Similar to the Revenue recognition process, for most companies the $ value of their Accounts Receivable represents one of the largest assets on their Balance Sheets, and accordingly, these amounts are usually very significant / material. Therefore, the SOX Business Process should be carefully reviewed and tested to ensure that no internal control gaps exist that could result in financial reporting misstatements.Best Practices for Accounts Receivable testing at a minimum, include the following:
• Test a sample of invoices that are outstanding in one of the significant customer AR balances. (Note – sample size depends on a number of factors including type of controls in place, materiality, but typically 25 transactions should be tested and reviewed at various times throughout the year). For the invoices selected, ensure that the following as applicable;
o $ amounts agree with approved price files,
o Supported by a bill of lading or other shipping document,
o Sale has been recorded in the appropriate Revenue and Accounts Receivable account,
o Customer payment has been received (copy of cheque), P
o Payment debited to the Bank and offset with a credit to AR.
• Test Customer A/R ledger, that is aged (current, 30, 60 days etc) and reviewed on a monthly basis. The A/R ledgers should be printed and maintained for review, and should be approved (evidenced by way of signature and date) by the appropriate management personnel (Controller, Credit Manager etc).
• Test Reserve for Bad Debts / Allowance for Doubtful accounts – most companies as a normal course of commercial business, provide their customers with credit and payment terms. As a result, it is very important to ensure that a review of doubtful accounts has been reviewed and documented on a monthly basis. For GAAP reporting, the allowance will vary by industry but comparison to historical information, and inclusion of any amounts that are aged beyond 90-120 granted terms would normally be considered. The Allowance for Doubtful accounts should be supported by a review of the aging and once again should be approved by management. In many organizations, the reserve amount is based on specific policy – is the reserve in line with the policy?
I hope this helps. Remember, each company will need to be assessed based on unique circumstances and using Risk Based Top Down approach. Please contact Edelkoort Smethurst Schein CPA’s LLP if you have any questions or comments.
Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS). The firm is also registered as an IRS Certified Acceptance Agent.
All blog posts published on this site are for informational purposes only and do not constitute professional advice. Readers should contact a professional to discuss their individual situation. Neither the author or the accounting firm shall accept any liability for any reliance placed on the information posted.