Question

Explain the internal control over Notes Receivables

Answer 1

Internal Control is the process designed to ensure reliable financial information & its reporting, effective and efficient operations, and compliance with applicable laws and regulations, safeguarding of assets etc.

Now a day a company to enhance its sale it extends attractive credit policy to its customers. As a matter of fact, accounts receivable can make up a substantial portion of its assets.

An Auditor must have an understanding of the possibility of how a company can misstate accounts receivables, either inadvertently or intentionally, thus in order to express his opinion on the company’s financial statements.

Hence, it is vital for a business organization to ensure a sound internal control on account receivable.

Account Receivable includes amount collectible from customers on account of credit sales or service.

In order to ensure adequate internal control, a business organization is advised to implement the following control measures,

Policy – A business should have well-documented policies and procedures on accounts receivable internal controls such as credit and collection policies, to ensure that all staff understands the accounts receivable process.

Segregation of Duties – Company should ensure that the process of invoicing, accounts receivable, cash collection, and the review is not vested on a single employee. Ensure to separate the accounts receivable function and cash collection function.

Receive Purchase Order – Purchase order acts as proof of order price, terms, and conditions etc. Ensure that purchase orders are properly authorized.

Sales Order – Reconciliation of sales and purchase order to be done. Validate the approved sales order.

Invoice – Invoice is an important document that is vital for control of its receivables. Ensure that sale invoices are pre-numbered, customer details are adequate and accurate, separate invoice for cash sales.

Credit Worthiness - Review the creditworthiness of the customers before extending the credit facility to the customers.

Reconciliation and follow-up – Periodical reconciliation of the receivable account with account receivable control account in the general ledger should be made.

Credit Control Procedure – Ensure that a strict credit controls procedure for collecting accounts receivable is in place, that proper aging schedule is prepared and follow-ups are done to ensure a timely follow of cash.

This is not an exhaustive set of control; these items constitute the basic accounts receivable controls. A business must focus on designing its own set of control that helps in achieving its objective.