4. Accounts Receivable
Accounts receivable consists of monies owed to the company by its
customers for good or services provided. Other than the trade
receivables account, there is also usually a provision against bad
and doubtful debts.
When auditing accounts receivable, the key audit objectives are:
• Accounts receivable represent amounts owed to the
company by their customers at the balance sheet date, and
the company has a legal right to these monies (i.e. the debt
has not been sold or factored) (ownership/existence)
• All claims on customers are included within accounts
• Accounts receivable are stated at net realisable value, and
provisions are in place for bad debts (valuation)
• Sales are posted to the correct period (accuracy)
There may be substantial incentive for management to overstate
For example, to hit performance targets revenue may be overstated
by creating false sales and crediting them back post year end, which
leads to overstated accounts receivable.
Overstating accounts receivable will also improve the current ratio
and other liquidity ratios, which may affect bank covenants.
There may also be incentive to post legitimate sales to the wrong
period, and this can occur both ways. For example, if it has been a
bad year and performance targets have been missed, pushing sales
into the next period makes it easier to hit targets next year.