The sales and collections cycle in a business refers to the set of processes that begin when a customer purchases goods or services and ends when business receives payment in full. As part of the year-end audit of your financial statements, external accountants test sales transactions and the internal controls over those transactions to ensure your company is not materially misstating its revenues or accounts receivable.
- Obtain an understanding of the procedures for developing and documenting sales forecasts.
- Verify the approvals required as per the defined limitation of matrix signed by the management.
- Verify the timelines for preparation and review of sales forecasts and test check on sample basis whether the same is being followed.
- Verify the access rights for updating sales forecasts in the system and validate the same with DOP.
- Verify the parameters for developing sales forecasts. Verify that factors such as seasonal demand, market analysis, competitor intelligence and previous year sales etc.
- Verify that management periodically performs a variation analysis between sales forecasts and actual sales (sales volume and revenue).
- Verify root cause analysis has been performed for major variances.
- Verify that customer identification strategies have been defined for all products and ascertain whether they are reviewed periodically and approved as per DOP.
- Verify the agreements on a sample basis entered with the customers and approved as per DOP. For a sample of new customers created test check the accuracy of customer details updated in the customer master with the approved customer creation forms.
- Review the system configuration to verify if all essential customer details are to be mandatorily entered into the system
- Review the system access rights to verify if the access to create and modify customer details and also verify the Log for Addition/Modification in customer master.
- Review the system controls for duplicate/inactive customer codes.
- Verify the product pricing policy.
- Verify the overhead considered in pricing of the product.
- Verify the approval and working of pricing of the product.
- Verify the frequency of amendments in pricing.
- Verify the prices as per the sales order vis-à-vis the price list and highlight the difference.
- Verify the approvals for the differences.
Sales Order Processing
- Review the process for receiving sales orders from customers from different sources (such as emails/ fax/ phone/ post) and updating them in the system.
- Review the system configurations and controls w.r.t the creation of sales order and modification therein, if any.
- Review system configuration to verify that expected delivery date of goods are accurately applied in the sales order confirmations based on production lead times or other approved parameters.
- Verify that segregation of duties have been defined between the personnel responsible for creating/ modifying/ cancelling sales orders and the personnel responsible for approving sales orders in the system.
- Verify the serial control for Sales order created during the audit period.
- Verify the credit limit given to customer has been considered before processing of the order and system control for credit limit.
- Data analytics to identify instances where date of dispatch was prior/ very close to date of sales order entry. Also verify system control for backdated sales order creation.
- Review the process related to generation of invoices.
- Obtain the list of Invoices raised during the year and verify with Sales order and Dispatches.
- Verify for each dispatches, an invoice has been generated; compare the gate outward registers vis-à-vis Invoice register.
- Verify Each invoices created, modified and cancelled as per DOP.
- Verify that segregation of duties have been defined for creating , approval and modification of invoices.
- Verify whether manual invoices have been created; if yes, analyze the reason for the same.
- Verify whether invoices having zero value have been generated
- Test check for a sample of intercompany invoices to verify that applicable rates have been used for invoicing.
- Perform an ageing analysis for open sales orders to identify orders where invoices have not been generated.
- For invoices raised during the audit period, verify that payment due date as per the invoice is in line with the defined payment terms for customers.
- Verify the serial control for Invoices created during the audit period and analyze the reason for the missing serial number, if any.
- Verify whether any invoices have been cancelled during the audit period and confirm whether the same has been approved as per DOP.
- Obtain the cases wherein invoices have been generated; however, goods not dispatched.
Collection & Accounts Receivable
- Verify the policies/ procedures/ guidelines for monitoring and follow up for receivables from customers.
- Obtain the invoice date wise accounts receivables as on date and analyze the ageing for the same; highlight the case of overdue receivables.
- Verify the policies/ procedures/ guidelines for creating provisions for bad debts and validate whether the provisions have been created as per the define policies.
- Obtain an understanding of the modes through which payments are received from customers.
- Verify whether any short collections have been received against the invoices; if yes, analyze the reason for the same.
- Verify that collections are accurately posted to the right ledger account and Verify whether collection have been adjusted against each invoices.
- Review the unreconciled credit if any; i.e. collections received but not set off against customer invoices.
- Finished stocks received are properly recorded and securely held.
- There should be system control so Outward should not more than quantity as per Invoice or Sales order.
- Timeliness is maintained in case of local dispatches from warehouse in accordance with ‘Revenue Recognition’ norms as per Indian GAAP Closing Guidelines or IND-AS.
- Verification of invoices (local deliveries) with acknowledgement and/or Proof of Delivery (POD) to ensure that the concerned materials were delivered within the last day of the month.
- Verification of LR copy (upcountry deliveries) to ensure that materials were handed over to the transporters within the last day of the month.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.
CA Aman Aggarwal
AKGVG & Associates