Accounts Receivable Audit and Risk Assessment Best Practices

A healthy payment cycle is key to operational success. When payments are delayed or stuck, it’s unrealistic to expect smooth business operations. That’s where strategic practices like accounts receivable audits and risk assessments come in. These tools safeguard your working capital, minimize financial leakage, and position your business for sustainable growth.

A survey from Revelwood revealed that 75% of finance executives now view accounts receivable as a key strategic function, rather than just a back-office task¹. Stats like this tell us how companies are increasingly realizing that AR isn’t just about collecting payments. Instead, it’s a strategic lever for optimizing cash flow and improving overall financial stability.

An audit of accounts receivable and a risk evaluation can help a business determine its financial standing and identify steps for future development. This blog sheds light on some best practices to follow when conducting accounts receivable risk assessments.

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What is the Audit of Accounts Receivable?

An audit of accounts receivable is a detailed check of the money your customers owe you. It keeps your records accurate and prevents fraud or mistakes in your financial reports. Auditors review documents like balance sheets and income statements to ensure that your business is accurately reflected.

Auditing your receivables is important because it shows the true status of your incoming cash. It also helps you understand accounts receivable risks and controls, such as how well you manage late payments and how strong your internal processes are.

In contrast, some problems that could occur in the absence of AR audits are:

• Missed or delayed payments that go unnoticed
• Unsent or unrecorded invoices, leading to lost revenue
• Increased risk of fraud or errors in financial reports
• Poor cash flow, making it harder to cover daily expenses
• Weak internal controls can affect the company’s financial health and reputation

It may be done by your own team (internal audit) or by a government agency (external audit). Nonetheless, the core purpose of an accounts receivable audit remains the same: to provide a clearer picture of your financial health and help you plan better for the future.

Key Areas in Accounts Receivable Risk Management

When trade receivables are overstated or misreported, it becomes difficult to present a true and fair view of a company’s finances. This can raise the risk of fraud and limit the auditor’s ability to detect any serious errors. That’s why following proper accounts receivable audit procedures and assertions is essential during an audit.

The focus areas during this process include:

Existence

One of the most important areas auditors focus on is existence. They verify that the receivables listed in the financial statements are genuine. This is usually done by reviewing sales invoices and sending confirmation requests to customers. Auditors carefully verify that all reported receivables are legitimate and likely to be collected.

Valuation

For financial statements to be reliable, receivables must be recorded at the amount the business actually expects to collect. This means checking if enough has been set aside for doubtful debts and whether any receivables should be written down. If the valuation is off, it can lead to overstated profits and misleading financial reports.

Cut-Off Testing for Trade Receivables

Accurate financial reporting depends on recording sales in the right accounting period. If sales are logged too early or too late, it can throw off revenue and profit numbers. To ensure everything lines up, auditors review sales invoices and shipping records to verify that the timing of transactions is accurate.

Steps to Follow When Conducting Accounts Receivable Risk Assessment

Regularly reviewing your customers' credit history and the factors that affect unpaid invoices can cut down accounts receivable risks. These checks should be a core part of your risk management process and can be organized using an accounts receivable risk and control matrix.

Segment Your Customers

Dividing your customers into groups makes it easier to spot patterns and potential risks. You can segment them by location (domestic vs. international), industry, type of product or service, or account size, based on how much they owe.

Pay special attention to customers who regularly miss payment deadlines, especially if they account for a large share of your receivables. If just a few clients represent most of your outstanding payments, losing their income could put your cash flow at serious risk.

Review Past Customer Payment Losses

Reviewing your past losses from customers who couldn’t pay helps you spot trends and reduce future risks. For example, if many unpaid accounts come from the same industry or region, it might be time to tighten credit terms or add extra safeguards for those customer groups.

This review also gives you a chance to improve how your company handles receivables. Review how you perform credit checks. Check if your credit limits make sense. Make sure your processes follow accounts receivable audit procedures and assertions. This will help strengthen controls and reduce payment risks.

Review Security Measures and Guarantees

After identifying high-risk customers, take note of any protections you have in place—like credit insurance, letters of credit, liens, bonds, or asset transfers. These measures help reduce the chance of financial loss.

Ensure that your higher-risk customers have sufficient safeguards in place. Once you’ve reviewed all security arrangements, it's a good time to reassess payment terms for all your customers to ensure they align with the level of risk involved.

Review Your AR Aging Report

An aging report helps track how long your invoices have been unpaid. It sorts receivables into time frames, such as current, 1–30 days, 31–60 days, and so on. This gives you a clear view of which accounts are overdue and how much they are overdue.

This report is a key tool during accounts receivable audit. It helps you spot customers who may be turning into credit risks. If certain clients often pay late, consider adjusting their payment terms or requesting upfront payment.

Managing accounts receivable risk is crucial to staying afloat in the business world. Instruct your finance team to conduct due diligence on new customers, update credit insurance, and letters of credit accordingly. When entering new markets, assess economic risks and monitor credit ratings. These measures will help safeguard your receivables as your business scales.

Accounts Receivable Audit Procedures and Assertions

By now, we’ve established that accounts receivable are one of a company's biggest assets. Auditors tend to spend a good enough time to gain assurance that the stated amount of the asset is reasonable.

The steps involved in this audit are:

1. Start by matching the total accounts receivable balance to the general ledger to ensure consistency in your financial records.
2. Add up all customer invoices to confirm that the total aligns with the amount recorded in the general ledger. Invoices can be in any format that clearly outlines the amount owed by customers.
3. This process, adding up and verifying all receivables, is called reconciling the receivable report.
4. Next, investigate any discrepancies or items that need reconciliation. For larger amounts, compare journal entries with the supporting documents to confirm accuracy. Well-documented entries make this process smoother.
5. Then, select a few invoices at random and match them with supporting documents, such as delivery notes or contracts, to ensure the charges are accurate and legitimate.
6. For customers with large outstanding balances, you may need to contact them directly to confirm the amount owed. This step, often done at the end of the audit period, strengthens the reliability of your receivable records.
7. Review your receiving logs and check for any related party transactions. This helps identify any unapproved shipments or transactions near the end of the audit period that may need further review.
8. Finally, examine financial trends in your accounts receivable. Analyzing these patterns gives you a better picture of your company’s cash flow health and ensures everything aligns before closing the audit.

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Common Accounts Receivable Audit Challenges

An audit of accounts receivable is an indispensable part of a business. But, despite its importance, there could be some challenges that auditors often come across, such as:

• Incomplete or inaccurate customer records
• Unsent or misfiled invoices
• Lack of standardized audit procedures
• Difficulty reconciling aged receivables
• Delayed responses from customers during confirmations
• Inconsistent credit policies across departments

Indeed, accounts receivable risk assessment is a stressful process. However, a business tends to be in a better place when it’s well-prepared and has solid policies. Maintaining strong audit practices is key to leading the current business landscape.

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FAQs - Accounts Receivable Audit and Risk Assessment Best Practices

Here are some of the most commonly asked questions:

What are accounts receivable risks?

Accounts receivable risks can slow down the money coming into your business, making it harder to grow. Good risk management helps ensure that customers pay their invoices on time, keeping your cash flow steady.

What’s the difference between a risk assessment and an audit?

A risk assessment comes first. It helps a business identify and understand potential problems or areas for improvement. An audit comes later. It checks if the company is following the right steps to fix those problems.

What is the biggest problem with accounts receivable?

The most common issues include late payments, inaccurate records, customer disputes, and keeping up with new payment methods. These problems can disrupt cash flow and add extra work for your team.

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Sources used:

1. Unlocking the Potential of Accounts Receivable in 2024

Sources last checked on date: 04-Jun-2025