Businesses conduct financial audits annually to ensure that the financial statements are consistent and recorded adequately. Accounts receivable are a significant business asset, and financial auditing will determine whether the collected amount is reasonable. It is a time-consuming activity to audit accounts receivable, and it is performed to check financial fraud. Besides internal audits, there are external audits conducted by the government to scrutinize your taxable revenue and identify potential errors that may result in fines. To audit your accounts receivables effectively, this blog offers tips and best practices to perform actual audits.

Accounts Receivable Auditing Explained

Whether conducted internally or externally, accounts receivable auditing involves a thorough inspection of the financial documents, including the income statement and balance sheet of the company. In this audit, the auditors will verify accounts and ensure that the ledgers are consistent and there is no fraud or that the actual data is reflected in the company's financial reports. It assesses the organization's cash flow, verifies accounts receivable, and evaluates the promptness of customer invoice payments.

Ways to Audit Your Accounts Receivable

There are many ways and procedures to audit the accounts receivable of your company. Some common ways to audit are reviewing the income statement, balance sheet, general ledger, accounts receivable ageing reports, and other reports of the company. You will need to audit manually if you don't have an automated B2B payments system. To manually audit your accounts receivables, you must ensure you share your bookkeeping practices, including excel spreadsheets and other reports. Following are the ways to audit accounts receivables.

1).Verifying the Accounts Receivable Ledgers for Accuracy

This procedure confirms whether the AR ledger is correct and adequately recorded by the finance teams of the company. It details all the customer invoices and bills for a specific period. The process starts with auditors adding and matching each invoice on the report to ensure it totals correctly. If there are any discrepancies, they must be resolved. Though the process seems straightforward, it takes longer to conduct an audit.

2. Verifying the AR Ledger to Match with the General Ledger

The AR ledger is compared to the general ledger to ensure it totals accurately. This procedure demonstrates that the AR adds to the total balance reported on the balance sheet and general ledger. Failure to match the totals brings doubts and increases the risks of fraudulent activities or errors on the ledger. Sometimes, a small error can be considered a missed journal entry.

3. Verifying the Accuracy of AR Journal Entries in General Ledger

This procedure ensures that each journal entry is accurately reported in the general ledger. Journal entries are sometimes adjusted in the account to maintain the ledger, but you must have supporting documents to verify it.

4. Verifying Invoices to Match with Shipping Logs

Here, you match the invoices with the shipping logs to confirm that they match the total. If the invoices fail to match with shipping logs, there is a likelihood of a miss-posted entry. You must audit the invoices and ensure they were delivered and recorded in your ledgers. Recording sales in the incorrect period is another common issue found when auditing invoices with shipping logs.

5. Verifying Customer Accounts with Accounts Receivable Balances

This is another essential verification test to ensure customer accounts are consistent with the AR balances. Often, when dealing with large customer balances, a random sampling of other client balances can be mistakenly recorded in the customer's account. Lack of accounts receivable automation solutions leads to such issues. An independent verification is required to confirm with the customer and come to a resolution. This will help verify the account with AR balances.

6. Verifying Cash Receipts of Accounts Receivables

Similar to customer verification, this step verifies the receipts of accounts receivables. When you have a cash receipt, it indicates that the collection was valid and accurate. One can also match the bank statement with the company's cash deposits to compare whether it matches the record. This verification step is a backup of the previous step in auditing accounts receivable.

7. Verifying and Reviewing the Doubtful Accounts

Sometimes, there are accounts that are not paid, often referred to as allowance for doubtful accounts or contra accounts. This is an estimate that a company writes off, but it requires a valid justification. A perfect way to test this is by having the accounts manager describe the process. With this analytical review, one can determine whether any changes are required. Auditors can also review other documentation to find a justified explanation for doubtful accounts.

8. Verifying the Bad Debt Percentage Written During the Period

Finance teams often write bad debts that are uncollected payments from a customer or a customer who fails to pay, regardless of the reason. This bad debt is written off, and auditors verify it to make sure that the bad debt is not excessive. To determine this, auditors will compare the bad debt of this period to previous years. It needs to be justified if there is a large discrepancy between the current and the previous year's bad debt.

9. Verifying the Accuracy of Credit Memos

Like customer invoices, the auditors must review the credit memos. Instead of checking entire credit memos, they are randomly selected and reviewed to ensure that the sales are accurately recorded. It is imperative to conduct a thorough and meticulous review of credit memos issued after the conclusion of the audit period.

10. Verifying Overall Accuracy of Accounts Receivable

As a part of the accounts receivable review, it is essential to verify the accuracy of the accounts through analytical ratios. One effective way to perform this review is by comparing accounts receivable as a percentage of sales for similar periods. This helps identify trends or potential issues that may require further investigation.

Effortless Auditing with Accounts Receivable Automation Solution

With an automation solution, you don't have to wait for auditing and conduct it manually because this solution helps you keep your ledgers consistent. Electronic bookkeeping and recording of your transactions increase traceability, so you can highlight and track potential errors. Automation replaces human errors by replacing manual data entry, improving the accuracy of financial reports and statements.

An automation solution can help you with auditing procedures because you don't need to manually verify your invoices, bills, shipping logs and account balances. All this is performed on a single platform, eliminating the need to match from disjointed systems. However, automation doesn't replace humans and small internal audits every month are essential to ensure that your balances and entries are aligned.