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Auditing Collections for non-FS Firms

Managing accounts receivable is a key activity for any organisation – in the private, public, or third sector. 

In these challenging times of economic pressures including high inflation, rising interest rates, increasing fuel costs, falling exchange rates etc. this is an even more critical activity.

Successful businesses may fail if effective processes are not in place to collect debts on a timely basis.

As an auditor – this is one of the key risks that we should consider when developing our audit plan, and something that we should review periodically to provide assurance to the organisation.

Some areas of focus for internal audit may include:

  • Does the organisation have a debt collection strategy to help with cash flow and to make sure that money is received on a timely basis? Is this strategy reviewed and refreshed on a regular basis or based on trigger events (such as significant economic changes)?
  • Does the organisation have a credit policy – or simply invoice terms? Is this policy reviewed and refreshed on a regular basis?
  • How aligned are the receivables terms offered to customers to the payables terms inflicted on the company? Where the receivables terms are far more generous, this may lead to cash flow issues.
  • How are staff trained and supported as they implement the debt collection strategy and credit policy; what levels of authority do they have and how is the use of these authorities monitored? Is this controlled through system based preventative controls or more manual / detective controls?
  • Is there adequate management information and reporting – is there data available to understand the level of unpaid debt, the time payments have been outstanding etc. This will help the organisation to understand the success, or otherwise, of its strategy and policy. It can also help ensure that any actions needed to address issues are identified and completed on a timely basis.
  • Is there segregation of duties over the awarding or increasing of customer credit limits?
  • From an accounting perspective, is the provisioning of doubtful debts appropriate? The same is applicable for write-offs.
  • Has any due diligence been completed to understand the risk involved when engaging with new customers; are they credit-worthy; can they afford to pay; are they likely to pay?
  • When contracts are signed, or business is agreed – are the payment terms agreed with the customer on an individual basis or does one policy apply to all customers?
  • Is the invoicing process effective – are invoices issued timely; is once a month sufficient; should an invoice be issued after every transaction?
  • Are invoices clear in terms of the services / goods provided and the payment terms? Are regular statements sent to customers to allow them to have visibility of outstanding debts? This may help address queries early on and prevent delays.
  • Are the payment methods easy for the customer to use – this is more likely to encourage them to pay timely?
  • Review IT systems – consider accuracy, completeness of invoicing; user access rights; approval levels?
  • Are reconciliations of payments vs. debt completed timely and accurately to enable unpaid amounts to be identified promptly?
  • Are unpaid amounts followed up timely; are the contact methods appropriate – finding the balance between encouraging payment and being strong in terms of expectations?
  • What action is taken when a customer says they can’t pay – or refuses to respond? Are there arrangements needed to collect payments over a longer period, or perhaps in instalments; how do you deal with vulnerable customers who may need additional support? Has the need for litigation been considered and applied appropriately?
  • Is a debt collection agency engaged at the right time; has the cost / benefit been considered and have appropriate steps been completed to engage and manage a third-party? How is the conduct risk of using a third party being managed?

There is a paper on Auditing Collections, although written for financial services firms, which includes elements that are relevant for all types of organisations.

It is important that organisations have effective processes in place to support the flow of cash particularly if customers fail to make the agreed payments in a timely manner. This can help prevent or limit financial loss and help to ensure that customers are treated fairly and protect the reputation of an organisation.

How will you as the internal auditor provide this assurance to your organisation?

Content reviewed: 1 February 2023