Accounts Receivable Controls
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 really 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.