Internal Audit Checklist: Client Acceptance and Sales Agreements

Pricing Discount RiskIn general, the objective of an internal audit is to assess the risk of material misstatement in financial reporting. Material misstatements can arise from inadequacies in internal controls and from inaccurate management assertions. As such, testing the validity of various implicit managerial assertions is a key objective of an internal auditor.

While this applies to all financial cycles, this article is the fourth in a series focusing on the General Control Activities for the Sales, Invoicing and Credit Management (SICM) cycle. The most important general controls for SICM include:

Client Acceptance

The most important goal with the Client Acceptance process is to make sure your company is only approving credit worthy clients. If your company extends credit to non-credit worthy clients, the result will invariably become bad debt.

When conducting the audit look out for the following controls/best practices:

  • Evaluate process for gathering client background and credit data.
  • Make sure the new client data is reviewed and approved by appropriate management.
  • Review the process for performing credit checks (credit reports, reference check, etc.).
  • Ensure credit limits are set based on established procedures and reviewed and approved by appropriate management.
  • Review the process for identifying and tracking black listed clients.
  • Make sure a list of new customers and their credit limits is periodically reviewed by the responsible manager.
  • Evaluate the process for requiring advance payment by new clients

Sales Agreements

There are three primary goals for creating Sales Agreements with clients, which include:

  • Making sure that all agreements are profitable.
  • Making sure there is agreement on all contractual terms.
  • Making sure the company is protected from future misunderstanding with clients over terms or trade (direct costs or business disruption).

There are a variety of risks with an informal sales agreement process. The most obvious of which is that the company can enter into non-profitable agreements. However, your company could also be exposed to onerous commitments that are not in the best interest of the business, could face unnecessary risks because of informal agreements, and/or agreements could violate policies and procedures including anti-bribery and foreign corrupt practices legislation.

When conducting the audit look out for the following controls/best practices:

  • Contracts should be signed by authorized management to ensure the final approved version is adopted.
  • All contracts must be signed in accordance to Corporate Directives and in line with the schedule of authority.
  • Assure that there are standard templates for contracts.
  • Make sure there are standard templates for agency and distribution agreements with standard terms and conditions which have been reviewed by appropriate management and/or legal prior to the contract being signed.
  • Make sure that consideration has been given for anti-bribery clauses in instances where appropriate.
  • Review all contract support documentation, including margin analysis.
  • Make sure the contract file is maintained and filed with legal where appropriate.
  • In cases where a standard contract is not used, make sure that standard terms and conditions are attached to order quotations, confirmations and invoices.
  • Make sure that contracts do not contain anti-competitive terms, such as tying a supplier to a certain price, or restricting seller to only sell goods to certain customers.

Pricing and discount verification

The primary goal for the Pricing and Discount Verification process is to make sure that the agreements are profitable. Managerial review of pricing and discounts is important to make sure that there are no unauthorized changes to prices and that there is not preferential treatment to certain clients (maintaining competitive compliance).

When conducting the audit look out for the following controls/best practices:

  • Make sure the standard price list/discount list available and reviewed on periodic basis.
  • Assure that prices calculated based on cost, competitive environment, and/or market information.
  • Verify that price list is fixed in ERP system.
  • Validate that price and discount levels are approved in accordance with the schedule of authority.
  • Make sure that prices and discounts are transferred to sales system by a staff member and checked by the responsible manager.
  • Verify that there is a process to regularly review access rights permitting changes to prices and/or discount terms.
  • Validate that margin analysis at product and customer level is regularly completed.

In conclusion, auditing standards require that auditors test basic underlying management assertions implicit in the financial statements. Key objectives to these assertions are; Existence and Completeness, Rights and Obligations, Valuation or Allocation, and Presentation and Disclosure.


 
 

2 comments on “Internal Audit Checklist: Client Acceptance and Sales Agreements