Sales and Accounts Receivable Audit Program (Word)

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Sales and Accounts Receivable Audit Program (Word) Powered By Docstoc
					Contributed September 10, 2001 by <alfred.li@cn.pwcglobal.com>

Objective

Risk

Key Controls Credit and collections policies and procedures are established

Testing Steps Obtain and review credit and collections policies and procedures and ensure the followings are outlined:  Standard terms and conditions of payment  Levels of authority to vary standard customer terms and conditions  how prospective customers are assessed for credit  who has the authority to set and amend credit limits  how and when overdue accounts are controlled and followed up  when to turn delinquent accounts over to a third party / lawyer for collection  levels of authority to override the charging of interest and penalties Review collection policies and procedures and ensure responsibility, timing and actions to be taken on overdue accounts are clearly defined.

Findings & Recommendation

W/P Ref.

Credit and collection Proper credit In consistent credit and and collection collection procedures procedures have increase possibility of been established bad debts and delay in and compliance cash flow. is assured.

Unclear responsibility and vague collection procedures increase risk of bad debts.

Policies and procedures clearly defined the responsibility, timing and actions to be taken on overdue accounts.

Objective

Risk Incompetent employees increase possibility of bad debts and delay in cash flow.

Key Controls Full time trained dedicated credit and collection staff is employed and proper training is provided.

Testing Steps Obtain departmental organisation chart and discuss with department head to ensure adequate resources are deployed and staff have been trained on: – how to manage and collect receivables – understanding the standard terms and conditions Review DOA and ensure DOA defines different authority for approving credit limits in the following circumstances: – generic credit limits based on credit ratings – overrides to the formula Note the following incompatible duties are segregated:  accounts receivable  credit control  collections  order entry  invoicing  cash receipts  credit notes  stock custody/delivery  general accounts

Findings & Recommendation

W/P Ref.

Unauthorised sales.

Clearly defined DOA for approving credit limits.

Fraudulent activities in credit and collection process.

Proper segregation of functions should be installed.

Objective

Risk Insufficient customer credit information to support credit rating.

Key Controls All credit applications and essential information such as the nature and size of customers’ businesses, and their bank and trade references and the results of trade inquiries should be documented.

Testing Steps  Review customer credit files and ensure all customer information is available to support the credit ratings.  The rating is then used for: – defining DOA authority levels (i.e. for unblocking credit holds according to credit ranking – setting monetary credit limits – assigning priorities for collection efforts – focusing monitoring and credit reviews of higher risk customers – provision of better credit facilities to lower risk customers Review new customer files to ensure these new customers are assessed against credit standards.

Findings & Recommendation

W/P Ref.

Sales to delinquent customers and increase bad debts.

All new customers are assessed for their credit standing regardless of apparent standing.

Objective

Risk Unauthorised sales which exceeded credit limits.

Key Controls  Credit limits are reviewed periodically based on a predefined schedule based on the ratings.  Changes in credit limits are approved by management in writing and with supportings.

Testing Steps  Discuss with management about the interval of customer credit rating assessment.  Review assessment file and check whether the followings are available to support the revision of credit: – obtaining a copy of the latest accounts – performing a detailed financial analysis – understanding the: - history of the business - experience of management - owners and their financial resources – conducting a site visit to the client – obtaining bank, trade and credit agency references, where available – completion of a credit appraisal form Select _____ samples of transactions, note for transactions that broke the credit limits by documenting previous credit standing and current credit standing after accepting the transaction and credit excesses were approved by higher level management in writing prior to the related order was processed.

Findings & Recommendation

W/P Ref.

Individual orders that would cause the total outstanding balance to exceed the credit limit are rejected and flagged for attention.

Objective

Risk Disputes due to ineffective communication.

Key Controls Terms and conditions are communicated to customer when an account is opened and related payment terms and methods are specified in sales invoices.

Testing Steps  Review customer credit application form and ensure payment method is specified on the documents.  Review invoices and ensure payment terms and due dates are clearly and accurately displayed on the invoices. Note: Post-dated cheques are only accepted under extraordinary circumstances and with the approval of senior credit or financial management.

Findings & Recommendation

W/P Ref.

Objective

Risk Delay in collection increases risk of bad debts.

Key Controls Prompt collection action is taken when pre-determined warning signal appears.

Testing Steps  Discuss with collection staff to ensure prompt collection actions are taken when more than one of the following signals is noted about a customer: – slower payments or changes in payment habits – broken promises of payment – unreturned messages – postdated or NSF checks – changes in customer banks – unauthorised return of merchandise – radical changes in buying patters – customer selling at unusually low prices  Review delinquent customer files and note whether collection action have been taken when warning signal appeared.

Findings & Recommendation

W/P Ref.

Objective

Risk Bad debts.

Key Controls High risk accounts are not approved unless security is provided.

Testing Steps  Review 10 high risk customer files and note whether security is provided, such as:  cash  bank guarantee  standby letter of credit  corporate guarantee  personal guarantee  mortgage  deposit  retention of title clauses Discuss with credit staff and ensure credit staff monitor the followings for each guarantee:  current value (when assets are pledged)  financial situation of guarantor.

Findings & Recommendation

W/P Ref.

Credit staff monitors the guarantees continuously.

Objective

Risk

Key Controls Collection processes are clearly specified.

Testing Steps Review collection policies and procedures and ensure: - invoices are issued with terms net 30 days on the day of sale, delivery of service or completion of milestone, - pre-collection calls to customers are required before the receivable is due to confirm that: - everything is satisfactory - the invoice has been received, and - terms are understood - customers with past due invoices are called ten days after the due date Review debt collection records to ensure the following information: - dates and details of calls and correspondence to customers, - details of when payments were promised, and - last payments received.

Findings & Recommendation

W/P Ref.

Lost of collection information.

Documentation on debt collection must be kept.

Objective

Risk Slow reaction increase risk of bad debt.

Key Controls Credit report should be prepared and reviewed by management so that actions can be taken immediately to prevent loss.

Testing Steps Review management reports to ensure they are prepared and reviewed monthly (or more frequently) detailing: - receivables aged analysis, including significant past due balances, accounts in dispute and claims by customers - customer balances which exceed credit limits - overdue customer accounts - customer accounts that regularly fall overdue - credit balances - unallocated cash   Discuss with management/employees about the updated practice. Select __ samples of receipts from receipt logbook and trace to respective receivable sub-ledgers for updating in a reasonable time frame.

Findings & Recommendation

W/P Ref.

Incorrect receivable balances.

Account clerk updates accounts receivable balances upon receipt within a reasonable time period.

Objective Pricing Standard price is maintained with proper approval.

Risk Unauthorised sales with improper selling prices.

Key Controls Management should approve standard price list and any subsequent changes.

Testing Steps  Review standard price list to ensure it’s approved by appropriate level of management. Review standard price list and ensure changes to price lists, pricing data, and discounts are approved by authorised personnel and, where computerised, subject to access control. Discuss with related personnel on the updating of standard price list and who can access to the price list. Review price list to ensure only personal with authority can perform the changes. Ensure whether a sales order logbook is used to log all customer purchase orders.

Findings & Recommendation

W/P Ref.

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Selling price entered to price master file by Finance staff based on authorised revised price list.

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Sales ordering A proper sales order system is established.

Understatement of sales.

Sales order logbook should be used to log all customer purchase order, both verbal and written.

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Objective

Risk Unauthorised sales with improper terms and conditions or exceeding credit limits.

Key Controls  Sales orders are made in accordance with authorised terms and conditions.  Credit limit is checked at the time of order.  Non-standard terms are approved with appropriate management.  Write access and edit to sales order file is limited to authorised personnel. Sales order number is generated by system or prenumbered. Missing sales order has been investigated. Approval should be obtained for order modification. Modified or cancelled order should be timely communicated to production department. Orders modification or cancellation should be timely updated in the sales order file.

Testing Steps Select sales orders and perform the following: – Check sales orders are authorised; – Check supporting document for credit check, i.e., sales is accepted only if credit limit has not been exceeded.

Findings & Recommendation

W/P Ref.

Sales orders incomplete.

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Scrutinise sales order file for any duplicate or missing orders. Discuss with management and confirm that sales order can only be accessed by designated employees.

 Unauthorised sales.  

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Check monthly report of changes in sales order file has been reviewed by management. Select sales order modification or cancellation, perform the following: Check proper approval; Check update in sales order file; Check timely communication to production department.

Objective Goods delivery Goods are shipped with authorisation.

Risk Improper shipment.

Key Controls  All delivery should be reference back to sales order or contract and approved. Delivery Notes are prenumbered. Credit manager should verify all delivery prerequisite before release of goods. Customer credit limit has been checked before delivery authorised. Customers should sign on Delivery Notes as evidence of goods receipt.

Testing Steps Select Delivery Notes and match to related sales order by reference of sales order number, perform the following: – Check product shipped agreed with product ordered; – Check quantity shipped is less than or equal to quantity ordered; – Check customer in sales order and Delivery Note are the same; – Check customer acknowledgement of receipt; – Investigate any unmatched transactions.

Findings & Recommendation

W/P Ref.

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Sales invoicing All sales should be recorded accurately on a timely basis.

Sales incomplete.

Sales invoices are sequentially controlled. Sales invoices are prepared based on terms and conditions from sales orders or contracts and information from Delivery Notes.

Scrutinise sales invoice files and note for duplicate or missing invoices. Select ____ sales invoices and trace to related sales orders, Delivery Notes, agree price, quantity and terms and conditions on sales invoices to sales order and Delivery Notes.

Inaccurate billing and understatement of sales.

Objective

Risk Understatement of sales.

Key Controls Sales should be recognised upon physical delivery.

Testing Steps  For above sales invoices selected, check whether sales invoice dates are the same as dates on Delivery Notes.  Review shipping Log and identify goods shipped that have not been invoiced. For above sales invoices selected, check whether appropriate management approves sales invoices. Review 3-month sales journals and scrutinise for any missing invoice number.

Findings & Recommendation

W/P Ref.

Unauthorised sales invoices. Understatement of sales.

Management approves sales invoices. Sales journal should be reviewed periodically for numerical sequencing. Missing invoice numbers should be investigated. Access to invoice and credit note functions is restricted to authorised personnel.

Credit notes and adjustments Returns and Unauthorised invoicing allowance and credit note issuance. should be controlled, documented and recorded. Credit notes incomplete.

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 Credit notes are sequentially controlled. Written authorisation should be given to customers to permit the return of goods when appropriate.

Discuss with management and confirm with MIS that invoicing and credit note functions are restricted to authorised employees. Observe that invoicing and credit note function is password controlled.

Review ____ batches of credit notes, each has 10 copies, note for sequential numbering. Review returned reports and note for management approval with justification and conditions of the goods in writing.

Authorised customer returns.

Objective

Risk Unauthorised credit notes.

Key Controls Credit notes are approved by senior management on a requisition setting out the reasons for the credit note. Open file of unmatched receiving reports should be reviewed periodically to identify valid but unprocessed claims.  Cash receipts are set off accounts receivable on a timely basis. Cash receipts match to individual sales invoices. Unidentified cash receipts analysed and cleared periodically. Receipts are banked in promptly.

Testing Steps Review ____ credit notes and note for proper justification, supporting (e.g., receiving report, quality report) and management approval. Review open file of unmatched receiving reports to identify any long outstanding unprocessed claims.

Findings & Recommendation

W/P Ref.

Inaccurate sales.

Cash receipts Receipt is identified and recorded on a timely basis.

Delay in recording of receipts and receipt misappropriation.

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Discuss with receivable accountant about the practice. Review the unidentified cash suspense account and note for material and long outstanding unmatched receipts. Selected _____ cash receipts from bank statements and check account receivable has been promptly credited and verify cash is applied to individual invoices.

Objective

Risk

Key Controls  Customer statements are mailed periodically to customers and disputes/queries are investigated on a timely basis and monitored by a responsible official. Ageing report is prepared and reviewed by management. All overdue balances are reviewed, at least quarterly, by a senior official and appropriate provisions determined. Accounts receivable status should be reviewed periodically. Provisions are calculated in accordance with approved procedures. Bad debt write-offs are properly approved by authoritative staff.

Testing Steps  Discuss management action towards long outstanding and disputes/queries invoices. Check customer statements have been sent on a timely basis. Review ageing report and monthly investigation report on long outstanding receivable and note management follow-up action documented in writing, in particular, responsibility, follow-up steps and evaluation, etc.

Findings & Recommendation

W/P Ref.

Accounts receivable A/R balance is Overstatement of accurately receivables and bad stated. debts.

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    Discuss with management about the provision procedures. Ensure provision procedures are in compliance with corporate policies. Check bad debt write-off authorisations.

Overstatement of receivables due to inadequate write-offs or provision for doubtful debts.

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