments are always linked to the proper account. It saves time, reduces errors, and makes the audit process smoother. When auditors look at the accounts receivable, they see that every payment is applied correctly.
Payment Reconciliation
Peakflo helps businesses by automatically matching incoming payments with their records. It makes sure cash is posted to your accounting system with proper codes in real-time. It makes audits of accounts receivable and month-end closing faster and reduces the risk of mistakes.
Reduces Human Error
Manual processes like entering payments or creating invoices can lead to mistakes. Peakflo helps reduce human error by automating these tasks. With fewer mistakes in the records, auditors have fewer issues to find, making the audit process smoother and more efficient.
Conclusion
An audit of accounts receivable is essential for any business looking to maintain financial stability. By following the steps outlined above, you can ensure that your AR processes are accurate, efficient, and compliant with the relevant standards.
From preparing your records to reviewing your credit policies and collection procedures, every step plays a role in minimizing risks and improving your business’s financial position.
Peakflo’s automated solutions help businesses like yours save time, reduce errors, and maintain a healthy cash flow! Schedule a demo to learn more!
