Accounts Receivable/Revenue Documentation

General Understanding If Accounts Receivable/Revenue is deemed to be a significant transaction cycle, then perform the following. Please document the following: 1. How are revenues recognized (at what point i.e., as work is performed or when a bill is created - and using what method i.e., upon receipt of cash, accrual, percentage of completion)? 2. What documentation (e.g., sales ticket) is used to capture the revenue recognition and who records or keys that information into the accounting software? 3. What method, if any, does the entity use to compute the allowance for uncollectible accounts? Who is responsible for computing and reviewing the computation? 4. Are there subsidiary receivable ledgers? If yes, who reconciles the subsidiary ledgers to the general ledger and how often? 5. Who creates and mails bills to customers? (If anyone reviews the bills prior to sending, please document person responsible for review.) 6. Does entity have an established policy for writing off receivables (e.g. after 90 days)? If yes, document that policy and who makes the accounting entries to write off an uncollectible account. 7. What persons can write off or adjust receivable accounts? Do those persons have access to cash or checks? If yes, document persons who can adjust receivable accounts and also have access to cash/checks.

Created by Charles B. Hall, CPA, CFE, MAcc

8. Who opens the mail? Does that person list cash or checks received upon opening the mail? If yes, is a second person present when the mail is opened? Does the entity receive any cash payments for which there is no recorded receivable? If yes, document the types of those payments (e.g. sales of inventory) and who receives those payments. 9. Who creates the deposit tickets and how often? Does that person take cash to the bank for deposit? Does the person making the bank deposit return to the business a deposit receipt from the bank? If yes, who receives the deposit receipt? 10. Who reconciles the bank statements?

If a second person reviews the bank reconciliation, document who that person is. 11. Are bank statements reconciled on a timely basis (within one month of receiving the bank statement)? 12. What types of revenues reports (e.g. profit and loss statements) are provided to management and/or board for periodic review? How often are those reports provided?

Created by Charles B. Hall, CPA, CFE, MAcc

Walk Through 1. Observe the segregation of duties. Are the following segregated? a. Custody of assets (e.g. cash or checks) b. Reconciliation procedures (e.g. person who reconciles bank account, person who reconciles receivables to G/L) c. Authorization (e.g. person approving the recording of receivables or the adjustment of receivables) d. Accounting (e.g. person who keys in receipts into system) Function Custody of Assets Reconciliation Authorization Accounting Person

If functions are not segregated, are there any mitigating controls (e.g. monitoring performed by board or owners)? 2. Inspect the following for one transaction: a. b. c. d. e. Bill for services Receipt of payment Deposit made to bank Keying of the amount received into accounting system Reconciliation of bank statement for that month

Invoice # Examined (if printed on the bill for services): Receipt # Examined: Date deposit made to bank: G/L Acct. # or Chart of Account name receipt posted to: Bank reconciliation examined for the month of: Name of person who performed the bank reconciliation:

Created by Charles B. Hall, CPA, CFE, MAcc

3. Inquire about: a. Who performs the above when persons are out sick or on vacation? b. Has the system changed during the year? c. Have personnel been asked to override controls? d. Are accounts receivable functions being performed on a timely basis? Deficiencies Noted Does it appear that there are any control deficiencies (see definitions below)? ___Yes ____No

If yes, then note control weaknesses on the Control Deficiency Comment and Management Point Development form (at 0153).
Control Deficiency. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. The communication of control deficiencies that are not considered significant deficiencies or material weaknesses can be either written or oral. Significant Deficiency. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Material Weakness. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entitys financial statements will not be prevented, or detected and corrected on a timely basis. [As used in the SAS, a reasonable possibility exists when the likelihood of the event is either reasonably possible or probable as those terms are used in Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FASB ASC 450).]

If there are significant deficiencies in controls, then consider the weakness in developing your audit program for this area.
Disclaimer This document has not been peer reviewed; user assumes all risks related to its use.

Created by Charles B. Hall, CPA, CFE, MAcc