Obtaining the Aged Trial Balance of Receivables
Key Facts
- Obtain the aged trial balance of receivables: The first step in testing accounts receivable is to obtain the aged trial balance of receivables. This report provides a detailed breakdown of the outstanding receivables by customer and the length of time the receivables have been outstanding.
- Trace the total balance to the general ledger: Once you have the aged trial balance of receivables, you should trace the total balance to the general ledger. This ensures that all outstanding receivables are included in the financial statements.
- Inspect customer orders: During the audit, it is important to inspect customer orders and compare them with the invoices that have been sent out. This helps to verify that the amounts on both documents match and that total receivables have been recorded accurately.
- Compare receivable reports with the grand total: Another step in testing accounts receivable is to compare the amount in the accounts receivable account in the general ledger with the grand total of receivables in the period-end accounts receivable aging report. Any discrepancies indicate the presence of incorrect journal entries.
- Match invoices to shipping log: Auditors should match the date on each invoice with the shipment dates of the corresponding items in the shipping log. This helps ensure that sales are recorded in the correct accounting period.
- Confirm receivables with customers: Auditors may directly contact customers to confirm any unpaid accounts receivable as of the reporting period’s end. This is done to verify the accuracy of the recorded accounts receivable.
- Review cash receipts and credit notes: Auditors should review proof of payments made by customers, such as check copies, and reconcile them with bank transactions. Additionally, they should review credit notes to ensure they were properly authorized and issued during the correct period.
The initial step in testing accounts receivable is to acquire the aged trial balance of receivables. This report provides a detailed breakdown of the outstanding receivables by customer and their respective aging periods (https://www.accountingtools.com/articles/accounts-receivable-auditing).
Tracing the Total Balance to the General Ledger
After obtaining the aged trial balance, the total balance should be traced to the general ledger. This step ensures that all outstanding receivables are reflected in the financial statements (https://www.accountingtools.com/articles/accounts-receivable-auditing).
Inspecting Customer Orders
Auditors must inspect customer orders and compare them with the corresponding invoices sent out. This verification ensures that the amounts on both documents align and that total receivables have been recorded accurately (https://www.zoho.com/books/guides/accounts-receivable-audit.html).
Comparing Receivable Reports with the Grand Total
The amount in the accounts receivable account in the general ledger should be compared with the grand total of receivables in the period-end accounts receivable aging report. Any discrepancies indicate the presence of incorrect journal entries (https://www.accountingtools.com/articles/accounts-receivable-auditing).
Matching Invoices to Shipping Log
Auditors must match the date on each invoice with the shipment dates of the corresponding items in the shipping log. This step ensures that sales are recorded in the correct accounting period (https://www.accountingtools.com/articles/accounts-receivable-auditing).
Confirming Receivables with Customers
Auditors may directly contact customers to confirm any unpaid accounts receivable as of the reporting period’s end. This confirmation verifies the accuracy of the recorded accounts receivable (https://www.zoho.com/books/guides/accounts-receivable-audit.html).
Reviewing Cash Receipts and Credit Notes
Auditors should review proof of payments made by customers, such as check copies, and reconcile them with bank transactions. Additionally, they should review credit notes to ensure they were properly authorized and issued during the correct period (https://www.zoho.com/books/guides/accounts-receivable-audit.html).
Sources
- https://www.accountingtools.com/articles/accounts-receivable-auditing
- https://www.zoho.com/books/guides/accounts-receivable-audit.html
- https://www.universalcpareview.com/ask-joey/how-to-test-the-completeness-of-the-accounts-receivable-balance/
FAQs
What is the purpose of testing accounts receivable?
**Answer:** Testing accounts receivable helps ensure that all outstanding receivables are recorded accurately in the financial statements and that the company has taken appropriate measures to minimize the risk of bad debts.
What are the common procedures used to test accounts receivable?
**Answer:** Common procedures include obtaining an aged trial balance, tracing the total balance to the general ledger, inspecting customer orders, matching invoices to the shipping log, confirming receivables with customers, and reviewing cash receipts and credit notes.
Why is it important to trace the total balance of the aged trial balance to the general ledger?
**Answer:** Tracing the total balance ensures that all outstanding receivables are included in the financial statements and that there are no unrecorded receivables or duplicate entries.
What is the purpose of matching invoices to the shipping log?
**Answer:** Matching invoices to the shipping log helps ensure that sales are recorded in the correct accounting period and that there are no unrecorded sales or duplicate entries.
Why do auditors confirm receivables with customers?
**Answer:** Confirming receivables with customers provides independent evidence of the existence and accuracy of the recorded accounts receivable.
What should auditors look for when reviewing cash receipts?
**Answer:** When reviewing cash receipts, auditors should look for evidence of payments made by customers, such as check copies or bank statements, and reconcile them with the recorded cash receipts.
What is the purpose of reviewing credit notes?
**Answer:** Reviewing credit notes helps ensure that they were properly authorized and issued during the correct period, and that they have been recorded accurately in the accounts receivable records.
What are some red flags that may indicate potential issues with accounts receivable?
**Answer:** Red flags include a high percentage of overdue receivables, a significant increase in the allowance for doubtful accounts, or a pattern of customers disputing invoices or requesting credit notes.