Internal Audit Checklist: Credit Management

Internal Audit of Credit Management

In 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 ninth 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:

Debt Monitoring

The purpose for Debt Monitoring is to make sure debts are received on time and meet terms of customer agreements. If not effective the result will likely be either an increase in bad debts or slow paying customer, increasing the cost of working capital.

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

  • Verify that customer account statements are mailed periodically.
  • Make certain that aged debt analysis is performed and reviewed by the responsible manager. Any follow up action should be taken and tracked to ensure timely closure.
  • Validate that AR aging is frequently sent to sales for timely monitoring.
  • Check to see if chasing letter is sent automatically by the system and a credit block is automatically activated.
  • Verify that dunning procedures include details of when to invoice outside solicitors or debt collection agencies.
  • Validate that all changes to credit limits are appropriately authorized, and rationale maintained.

Debt Factoring

The objective of Debt Factoring is to minimize the cost of financing.

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

  • Verify that any debt factoring should be approved by appropriate management/finance.
  • Test to be certain that all relevant information is communicated in a timely fashion to factoring firm.
  • Validate that factored balances are correctly disclosed in reporting.
  • Make sure that debt financing statement is regularly reconciled, especially in cases where discounting is in practice.
  • Assess whether other local credit instruments are in place and if they are applied in line with local regulations and practices.

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.