April 27, 2022 April 27, 2022/ Steven Bragg
Controls over accounts receivable really begin with the initial creation of a customer invoice, since you must minimize several issues during the creation of accounts receivable before you can have a comprehensive set of controls over this key asset. Controls then span the proper maintenance of accounts receivable, and their elimination through either payments from customers or the generation of credit memos. The key controls to consider are:
Require credit approval prior to shipment. You will have problems collecting accounts receivable if an order is shipped to a customer with a bad credit rating. Therefore, require the signed approval of the credit department on all sales orders over a certain dollar amount.
Verify contract terms. If there are unusual payment terms, verify them before creating an invoice. Otherwise, accounts receivable will contain invoices that customers refuse to pay.
Proofread invoices. If an invoice for a large-dollar amount contains an error, the customer may hold up payment until you send a revised invoice. Consider requiring the proofreading of larger invoices to mitigate this problem.
Authorize credit memos. People who have access to incoming customer payments could intercept incoming cash and then create a credit memo to cover their tracks. One step in the prevention of this problem is to require the formal approval of a manager for credit memos, which are then verified at a later date by the internal audit staff. Do not take this control to extremes and require approval for extremely small credit memos - allow the accounting staff to create small ones without approval, just to clean up small remaining account balances.
Restrict access to the billing software. As just noted, someone could intercept incoming payments from customers and hide the theft with a credit memo. You should password-protect access to the billing software to prevent the illicit generation of credit memos.
Segregate duties. As just noted, no one should be able to handle incoming customer payments and create credit memos, or else they will be able to take the money and cover their tracks with credit memos. Therefore, assign these tasks to different people.
Review accounts receivable journal entries. Accounts receivable transactions almost always go through a sales journal in the accounting software that generates its own accounting entries. Therefore, there should almost never be a manual journal entry in the accounts receivable account. You should investigate these entries carefully.
Audit invoice packets. After invoices are completed, there should be a packet on file that contains the sales order, credit authorization, bill of lading, and an invoice copy. The internal audit staff should review a selection of these packets to verify that the billing clerk properly reviewed all of the supporting paperwork and correctly generated an invoice.
Match billings to shipping log. It is possible that items will be shipped without a corresponding invoice, or vice versa. To detect these situations, have the internal audit staff compare billings to the shipping log, and investigate any differences.
Audit the application of cash receipts. The accounting staff may incorrectly apply cash receipts to open invoices, perhaps not even applying them to the accounts of the correct customers. Have the internal audit staff periodically trace a selection of cash receipts to customer invoices to verify proper cash application.
These items constitute the basic accounts receivable controls. A company with a specialized receivables system may need to implement additional controls, or may not need some of the items listed here.
April 27, 2022/ Steven Bragg/
Strong internal control procedures for managing accounts receivable are critical to improving cash flow, ensuring the reliability of financial information and combating the risk of fraud, error and loss of assets. The right tools and clear data can help you establish strong internal control of your accounts receivable management processes. These tools and data can inform how you standardize invoice creation, maintain and report receivable accounts, and how you collect and record invoice payments.
The following are some of the most common accounts receivable control methods, a comprehensive accounts receivable control checklist and additional resources for mitigating risk for accounts receivable.
Segregation of Duties for Accounts Receivable
Segregation of the duties of accounts receivable management is an important internal control method. By dispersing the accounts receivable management duties among different employees, you can increase oversight and reduce the opportunity for fraud. Segregation of duties for accounts receivable means that no one person has sole responsibility for more than one of the four main functions of accounts receivable management:
- Custody of accounts receivable
- Authorization to use the accounts receivable receipts
- Recording accounts receivable
- Production of accounts receivable reports
Accounts Receivable Internal Control Checklist
Well-documented policies and procedures for who should handle which accounts receivable responsibilities, and how those responsibilities should be handled, is an important factor in establishing strong internal control over accounts receivable Be sure to implement these controls along the entire accounts receivable management process:
Receive a Purchase Order from Your Customer
Internal control over accounts receivable often begins with receipt of the purchase order. When a customer’s purchase order is received, accounts receivable best practice is to review the purchase order to:
- Check that the pricing, terms and conditions agree with the sales order and company policy for credit terms;
- Ensure the order is authorized by the proper person;
- Review the customer’s credit rating before extending trade credit; and
- Check current account balance against balance limits.
- Create the Sales Order
Before issuing the sales order, be sure these control procedures for accounts receivable are in place:
- Check that the details on the purchase order match those on the sales order; and
- Ensure that the sales order is properly authorized or approved.
Prepare the Sales Invoice
The sales invoice details the services or goods provided to the customer, the amount owed for the goods or services and the due date for the payment. Careful control of this process includes:
- Preparing the numbered invoice on a branded company template;
- Reconciling the invoice information against the sales order;
- Reviewing invoice calculations for accuracy;
- Checking that the customer’s address and contact person are correct; and
- Issuing the invoice to the customer on time.
Post the Sales Journal
The sales journal provides a clear view of each sales transaction, detailing what customers purchased, the credit extended and the payment received. Careful internal control over receivables includes these sales journal steps, including:
- Using an invoice copy to quickly post to the sales journal for each transaction;
- Reviewing journal entries against invoices to ensure accuracy;
- Filing invoice copies by invoice number; and
- Posting the sales journal totals to the accounts receivable control account in the general ledger.
Post the Accounts Receivable Ledger
The accounts receivable ledger is a record of all trade credit sales made by a business. Because the ledger records all customer invoice amounts, it provides a clear look at the amount of unpaid accounts receivable. Managing the accounts receivable ledger is a separate duty from collecting on invoices.
Recommended internal control procedures for the accounts receivable ledger include:
- Using an invoice copy to quickly post to the accounts receivable ledger as soon as an invoice is issued;
- Reviewing journal entries against invoices to ensure accuracy;
- Filing unpaid invoice copies by invoice date;
- Carrying out random checks of customer sales activity to identify any unusual patterns;
- Regularly reviewing credit balances for each customer;
- Creating an aged accounts receivable report;
- Reviewing the balances and flagging large and overdue accounts;
- Recording cash settlement discounts; and
- Reconciling the accounts receivable ledger with the accounts receivable control account in the general ledger.
Mitigate External Accounts Receivable Risk
Internal controls for the accounts receivable management workflow are vital in avoiding mistakes that can cause harm to your financial position. For added security, trade credit insurance can help you better manage commercial risks that are beyond your control, such as an interrupted cash flow due to late or non-payment of invoices. Learn how credit insurance works and how it can support prudent accounts receivable management. Download our free Guide to Trade Credit Insurance.