ACCOUNTS RECEIVABLE/
COLLECTIONS AUDIT WORK
PROGRAM
EXECUTIVE SUMMARY
The accounts receivable process is a critical financial function that involves managing the company's outstanding
customer balances, invoicing, and collections. This process is important because it directly impacts the company's
cash flow and profitability.
A standard accounts receivable process begins with the creation of invoices and the delivery of goods or services
to the customer. Once invoices are generated, they are sent to the customer for payment.
After the invoices are sent, the company monitors customer payment behavior and follows up on any overdue
payments. This may involve sending payment reminders, making phone calls, or even engaging the services of a
collection agency.
The ultimate goal of the accounts receivable process is to collect payment from customers in a timely manner,
while also maintaining positive relationships with them. This requires a delicate balance of the need for timely
payment with the need to provide excellent customer service.
To effectively manage the accounts receivable process, companies should establish clear policies and
procedures for invoicing, collections, and payment tracking. Investing in technology and systems that can
automate and streamline these processes will also help reduce the risk of errors and improve efficiency.
Overall, the accounts receivable process is a vital aspect of a company's financial operations, and it requires
careful attention and management, including periodic audits, to ensure optimal cash flow and profitability.
This KnowledgeLeader tool includes two sample work programs created to help organizations complete an audit
of the accounts receivable/collections process. The audit steps within each sample cover an expansive range of
project phases, including planning, fieldwork, improvement opportunites, credit management, testing, invoicing
and credit memos, remittance processing, collections, accounting, and reporting.
This document should be used as a general guide to understand and review this business process. Organizations
should customize this tool to ensure that it reflects their business operations and continuously monitor the
process to ensure that the steps described are accurate.
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ACCOUNTS RECEIVABLES/COLLECTIONS AUDIT WORK
PROGRAM: SAMPLE 1
PROJECT TEAM (LIST MEMBERS)
Project Phase Date Comments
Planning
Fieldwork
Report Issuance (Local)
Report Issuance (Worldwide)
Time Project Work Step Initial Index
Planning
Conduct project planning, scope setting and auditee requests/coordination.
Coordinate meetings with key process personnel.
Review ABC's internal days sales outstanding (DSO) project reports.
Meet with external audit to obtain an understanding of testing performed and
issues identified. Coordinate scope and work steps to avoid duplicating efforts.
Review known best practices for benchmarking and process information on the
following topics: Accounts Receivable, Credit and Collections.
Develop work programs and other reporting templates.
Fieldwork
Understand and Document the Process
Obtain and review written (and desktop) policies and procedures and
organizational charts for receivables collection areas, including credit, billing,
remittance processing and collections.
Review memos over the process areas prepared by external audit. Ensure that
information is still current.
Understand and document the receivables collections process via high-level
process maps.
Prepare a timeline of the accounts receivable cycle from credit through
collections.
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Time Project Work Step Initial Index
Identify key business risks and mitigating controls.
Understand the following while conducting interviews:
• Management's goals and strategy regarding receivables collections
• Efficiency and effectiveness of the receivables collection process in meeting
management's goals
• Performance measures used by management to evaluate the receivables
collection process
Review and evaluate key management reporting tools for adequacy.
Improvement Opportunities
Review and understand the following. Draft any questions, which may be asked
during interviews and while process mapping. Interview appropriate personnel
and evaluate ABC's practices.
• Eliminate barriers to payment.
• Use the credit and collections process to enhance customer satisfaction.
• Automate the remittance processing function.
• Assign and update customer credit ratings.
• Develop, motivate and monitor collections specialists.
• Outsource the collections function and monitor the vendor's performance.
• Identify and act on distressed and delinquent accounts.
Based on interviews, reviewing policies and procedures, and testing each of the
process areas below, identify and evaluate ABC's practices.
Credit Management
After reviewing external audit process memos, interview key credit department
personnel to gain an understanding of the credit approval and monitoring
processes. Identify personnel ultimately responsible and accountable for this
process.
Understand how policies and procedures are enforced and how compliance is
monitored.
Understand and evaluate the following processes:
• Evaluate the customer credit rating system and scoring process.
• Understand the credit approval policy and credit limits.
• Evaluate the monitoring and reevaluating credit standings process.
• For each of the above areas, identify the personnel responsible and ensure
that proper segregation of duties exists and that it is appropriately monitored.
Assess the adequacy of the internal controls currently in place to mitigate
business risks in this area.
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Time Project Work Step Initial Index
Testing
Note: Testing may include compliance with existing policies and procedures,
recording completeness and accuracy, proper authorization, proper
documentation, and timeliness.
Select X-X customer accounts from the aged trial balance and test each account
to ensure that credit was granted in compliance with corporate policy. Items
should be greater than XX days and less than X% of the total AR balance. If
appropriate, stratify the sample to ensure that it includes credits from the past six
months as well as previously existing credits.
Review the credit rating for X customers. Ensure that credit classifications align
with scoring policies. Investigate and document any discrepancies.
Assess the efficiency and timeliness of the credit approval process. Note any
activities that could be automated.
Assess the efficiency and timeliness of the credit monitoring process. Note any
activities that could be automated.
Invoicing and Credit Memos
After reviewing the external audit process memos, interview key invoicing
department personnel to gain an understanding of the credit approval and
monitoring processes. Identify personnel ultimately responsible and accountable
for this process.
Understand how policies and procedures are enforced and how compliance is
monitored.
Testing
Note: Testing may include compliance with existing policies and procedures,
recording completeness and accuracy, proper authorization, proper
documentation, and timeliness.
From the AR aged trial balance, select X invoiced transactions. Ensure that
invoicing procedures occur on time and comply policies and procedures. Check
invoices for accuracy.
Understand the process of consolidating invoices. Select X consolidated
invoices and review for accuracy, timeliness, and compliance with policies and
procedures.
From the AR-aged trial balance, select X credit memos. Ensure that credit memo
procedures occur on time and comply with policies and procedures. Check for
accuracy.
Obtain a list of credit memos issued during the past two quarters. Select X items
and trace them to supporting documentation. Ensure that they were issued and
approved in line with corporate policy and procedures.
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Time Project Work Step Initial Index
Assess the adequacy of the internal controls currently in place to mitigate
business risks in this area.
Assess the efficiency and timeliness of the invoicing process. Note any activities
that could be automated.
Remittance Processing
After reviewing external audit process memos, interview key billing department
personnel to gain an understanding of the credit approval and monitoring
process. Identify personnel ultimately responsible and accountable for this
process.
Understand how policies and procedures are enforced and how compliance is
monitored.
Testing
Note: Testing may include compliance with existing policies and procedures,
recording completeness and accuracy, proper authorization, proper
documentation, and timeliness.
Select X cash receipts. Ensure that all receipts are posted on time and
procedures comply with policies and procedures.
Understand what types of payment methods are accepted.
Assess the adequacy of the internal controls currently in place to mitigate
business risks in this area.
Assess the efficiency and timeliness of remittance processing. Note any
activities that could be automated.
Collections
After reviewing external audit process memos, interview key invoicing
department personnel to gain an understanding of the credit approval and
monitoring processes. Identify personnel ultimately responsible and accountable
for this process.
Understand how policies and procedures are enforced and how compliance is
monitored.
Testing
Note: Testing may include compliance with existing policies and procedures,
recording completeness and accuracy, proper authorization, proper
documentation, and timeliness.
Review the AR-aged trial balance for unusual and/or large balances. Investigate
significant items (less than XX days and less than X% [absolute value] of total
AR balance.) Perform the following duties:
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Time Project Work Step Initial Index
Review details of significant past due balances and discuss them with
management. Obtain and document the probability of collectability and plans for
collection.
Ask what steps have been taken to collect on these accounts. Review online
notation, dunning letters, collection logs or other documentation.
Understand policies and procedures related to the use of external collection
agencies. Understand how performance is monitored and measured.
Understand account write-off policies and procedures. Obtain a list of accounts
written off in the past two quarters and review support for charges and authority
for write-offs. Review customer files or other documentation to see whether any
sales were made to accounts after write-offs.
Assess the efficiency and timeliness of collections. Note any activities that could
be automated.
Accounting/Miscellaneous
Review the policy for allowance for doubtful accounts for reasonableness.
Obtain the current calculation and ensure that it follows the policy.
Obtain calculation and analysis of DSO. Review for accuracy and
appropriateness.
Review the timeline prepared under "Understand and Document the Process"
above. Understand and document timing issues that may affect DSO, including
time lags, which may occur from service delivery to invoicing. Evaluate the effect
of these issues on current DSO.
Review AR reconciliation to GL. Verify timeliness.
Review the calculation of AR reserved amounts. Verify calculations and
reasonableness.
Review/evaluate management reporting reports/reconciliations (including
process performance metrics, budget-to-actual commission expense, target
earnings, quotas, etc.).
Reporting
Prepare reports on procedures, findings and recommendations.
Total Project Effort
Cost by Level
Estimated Project Expenses
Total Project Costs
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ACCOUNTS RECEIVABLES/COLLECTIONS AUDIT WORK
PROGRAM: SAMPLE 2
PROJECT TEAM (LIST MEMBERS)
Project Phase Date Comments
Planning
Fieldwork
Report Issuance
OBJECTIVES OF THE REVIEW
• Evaluate compliance with corporate policies and procedures.
• Evaluate the overall efficiency and effectiveness of process internal controls and procedures.
• Evaluate processes and practices against known best practices.
WORK PROGRAM STEPS
Time Audit Step Initial Index
Pre-Audit
Planning:
• Review known best practices and research them on the internet.
• Set up a binder.
• Develop project plans and determine scope.
• Prepare a budget.
• Plan coordination meetings with the process owner.
• Obtain accounts receivable process/functional overviews and expense
allocations.
Obtain a copy of accounts receivable and credit and collections policies and
procedures. Review procedures prior to beginning fieldwork. Draft any
questions that may be asked during interviews and while process mapping.
Review the following known best practices:
• Eliminate barriers to payment by offering customers multiple payment
options, flexible billing cycles and incentives to pay early.
• Create a single point of contact for all incoming customer calls regarding
payments and use technology to route the calls to the appropriate service
representative or automated activities.
• Electronically receive and post customer payments to the billing system in
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Time Audit Step Initial Index
real-time to reduce processing costs and expedite cash flow.
• Ensure that all employees with customer contact work together to deliver a
consistent message to the customer regarding company credit policies and
goals.
• Use credit scoring to assign the customer a credit rating that will trigger
appropriate sales and collections treatment.
• Update customers’ credit ratings continuously using a behavioral scoring
system, which monitors customer payment behavior, usage activity and
total customer account exposure versus assigned credit limits.
• Use the credit and collections process to enhance customer satisfaction.
• Develop, monitor and motivate collections specialists using individual and
team performance measures.
• Use performance measures to select and monitor outside collection agents
if it is cost-justified to employ them.
• Automatically initiate all treatment actions based on a pre-programmed,
“customized” treatment timeline that details specific action steps for the
initial identification of delinquent account customers based on customer
credit rating/class.
• Prioritize delinquent accounts for collections follow-up, allocate appropriate
collections resources, and provide real-time access to customer
information.
Benchmark company accounts receivable processes and statistics to other
similar companies (if applicable).
Based on the interviews, gain an understanding of the following areas:
• Overall accounts receivable process
• Customer credit rating system/scoring process
• Order entry process (high-level review of AR’s role in the order entry
process – e.g., credit classification)
• Process for monitoring credit standings
• Reconciliation of shipped items to invoices, GL reconciliation
• Invoicing process
• AR cash application process
• Process for collection of overdue amounts
• Process for writing off overdue receivables
• Management reporting (including process performance metrics)
• Reserve process – (Coordinate with external auditors to determine their
process for reviewing the company’s reserve values to ensure that there
are no duplication efforts.)
Compare all processes to known best practices (if applicable) to determine
any suggestions for process improvements.
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Time Audit Step Initial Index
Obtain an understanding and evidence of the accounts receivable/credit and
collections process by performing the following transaction testing:
• Review the company's AR trial balance for unusual and/or large items and
investigate, if necessary. Items should be greater than XX days and less
than X% of the total AR balance.
− Review details of significant past due balances and discuss them with
management. Obtain and document the probability of collectability and
plans for collection.
− Verify compliance with existing policies and procedures.
− Ensure recording completeness.
− Verify customer payments made.
− Verify recording accuracy.
− Review credit due dates – aged amount.
− Verify proper authorizations (if necessary).
• Select 10-20 cash receipts. Ensure that all receipts are posted on time and
procedures comply with established policies and procedures.
• Select 10-20 invoiced transactions. Ensure that invoicing procedures occur
on time and procedures comply with established policies and procedures.
• Review credit ratings for 10 customers. Ensure that credit classifications
align with scoring policies. Document all discrepancies.
• Obtain the list of credit memos issued for the Q49X and Q19Y. Select 10
items and trace them to supporting documentation. Ensure that they were
issued and approved in line with corporate policies and procedures.
• Obtain an analysis of allowing doubtful accounts. Verify that the allowance
is adequate and has been calculated in line with corporate policy.
• Review AR reconciliation to GL. Verify timeliness.
• Review AR reserved amounts. Determine the method of calculations and
verify reasonableness.
• Review/evaluate management reporting reports/reconciliations (including
budget-to-actual commission expense, target earnings, quotas, etc.).
Obtain the following background information and display graphically (utilize IT
auditors, if necessary):
• Number and dollar value (absolute) of invoices for the last six months:
Obtain soft copies of information.
• Current aging of the receivables: Identify high-value invoices, credit notes,
etc.
• Numeric sequence: Search for duplicates and missing invoices.
• Receivables by location (Insert Location): Obtain soft copies of the
information.
• Percentage of debit/credit memos by location (Insert Location) – Obtain soft
copies of the information.
• Match billings to shipping reports for quantities shipped but not billed,
matching billing date to shipping date. Determine the time gap.
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Time Audit Step Initial Index
Discuss findings with management before drafting the audit report.
Draft final reports in conjunction with the process owner.
Distribute final reports as prescribed by the internal audit distribution list.
Schedule follow-ups as appropriate.
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