Best Practices & Controls-Accounts Recievables

For All..

In this topic I will try to list the basic Control Objectives (CO) , Risks (RS) and Controls (CN) under an Accounts Receivables Function/Process...

Do share your views also.

1. Customer Master Database Maintenance



a. CO: User access to the database should be appropriately restricted.


RS: Unauthorized access or changes to financial and operational data.


CN: Access to the database is administered by the Database administration group. Forms are required with approvals from the individual's manager and the owner of the data.


b. CO: Changes in the database are approved and input completely and accurately.


RS: Unauthorized changes to the financial and operational data


CN: "An appropriate official approves changes made to data, prior to input. Each change must be supported by sufficient documentation.


A one-to-one check for changes to the data via A comparison between post input/update reports to the change source documents for completeness and accuracy. Discrepancies are resolved and the re entered data is subject to the same control.

Changes in certain type of critical data and or changes outside certain parameters the system produces a report of these changes and is forwarded to management for their review. Acceptance of these changes by the system is dependent upon management review of supporting documentation and approval. "



c. CO: Adequate segregation of duties is maintained


RS: Unauthorized changes to the financial and operational data

CN: Segregation of duties to be maintained between the updation of data and the maintenance of data. Exceptions noted are to be investigated and resolved.
 

d. CO: Data is kept current and updated.


RS: Incorrect processing of the transactions


CN: System generated report detailing records not accessed over a period to be reviewed periodically by the Database Administrator in consultation with the Process Owner

2. Credit Policy & Credit Control...



a. CO: Credit Policy is in place for all the Customers based on various financial and non financial factors

RS: Credit Policy not defined for various customers

CN: Credit Policy is in place for all the customers. The policy defines the credit period and payment terms for all the domestic and International customers.
 
b. CO: Credit Policy is Approved


RS: Credit Policy is not approved as per the Delegation of Power
 
CN: Credit Policy is approved as per Delegation of Power
 
c. CO: Credit limit revision and extension are approved


RS: Unapproved credit limit resulting in bad debts or delays in collection


CN: "Credit Limit shall be unfreezed as per Delegation of Authority Matrix. Any extension of Credit period is approved as per Delegation of Authority Matrix."
 
3. Sales Order Generation



a. CO: Customer orders received are duly acknowledged

RS: Non acknowledgment of the receipt of customer order may result in unsatisfied customer
 
CN: Acknowledgment of receipt of customer order to be sent immediately by Sales Manager on receiving the Customer Order
 
b. CO: Delivery schedule is finalized and communicated to the customer on a timely basis



RS: Non confirmation of the delivery schedule (dispatches) to the customer may result in cancellation of sales order
 
CN: Delivery schedule to be confirmed by the Sales Manager within XX days of receipt of Customer Order by the Sales Team.
 
c. CO: "Customer Order is entered completely and accurately

Sales terms and prices are approved."


RS: The products, quantity, selling price, payment terms or shipping address included in the Customer order are incorrectly entered in the system.


CN: "Sales Order generated from system are reviewed for price, quantity, billing/ delivery address by the Sales Team and Sales Head with Customer Order and Approved Price List.


Further, the Sales orders over a set threshold require approval by management as per SOA before acceptance by the system. In absence of an approval a suspense file is created that is reviewed by management for clearance on a regular basis. (Additional control ensure that the Sales Order input above specific value in correct and accurate)"
 d. CO: "Customer Order is entered completely and accurately



Sales terms and prices are approved."


RS: Single customer order may be entered in the system multiple times


CN: "Edit checks exist within the system that reject the input of a customer order number that was already entered.


Rejects are placed into a suspense file where they are researched, reviewed and re-entered (if necessary) on a timely basis."
CO: Customer Order with cash terms are accurately processed



RS: Customer Order may be processed without the receipt of cash


CN: "Sales Team review the cash receipt before approving the processing the Customer Order.


a) In case of manual system Cash payment orders are reconciled with payments received on a regular basis. Management reviews and investigates unrecognized differences that exceed acceptable cash payment cycle deviation.


b) In automated system, no invoice and dispatch document should be issued from the system without generation of Cash Receipt, any deviation is escalated for approval as per SOA"
 
e. CO: Customers' credit limits are controlled.



RS: Sales Order is processed for customers not entitled to credit limit or who have exceeded their limits


CN: "Credit limits are established as part of accepting new customers.


a) In case of manual system the Sale orders and outstanding receivables are compared to established credit limit before a new order is processed. Orders in excess of credit limit are stored in a suspense file to be resolved on a timely basis.


b) In case of automated system, invoice and dispatch documents shouldn't be generated in the case the sale value exceeds the credit limit. Any deviation to be approved as per SOA. "
 
f. CO: Sales to fictitious customers (on credit) are prevented and detected.



RS: Order is processed for a Customers outside the Database


CN: "System does not accept Sales Order entry relating to a Customer who does not appear in the Database.


Rejects are placed into a suspense file where they are researched, reviewed and re-entered (if necessary) on a timely basis.

g. CO: Only appropriate users can enter Sales Order.



RS: Inappropriate access to Sales Order systems.


CN: "Access levels are pre-defined based on clear job responsibility.


Independent periodic review by management of ""Access Levels Rights"""
 
i. CO: All valid orders are processed and recorded.



RS: Back orders are not fulfilled.


CN: Policy and procedures are in place to log, track and monitor back orders.


Sales orders are pre-numbered and sequential order monitored by Sales Team
 
i. CO:Cancellations of orders are processed and recorded.



RS: Cancellations of orders are input inaccurately.


CN: Cancellation data is matched to the Original Order and approved by the Sales Head
 
3. Invoice Generation and Dispatch



a. CO: Deliveries are recorded in the proper period.


RS: Backlog orders are not properly monitored.


CN: Unfulfilled orders are monitored on a regular basis by the Sales Executive
 
b. CO: Deliveries are recorded accurately and completely.



RS: Inventory is incorrectly recorded.


CN: "The shipping system automatically generates work orders or inventory “pick” documents based on feeds from the sales order system. Edit checks against the sales order system ensure that these documents are complete and accurate.


The work orders or inventory “pick” documents are sequentially numbered and accounted for. A manual or system check is performed to ensure that the numerical sequence of these documents is maintained. All rejected, suspense, or missing items are researched, corrected and re-entered on a timely basis.


c. CO: Sales are recorded in the proper period.



RS: Deliveries are recorded prematurely or in the incorrect period.


CN: "Upon transfer of the shipment to the carrier, the shipping document is noted as “released/shipped” in the shipping system.


The systems should also not allow the predating of the shipping documents. (Note all shipments are FOB shipping point.) This notation includes the date and time of release.


Further, periodic physical verification must be undertaken by a team independent of sales, dispatch and shipping to reconcile physical stock as per system stock."
 
d. CO: Sales are recorded in the proper period.



RS: Delivery is made in an improper reporting period.


CN: Delivery during the period are reconciled to sales on a regular and frequent basis by a team independent of sales, dispatch and shipping to ensure that sales revenue is recognized in the proper period.
 
e. CO: All work orders or shipments of goods are input for processing.



RS: Work orders are incomplete or missing.


CN: On a daily basis, a system report of all open work orders or inventory “pick” documents is provided to the shipping department manager. All items are investigated and resolved as appropriate.
 
f. CO: Postings made to cost of sales and/or inventory in the general ledger are correct.



RS: Incorrect posting of COGS and Inventory


CN: Based on the date and time of shipping, the shipping system then appropriately updates inventory/COGS accounting records based on quantities shipped (partial shipment of orders is permitted). If a partial order is shipped, the remaining items are held in the shipping system as an open work orders or inventory “pick” documents.
 
g. CO: Only appropriate users can enter delivery of goods.



RS: Inappropriate access to delivery systems.


CN:"Access levels are pre-defined based on clear job responsibility.
 
Independent review by management should also be done."
 
i. CO: Sales invoice is generated for every approved shipment and recorded in the proper period.



RS: Shipments may not be billed, or may not be billed timely.


CN: Upon approved release of a shipment from the warehouse the system automatically produced invoices with the same date. Shipping dates cannot be modified with out approval by the appropriate levels of management.


"Invoices are sequentially pre-numbered and accounted for. Check is performed to ensure documents are not missing or duplicated or fall outside of a specified range of numbers.


All rejected, suspense, or missing items are researched, corrected and re-entered on a timely basis."
 
j. CO: Invoices generated represent the actual goods shipped.



RS: Billings may be inaccurate or incomplete.


CN: "A team independent of sales, dispatch and shipping reconcile the invoices generated for the day with the total shipments per the shipping system. A check is performed to ensure data is not duplicated or falls outside a specified range of numbers.


All rejected, suspense or missing items are researched, corrected and re-entered on a timely basis. "
 
k. CO: Price, amount, and other information on the invoice are correct.



RS: Billings may be inaccurate or incomplete.


CN: "System validate invoice data input (for example, customer name and number, pricing, amounts and other information) against approved data and the sales order input in the system.


Invalid data is rejected for re-entry or stored in a suspense file where it is researched, corrected and re-entered on a timely basis to ensure completeness."


"Management's approval is required for discounts and allowances in excess of predefined limits. Invoicing personnel examine the sales order for evidence of appropriate approval before input.


The lack of approval creates a suspense file that is reviewed by management for clearance on a regular basis. "
l. CO: Duplicate recording of invoices is prevented.



RS: Duplicate sales Invoice are generated and billed


CN: "A system check is performed to ensure invoice numbers are not duplicated or fall outside a specified range of numbers.


All rejected, suspense or missing items are researched, corrected and re-entered on a timely basis."
 
m. CO: Correct postings, are made to sales and receivables and are recorded in the proper period.



RS: Inaccurate, incomplete and untimely recording of Sales


CN: Upon approved release of a shipment from the warehouse the invoice are approved by Logistic Team in the system. The invoicing system then appropriately updates Sale/receivable accounting records.
 
o. CO: The calculation and application of tax amounts on invoices is accurate.



RS: Taxes and duties may be incorrectly computed and recorded


CN: The Excise Duty, sales tax, goods and services tax, and / or value added tax tables are updated accurately in the system. The system automatically calculates the tax amounts. Management reviews tax calculations for accuracy.
 
p. CO: Correct goods are shipped and accurately recorded.


RS: "Incorrect quantities may be shipped
Shipments made may not be properly (accurately & completely) recorded"

CN: "Shipments are subjected to dual counts (picking & packing) and these counts are evidenced in writing


Physical safeguards are in place at the loading dock and at the gate exit points.


Shipments recorded in the system and recorded by a person independent of the picking & packing.


Shipment documents (bills of lading) are signed by carriers indicating acceptance of quantities shipped.


Access to alter shipping information or initiate shipments is restricted to personnel outside of the shipping function"
 
4. Contract Management



a. CO: Distributor arrangements have to be adequately monitored


RS: Inadequate review of new and modified contracts (including distributor arrangements) resulting in improper revenue recognition


CN: Distributor arrangement should be adequately reviewed by the Finance Manager & monitored regularly for appropriate revenue recognition
 
q. CO: New sales contracts as well as contract modifications are properly reviewed for appropriate accounting treatment, prior to execution.


RS: Inadequate review of new and modified contracts (including distributor arrangements) resulting in improper revenue recognition


CN: "Standard contracts developed and reviewed by the Finance & Legal function to ensure that they are in accordance with GAAP


Exceptions from standards must be approved by Finance for revenue accounting implications, prior to execution. Factors to consider include: existence of multiple elements, incentives, pricing and discounts, installations, price protection provision, customer acceptance and guarantees.


Establish materiality threshold over which revenue contracts must be reviewed and approved by designated levels of Sr. Management prior to committing the Company


Non-standard contracts terms should be reviewed for administrative feasibility by Operations/Finance and communicated to those responsible for implementation and follow up (e.g. pricing, credit line, terms and conditions etc).


c. CO: Sales Contracts are standardized and must be clear and legally enforceable.



RS: Sales contracts may be unenforceable, resulting in loss to the Company


CN: "Legal counsel should review contracts where appropriate to assure that the contract is correct and appropriate and the Company is not exposed to unnecessary liabilities.


Standardized or clearly defined contract terms and conditions


Approval and communication process for non-standard terms and conditions


Contractual remedies are specified"
 
d. CO: Only written sales contracts signed between the company and customer is recognized as official.



RS: Side arrangements may result in the original contracts being rendered unenforceable, and may also impact the company's ability to recognize revenue


CN: "Final contract reflects the main points of negotiated customer proposal, including all negotiated terms


Final contracts agreed between customer and the Company should be signed.


Procedures should exist which restrict side arrangements (whether oral or written) from be entered into or recognized by the company


Communicate with sales personnel (i.e.. through training and formal policy) to avoid issuing unauthorized side agreements and similar instruments that undermine the intent of the original contract. e.g. promise of future product, price protection arrangement.


Procedures for disciplinary action taken when side agreement is identified.


f. CO: All new contracts and changes to contracts are reviewed and approved before being executed and input into the contract system.



RS: "Amendments from standard contracts have not been approved.


Sales contracts and pricing may not be adequately evaluated and authorized prior to execution"


CN: "Procedures are in place requiring various levels of approval prior to contract execution and input into the contract system


Formal procedures exist which specify the levels of management that may commit the company to the performance of a contract."


"Access to effect changes to contracts in the contracting system is limited to appropriate personnel (who have no responsibility for order entry or maintenance of customer accounts receivable).


All changes/additions made within the contracting system are subject to independent review through use of numerically or date controlled edit reports.


All contracts with any amendments are forwarded to Legal.


Legal consults with management, external counsel, and external auditors as needed for feasibility of terms."
 
5. Recievable monitoring
a. CO: The receivables from the customer are managed within the Company’s norms



RS: Collection targets are not determined.


CN: Collection target are prepared by the Sales Team every month by 7th (ideally) based on the previous month close balance and first week sales


The credit period has been kept at XX days for all Customers.


Security Deposit are obtained from all Distributor for minimizing the impact of any default by the distributor. Extent of security deposit to be received is spelt out in the Sales policy document, exceptions are escalated for approval as per SOA.


The Security Deposit is revised every year based on the revised allocation.
 
b. CO: The receivables from the customer are managed within the Company’s norms



RS: Customers are not encouraged to pay earlier than credit period


CN: The Company provides Early Payment Incentive to its Customers to encourage payment prior to due date. A process to identify and accrue early payment discounts if not adjusted with payment exists.


Delayed payment charges (DPC) is charged to distributor for any delay in receipt of payment. DPC terms are clearly mentioned in the Customer Contract and in the printed copy of Invoices.