Accounts receivable audit procedures

Auditing may bring to mind late nights, piles of paper and feelings of panic, but things don’t have to be this way.

Auditing accounts receivable (AR) used to be a painful process, but with the advent of e-invoicing this needn’t be the case.

Audit trails can now be generated at the touch of a button. Electronic documents, such as e-invoices, can be searched for and found electronically, saving hours of rifling through filing cabinets.

When did accounts receivable auditing become easier?

As electronic invoicing became more widely adopted by businesses, audit procedures for AR became far, far simpler.

Since January 1st, 2013, the European Council Directive requires all EU members to afford the same legal status to electronic invoice processes as they do paper invoice processes. As a result of this, e-invoices must have associated data guaranteeing the authenticity of origin, integrity of content, and legibility of the invoice made accessible for auditing purposes.

Electronic invoicing systems are also required, by EU law, to store e-invoices in their original format, as well as an associated human-readable format if the original is purely machine-readable. The machines haven’t taken over entirely yet!

Electronic invoicing systems, as a consequence of these requirements, provide easy access to e-invoicing, invoicing histories, and supporting documentation. Typically, this enables large-scale extraction and presentation of records for auditing purposes. Building an audit trail has become far easier as a result.

When electronic invoicing is done well, there should be full traceability of communication flow and engagement from customers with communications and associated invoicing processes. Every point of contact and system engagement should leave a trace that can be used to determine the status of payment, and/or awareness of payment requirements, supporting associated AR actions to bring the cash in to the business, and the auditing of this process.

Preparing accounts receivable for auditing

Even with electronic invoicing in place, it’s important that the e-invoicing solution is well structured and provides a clear record of accounts receivable balances for the timeframe in audit.

The e-invoicing system should list sales invoices for the full receivables ledger, alongside cash receipts, credit memos and debt write-offs for each account. Furthermore, aged receivables information should facilitate grouping, filtering, and analysis to understand payment progress against credit terms for every account on the receivables ledger.

Your e-invoicing solution is unlikely to have a full record of customer orders for the accounting period in audit, or for previous years, but these should be made available from the associated ERP and/or accounting system to facilitate a complete audit.

In order to achieve the audit objectives, you may also need to provide access to bank statements and the general ledger for the business, to give an understanding of how the accounts receivables ledger balances stack up against liabilities listed in other subledgers, such as the accounts payable ledger and other journal entries.

With a well-integrated and accurate e-invoicing solution, financial reporting can more easily avoid any overstatement, material misstatement, or other inaccuracies for the period-end – supporting a painless audit.

Easy risk assessment for auditing requirements

Electronic invoicing systems enable the following risk assessments to be easily met and even automated. Reporting on the scenarios below ensures accounts receivable are managed in an optimal fashion and no nasty surprises come to light through the auditing process.

• Checking for receivables that do not exist
• Checking for inaccurate receivable balances, matching receivable confirmations and cash receipts with bank statements
• Identifying incorrectly recognized revenue for the accounting period, so there is no material misstatement, understatement, or overstatement on any customer accounts
• Identifying collection problems with accounts receivable, through comparison of aged receivables with prior years and any increase in bad debt from uncollectible accounts
• Checking the allowance for doubtful accounts reflects previous bad debt experience
• Checking for sales transactions not processed in the correct periods

Auditing accounts receivable when factoring or outsourcing

Auditing accounts receivable may seem straightforward when you have everything in one place, on an electronic platform, but you may utilize invoice factoring or outsourcing of aspects of your accounts receivable process to a solution partner.

Where there is a segregation of duties around aspects of the accounts receivable process, it’s imperative that receivable reports are made easily available for auditing. Your factoring solution provider, or outsourcing partner for AR processes, should be able to provide immediate valuation of the receivables ledger alongside all of the nuances described earlier in this article (aged receivables, bad debt, cash receipts, credit memos, etc.)

In most cases, it will be easier to supply auditors with data files from your factoring or outsourcing provider, but some solution partners, such as Corcentric, will be able to provide dedicated reports for specific audit objectives at the touch of a button.

Beyond the audit trail – real-time visibility of invoicing progress

The benefits of e-invoicing in facilitating audit processes, such as audit trail generation, is clear. A related benefit, more valuable in a day-to-day context, is the ability to have a real-time view of invoicing and, in the case of an EIPP solution, payment processes.

Leading e-invoicing platforms, such as Corcentric EIPP, emphasize the use of pull communications (rather than push communications) – meaning that customers are encouraged to click through from communications to an online portal to access their invoices. This enables users to be tracked as they access their invoicing information and take any actions via the portal – e.g. acknowledging receipt of invoice, intention to pay, or payment.

This online tracking provides AR departments and credit controllers with the ability to quickly determine the status of specific invoices and accounts. Real-time information can then feed into management dashboards and be used to both track and improve business cash flow.

Understanding the status of the receivables ledger and associated ratios of payments to outstanding credit isn’t just a year-end analytical procedure for comparing progress to prior years. This data can provide immediately actionable information, such as facilitating automated follow-up to accounts with aged receivables beyond a specific threshold.

Audit trail for document distribution

It’s not just invoicing that can benefit from improvements in tracking and visibility. Document distribution in general is increasingly electronic in nature, even for business-critical and legally sensitive documents. With the advent of trust services, defined in the eIDAS regulation, more and more legal documents such as contracts are sent electronically; providing complete trust in recipient authenticity and content integrity. This also presents an opportunity for businesses who distribute their documents electronically to track receipt and engagement, in much the same way as e-invoicing systems do.

Businesses already need to distribute supporting documentation, such as financial statements, to accounts as part of their accounts receivable process. Doing so electronically, ideally via the same platform as used for electronic invoicing, should provide more auditable detail.

With systems designed to track and record which which documents were sent to whom, when, and how they were engaged with, this provides a detailed audit trail for all types of sensitive documents.

Whether businesses need to meet compliance requirements of Sarbanes-Oxley, or other mandates to preserve records and interactions for a number of years, electronic records are a far easier format to store documents, and map the relation between these and the communications relating to them.

Why wait for an audit – turn communication insight into competitive advantage

While e-invoicing and electronic document distribution enable ease of auditing, the insight they can provide is far more valuable for day-to-day business advantage. Understanding the status of each invoice in the collections process provides an unparalleled handle on cash flow into the business. Where anomalies occur, these can be acted on immediately – even automatically.

Document distribution can also provide analytical insights to improve responses and reduce the requirement for exception handling by staff. With the advent of robotic process automation, (RPA) and indeed artificial intelligence as part of such systems, manual exception handling can be learned from to improve the scope of automated responses.

Whether communications directly affect cash flow or service delivery, or form part of the broader customer communication remit, having the internal controls to know whether they have been received and the status of response provides valuable and actionable insight.

In high-churn markets, it’s critical to respond to delays or blockages in customer communications or risk losing business. Managing document distribution electronically, and automating where possible, presents competitive advantage in this regard.

In some cases, it may be practical to run small internal audits on a monthly basis.  Even small businesses can benefit from better understanding the performance of each account on their balance sheet and acting to optimize cash flow accordingly.