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How to Complete an Audit on Cash and Accounts Receivable

by Kevin Johnston, Demand Media

Prepare your small business records for auditing cash and receivables.

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mistakes or fraudulent transactions. Examine the types of controls a business should have for cash and accounts receivable, and you will have a plan for auditing transactions.
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Cash and Check Totals Step 1

Compare deposits to your register and invoice totals. These totals should exactly match for the period being audited. If your deposits are less than your register and invoice totals, you have a cash-handling problem in your operation.

Step 2
Examine deposit slips to find cash and check totals. If the grand total matches your sales figures, but the cash total does not match what you showed was taken in as cash, you may be a victim of lapping. Lapping is where an employee removes a check from the register before it gets recorded. The days sales are reported without the check. The next day the employee places the check in the register and removes an identical amount of cash. Your sales totals match your deposit totals, but you lost money. When cash totals and check totals do not match your records, this is an indication that someone is removing money from the register.

Step 3
Compare inventory figures to sales figures. Your employees should only be taking items out of inventory when there is a sale. If you find your employees have removed more inventory than you sold, this may indicate some orders were never recorded and that the cash was pocketed.

Step 4
Complete your cash audit by noting any discrepancies in the amount of inventory removed from stock, cash totals, check totals and deposit totals. Completing your cash

audit in this way will reveal exactly where the problem is occurring in your cash handling.

Accounts Receivable Step 1

Examine customer orders. Your accounts receivable represent customer purchases that were made on credit. In other words, you agreed to invoice your customers and let them pay at a later date. Examine the orders you wrote up and compare them to the invoices you sent out. You should find identical numbers on the invoices and the order forms.

Step 2
Compare invoices to checks and receipts. You should have a check for each invoice you issued, and the amounts should match exactly. If you have an invoice and no check, you must examine your deposit records to see if you deposited a check, and you should contact the customer to ask if she paid the invoice. If your research shows you that the invoice was paid, but the check did not make it to the bank, you may have a problem with your controls for accounts receivable income. At that point, look to see if you issued a receipt. If a receipt confirms the invoice was paid, the problem lies in how the check was handled -- or mishandled.

Step 3
Examine your bills of lading from the shipping department. This is a document included in shipments to tell the customer exactly what was shipped. Your shipping department should send copies of these bills of lading to the billing department. If you discover that an invoice was not sent that matches a bill of lading, you know you failed to bill a customer.

Total Cash and Receivables Step 1

Total your outstanding accounts receivable. Any invoices that customers have not paid count as outstanding accounts receivable. Add your outstanding accounts receivable, your total cash deposits and your check deposits. You may also add in any

figures for invoices that were paid by credit cards. This figure represents your total revenues for the period.

Step 2
Your total revenues should equal your gross sales figure for the period you are auditing. If the figures do not match, examine your system for handling sales transactions to find where the problem is occurring.

Step 3
File a copy of all of your internal audits and review them periodically. In particular, you should note any outstanding accounts receivable that show up on several auditing reports. This may indicate you have a collection problem.

Chart of accounts
A chart of accounts (COA) is a created list of the accounts used by a business entity to define each class of items for which money or the equivalent is spent or received. It is used to organize the finances of the entity and to segregate expenditures, revenue, assets and liabilities in order to give interested parties a better understanding of the financial health of the entity. The list can be numerical, alphabetic, or alpha-numeric. The structure and headings of accounts should assist in consistent posting of transactions. Each nominal ledger account is unique to allow its ledger to be located. The list is typically arranged in the order of the customary appearance of accounts in the financial statements, balance sheet accounts followed by profit and loss accounts.

[edit]Nomenclature,

classification and codification

Each account in the chart of accounts is typically assigned a name and a unique number by which it can be identified. (Software for some small businesses may not require account numbers.) Account numbers are often five or more digits in length with each digit representing a division of the company, the department, the type of account, etc.

As you will see, the first digit might signify if the account is an asset, liability, etc. For example, if the first digit is a "1" it is an asset. If the first digit is a "6" it is an operating expense. A gap between account numbers allows for adding accounts in the future. The following is a partial listing of a sample chart of accounts.

[edit]International

aspects and accounting information interchange - Charts of accounts and tax harmonisation issues
Most countries have no national standard charts of accounts, public or privately organised, and improvisation is the case. In many countries there are general guidelines, and in France the guidelines have been codified in law. Sweden has a very well developed standard chart of accounts, the branch organisation BAS chart has existed for several decades, making Sweden an exception to the improvisional rule. Sweden's standardized chart of accounts is also related to the income tax coding (SRU) of the Swedish tax authority. Differences in the Chart of accounts breakdown and meanings between countries represents a much bigger compatibility problem for accounting and financial information interchange between cultures, than physical file format. To a large extent, charts of accounts are a mirror of the tax legislation and governmental taxation reports. Different Tax regulations (lack of harmonisation of law) also make huge differences in the actual content of accounting and financial report information between countries. The EU commission has spent a great deal of effort on administrative tax harmonisation, and this harmonization is the main focus of the latest version of the EU VAT directive, which aims to achieve better harmonization and support electronic trade documents, such as electronic invoices used in cross border trade, especially within the European Union Value Added Tax Area. However, there is still a great deal to be done to realize a standard chart of accounts and international accounting information interchange structure.

[edit]Trial

Balance

The trial balance is a list of the active general ledger accounts with debit and credit balances. A balanced trial balance does not guarantee that there are no errors in the nominal ledger entries.

[edit]Types

of accounts

1. Asset accounts: represent the different types of economic resources owned or controlled by business, common examples of Asset accounts are cash, cash in bank, building, inventory, prepaid rent, goodwill, accounts receivable[1] 2. Liability accounts: represent the different types of economic obligations by a business, such as accounts payable, bank loan, bonds payable, accrued interest.[citation needed] 3. Equity accounts: represent the residual equity of a business (after deducting from Assets all the liabilities) including Retained Earnings and Appropriations.[citation needed] 4. Revenue accounts or income: represent the company's gross earnings and common examples include Sales, Service revenue and Interest Income.[citation needed] 5. Expense accounts: represent the company's expenditures to enable itself to operate. Common examples are electricity and water, rentals, depreciation, doubtful accounts, interest, insurance.[citation needed] 6. Contra-accounts: Some balance sheet items have corresponding contra accounts, with negative balances, that offset them. Examples are accumulated depreciation against equipment, and allowance for bad debts against long-term notes receivable.

[edit]Example
[edit]US

GAAP Simple Chart of Accounts

[edit]Group headings

Revenue Cost of Goods Sold SG&A Establishment Expenses

Interest Expenses Administration Expenses

Within each of these headings will be the individual nominal ledger accounts that make up the chart of accounts. E.g. establishment expenses may consist of rent, rates, repairs, and so on.

[edit]Balance Sheet Accounts [edit]Asset Accounts

[edit]Liability Accounts 201 Accounts Payable (Creditors) 206 Credit Cards 210 Tax Payable 220 Employment Expenses Payable 250 Bank Loans 270 Accrued Expense [edit]Stockholders' Equity Accounts

101 Cash - (Cash On Hand) 102 Bank Accounts 103 Accounts Receivable (Debtors) 104 Prepaid Expenses 105 Inventory (Stock On Hand) 106 Buildings 107 Accumulated Depreciation On Buildings 108 Vehicles & Equipment 109 Investments & Stocks 110 Other Assets 111 Accrued Income

300 Common Stock (Share Capital), 350 Retained Earnings (Revenue Reserves), 360 Dividends 370 Drawings

[edit]Profit & Loss accounts

[edit]Revenue Accounts

[edit]Expense Accounts 601 Advertising Expense 605 Bank Fees 606 Audit Fees 610 Client Expense 620 Depreciation Expense 630 Training Expense 640 Payroll Expense 645 Sales & Dist. Expense 646 Rental Expense 650 Income Tax Expense 655 Information Technology Expense 660 Insurance Expense 670 Office Expense 675 Utilities Expense 677 Maintenance - Vehicle 685 Legal Expense 690 Personnel Benefits' Expenses 695 Communication Expense 696 Travelling & Conveyance

400 Sales Revenue 401 Sales Returns & Allowances (Contra account) 402 Sales Discounts (Contra account) 420 Interest Income (Non-Operating Revenue) [edit]Cost of Goods Sold Accounts

5000 Purchases (Beginning Inventory + Purchases - Ending Inventory)

5001 Purchase Returns & Allowances (Contra Account)

[edit]French

GAAP chart of accounts layout

The French generally accepted accounting principles chart of accounts layout is used in France, Belgium and many francophonecountries. The use of the French GAAP chart of accounts layout (but not the detailed accounts) is stated in French law. In France Liabilities and Equity are seen as negative Assets and not account types of them selves, just balance accounts.

[edit]Balance Sheet Accounts

Class 1 Liability Accounts Class 2 Asset Accounts Class 3 Stocks Accounts Class 4 Third-Party Accounts Class 5 Financial Accounts [edit]Profit and Loss Accounts Class 6 Costs Accounts Class 7 Revenues Accounts [edit]Special Accounts

Class 8 Special Accounts

[edit]Swedish

BAS chart of accounts layout

The complete Swedish BAS standard chart of about 1250 accounts is also available in English and German texts in a printed publication from the non-profit branch BAS organisation. BAS is a private organisation originally created by the Swedish industry and today owned by a set general interest groups like, several industry organisations, several government authorities (incl GAAP and the revenue service), the Church of Sweden, the audits andaccountants organisation and SIE (file format) organisation, as close as consensus possibly (a Swedish way of working without legal demands). The BAS chart use is volunteer, is not any legal demand in Sweden, but so politically well anchored and well developed that it is commonly used by all. The BAS chart is not an SIS national standard because SIS is organised on pay documentation and nobody in the computer world are paying for standard documents. BAS were SIS standard but left. SIS Swedish Standards Institute is the Swedish domestic member of ISO. This is not a government procurement problem due to the fact all significant governmental authorities are significant members/part owners of BAS. An almost identical chart of accounts is used in Norway.

[edit]Balance Sheet Accounts

[edit]Asset accounts
1000 Immaterial assets 1100 Buildings and land assets 1200 Inventories, Machines, Vehicles & Equipment assets 1300 Financial relations with other near companies 1400 Stored products and work in progress 1500-1699 Receivables 1700 Pre-payments and accrued income 1800 Securities market assets 1900 Cash & Bank Accounts [edit]Liabilities accounts 2000 Equity 1 2100 Reserves 2200 Deposits (staff pensions etc.) 2300 Loans 2400 Short debts (payables 2440) 2500 Income Tax Payable 2600 VAT Payable 2700 Staff income Payable 2800-2999 other liabilities [edit]Profit & Loss accounts

[edit]Revenue accounts
3000 Revenue Accounts [edit]Expense accounts

4000 Costs directly related to revenues 5000-7999 General expense Accounts 8000 Financial Accounts 9000 Contra-accounts