Understand how an audit of accounts receivable works: key assertions, confirmations, cutoff and aging tests, and how to prepare your AR team.
Dadhich Rami
An audit of accounts receivable is the set of procedures an auditor performs to confirm that the receivables reported on a company's balance sheet exist, are complete, belong to the company, and are recorded at the amount the company expects to collect. Auditors test receivables closely because they are large, judgment-based, and a common area for errors and misstatement.
An audit of accounts receivable is a review of a company's receivable balances and the processes behind them, performed by external auditors as part of a financial statement audit or by internal auditors as part of a process review. It combines testing of controls with substantive procedures such as confirmations, cutoff testing, and valuation analysis.
The goal is to obtain enough evidence that the receivable balance is not materially misstated. For external auditors, the work follows auditing standards, including AICPA AU-C 505 on external confirmations for private companies and PCAOB AS 2310 for public companies.
Audit assertions are the claims management makes about the receivable balance, and each audit procedure is designed to test one or more of them. For accounts receivable, the most important assertions are existence and valuation, because receivables can be overstated by fictitious sales or by an allowance that is too low.
Auditors use a standard set of procedures for receivables, adjusted for the company's risk and the strength of its controls.
The first procedure is agreeing the total of the AR aging report to the accounts receivable balance in the general ledger. Auditors then test the aging itself by checking that invoices sit in the correct age buckets. A documented accounts receivable reconciliation for the balance sheet date makes this step quick.
Confirmations are requests sent by the auditor directly to customers, asking them to confirm the balance they owe. Positive confirmations ask the customer to reply in every case, while negative confirmations ask for a reply only if the customer disagrees. Positive confirmations provide stronger evidence and are used for larger or higher-risk balances.
Confirmations are the primary evidence for existence because they come from an independent third party. Auditing standards generally presume that material receivables will be confirmed, with documented reasons when confirmation is not used.
When a customer does not return a confirmation, auditors perform alternative procedures. The most common is examining subsequent cash receipts, meaning payments received after the balance sheet date for invoices open at that date. Auditors may also review the invoices, purchase orders, and shipping or delivery documents behind the balance.
Cutoff testing checks that sales and receivables are recorded in the right period. Auditors select invoices and shipping records from a few days before and after the balance sheet date and confirm that each sale was recorded in the period in which goods were delivered or services performed.
Valuation testing assesses whether the allowance for doubtful accounts is reasonable. Auditors review the AR aging report for old and disputed balances, compare the allowance to historical write-offs, review subsequent collections, and evaluate management's assumptions. The allowance for doubtful accounts calculation and its support are key documents for this step.
Analytical procedures compare receivable metrics against expectations to spot unusual changes. Common measures include days sales outstanding, receivables turnover, the percentage of balances over 90 days, and the allowance as a percentage of receivables. Significant movements without a business explanation lead to more detailed testing.
Auditors review credit memos and write-offs, especially those issued shortly after year end, because they can reveal sales that were recorded in the wrong period or receivables that were overstated. They check that each item was approved and supported.
Auditors identify receivables from related parties, employees, or affiliates, and large or unusual balances such as credit balances or round-number invoices. These items carry higher risk and are reviewed for disclosure and collectibility.
Preparing for an accounts receivable audit means having a reconciled aging report, supporting documents, and clear explanations ready before fieldwork starts. Preparation reduces the number of follow-up requests and the time auditors spend on site.
Most audit request lists for receivables include:
Running these reports from one system, rather than combining spreadsheets, also reduces questions about the completeness of the data. Current aging and balance data from an accounts receivable dashboard can be exported directly for the auditor.
Auditors look for patterns that suggest receivables may be overstated or misstated. Common red flags include receivables growing faster than sales, rising DSO, large credit memos after year end, customers who do not respond to confirmations, unexplained reconciling items, a high share of balances over 90 days with a flat allowance, and unusual customer addresses that match employee details.
Weak segregation of duties also raises audit risk, because it makes manipulation of balances easier. The accounts receivable internal controls that auditors test, such as approvals and reconciliations, directly affect how much substantive testing they perform.
An external audit of accounts receivable is performed by an independent CPA firm to support an opinion on the financial statements, while an internal audit is performed by the company's own audit team to assess processes and controls. External auditors focus on whether the balance is materially correct; internal auditors focus on whether the process is efficient and well controlled.
Internal audits often happen during the year and help fix control gaps before the external audit begins.
40%
DSO reduction70%
less manual work95%
cash match accuracyFind out exactly how much time and money your AR team can save with Quick Receivable. No commitment, no setup required.
AI-powered Accounts Receivable Automation on Salesforce, built to accelerate collections, automate workflows, and improve cash flow.