ACCOUNTS RECEIVABLE,

CREDIT AND
COLLECTIONS AUDIT
REPORT
AGENDA

03 Executive Summary 23-24 Appendix E

04 Objectives, Scope & Procedures 25-26 Appendix F
Performed
27 Acknowledgments
05 Background
06 Key Statistics
07-14 Issues and Observations
15 Appendix A
16 Appendix B
17-21 Appendix C
22 Appendix D

2
EXECUTIVE SUMMARY

Internal audit conducted a review of Company X’s accounts receivable and credit/collections processes at the corporate headquarters in
Location X in (Month) (Year). The objective of this review was to obtain an understanding of the processes, evaluate the adequacy and
effectiveness of the associated internal controls, and to identify opportunities for process improvements.
In (Month) (Year), Company X corporate converted from System A to System B. Since the System B conversion, Company X has been
spending a substantial amount of time and effort to make the system fully functional. During this review, obtaining data from System B was
difficult, and the functionality of System B (e.g., the forecasting tool) was not being fully utilized because of system errors. These system
limitations and the difficulty obtaining reporting information may hamper management’s ability to make informed decisions.
The internal controls related to the accounts receivable, credit and collections processes need to be improved. Based upon our detailed
review of the processes and limited transaction testing, internal audit noted that the policies and procedures are not clearly defined or do not
exist for many areas, and need to be consistently adhered to by employees and enforced by Company X management.
The following is a summary of the issues and observations noted during this review. Each issue/observation has been prioritized based upon
its business impact to Company X. For each issue, a page reference has been made to the section of this report which outlines the agreed
upon management implementation plan to address each issue/observation, the responsible person and expected completion of each item.

Issues/Observations Priority See Page

Policies and procedures for the accounting department need to be developed and/or updated. 6

Credit, collections, credit memos and write-off policies should be implemented. 7

The remittance processing function is not automated between the lockbox provider and System B. 8

A formal credit scoring system does not exist. 9

The accounting and credit/collections departments are using a significant number of temporary staff. 10

Web-based registration and prepayment is not used for training classes. 11

The System B accounting and Onyx customer data/billing status systems do not interface with System B. 12
Priority: Low Medium High

3
OBJECTIVES, SCOPE & PROCEDURES PERFORMED

Objective
• Obtain an understanding of the client acceptance, billing, accounts receivable and collections processes.
• Evaluate the effectiveness and efficiency of the existing policies and procedures.
• Review internal controls and operating processes and identify opportunities for improvement.
• Evaluate the quality and integrity of information systems supporting the processes reviewed.
• Compare Company X’s practices to leading practices.

Scope

The scope of the audit included a review of the account receivable, credit and collections processes at Company X’s corporate office
located in Location X.

Procedures Performed

• Interviewed key personnel to obtain an understanding of the accounts receivable, credit and collections processes.
• Reviewed drafts of policies and procedures for the accounts receivable, credit and collections processes.
• Performed transaction testing to evaluate the following:
− Credit memos and write-offs are properly authorized and support exists for these entries
− Customer credit files contain adequate documentation and research with the guidelines in the draft policy
− Cash receipts were posted timely
• Provided accounts receivable, credit and collections leading practices from XXX’s Global Leading Practices Knowledge Base.
• Evaluated the internal control environment against best control practices.
• Benchmarked Company X’s accounts receivable, credit and collection process against other companies.

4
KEY STATISTICS (1/2)

400 700
Accounts Receivable Aging by Product Line
XX XX
350 600

# of Outstanding Invoices
Dollar Value of Invoices
• The System B aging report consists of the following four 300
500
categories: Training, Consulting, License and Legacy 250
(information transferred to System B from System A). 400
XX
200
• The graph to the right shows the total aging per category 300
along with the number of invoices generated as of (Date). 150 XX
XX 200
• As of (Date), gross accounts receivable totaled $XX and do 100
XX XX
not include unapplied payments of $XX and credit memos 100
50 XX
of $XX (net aging of $XX as of [Date]). XX
XX
0 0
Source: System B aging report as of (Date). Training Support Consulting Legacy License

Accounts Receivable Aging Statistics Aging by Category

1-30 31-60 61-90 91-180 181+

Type Current Total
XX% Days Days Days Days Days

Unapplied XX XX XX XX XX XX XX

XX% Credit
XX XX XX XX XX XX XX
XX% Memos

Training XX XX XX XX XX XX XX
XX%
Support XX XX XX XX XX XX XX

Consulting XX XX XX XX XX XX XX
XX% XX%
Legacy XX XX XX XX XX XX XX
Current 1-30 Days 31-60 Days License XX XX XX XX XX XX XX
61-90 Days 91-180 Days 181+ Days
XX XX XX XX XX XX XX

Note: See Issue #5 related to the follow-up of the legacy revenue and employee turnover.

5
KEY STATISTICS (2/2)

Invoices by Type and Dollar Amount

• From the implementation of System B in (Month) (Year) to (Month) (Year), XX invoices were generated in System B for Training,
Consulting, License and Support. These four categories totaled $XX as of (Date). The graph to the left illustrates the total dollar amount
invoiced with the corresponding number of invoices generated.
• See Issue #6.
Source: System B invoice report from (Date) to (Date).

100 80
XX XX
90
70
80
Dollar Value of Invoices

XX 60
70

# of Invoices
50
60

50 40

40
XX 30
30
XX 20
20 XX
XX
XX 10
10

0 0
Consulting License Support Training

Invoice Type

6
 ISSUES & OBSERVATIONS (1/8)

Management Responsible
Issues/Observation
Implementation Plan Party/Timing
Accounting Department Policies: Policies and procedures for the accounting • Review and update (Name) (Date)
department need to be developed and/or updated. accounting policies
(Name) (Date)
1. As a result of the conversion from System A to System B in (Month) (Year), the and procedures for
accounting department has changed many of its processes and procedures. Company current (Name) (Date)
X’s policies and procedures, however, have not been updated to reflect the new processes/conditions.
(Name) (Date)
procedures related to the System B system. Company X’s existing polices and • Document the policies
procedures should be updated and implemented to ensure that efficient and consistent and procedures (Name) (Date)
output is maximized. related to the invoicing
Due to high employee turnover and the importance of generating accurate invoices in a process, including the
timely manner, an invoicing policy should be established. Detailed invoicing policies and issues identified at left.
procedures should be documented to ensure that accounts receivable personnel • Make the information
understand the importance of billing customers as quickly as possible and that licensing accessible to all
invoices are only generated only after the contract is properly completed and coded to employees online
be billed in Onyx. through the company's
Additionally, the personnel entering the billing status in Onyx must be educated to intranet.
ensure that they are aware of the implications of coding a deal as complete. Accounts • Update policies and
receivable must be able to rely on the Onyx data and should not be held accountable to procedures regularly
verify that a deal is properly approved for invoicing. Company X is evaluating integration on a real-time basis.
of these two systems in the future (See Issue #7). This integration should eliminate
many of the issues specified above.
Business Impact: Inconsistent understanding and application of policies and
procedures; Loss of process knowledge due to employee absence or turnover.

7
 ISSUES & OBSERVATIONS (2/8)

Management Responsible
Issues/Observation
Implementation Plan Party/Timing
Credit/Collections Policy: Credit, collections, credit memo and write-off policies • Document the policies (Name) (Date)
should be implemented to standardize the processes. and procedures
(Name) (Date)
2. Credit Memos/Write-Offs: internal audit reviewed XX credit memos/write-offs related to the credit
processed for proper approvals, noting that approvals were obtained for only XX% of memo and write-off (Name) (Date)
credit memos and XX% of write-offs. Also, supporting documentation did not exist for process, including the
these transactions. Policies and procedures should be created and enforced that guidelines identified at
includes the following guidelines: left.
• Proper signature/approval level structure • Distribute policies and
• Copies of required supporting information procedures to all
• Explanation/reasons for the credit memo/write-off departmental
• Copies of collections tracker (customer follow-up) employees and other
• System functionality that will maximize system controls appropriate personnel.
Consider posting all
Credit Approval: A formal policy and procedure with specific metrics and credit criteria policies on Company
needs to be implemented to standardize the credit approval process. (See Issue #5.) X’s intranet for easy
Credit Limits/Hold: A set credit limit is not given to customers but is issued on a deal- accessibility by all
by-deal basis for the amount of the expected deal. The current process does not employees.
consider the total credit amount extended to any single customer. In addition, proper
• Establish a credit limit
controls do not exist to ensure that the approved credit amount is not exceeded after the
and credit hold policy
deal is finalized. Company X does not enforce a credit hold policy that would stop a
that will allow
customer from receiving additional services, customer support or software upgrades to
Company X to deny
any customer that exceeds an established outstanding amount. Controls should be
product and services
implemented to ensure that the final sales amount is used to approve customers credit.
to customers with a
The results of the detailed testing is documented in Appendix F. substantial
Business Impact: Increased accounts receivable and uncollectable balances; Loss of outstanding balance
revenue on services provided to customers; Increased processing errors and owed to Company X.
inefficiencies.

8
 ISSUES & OBSERVATIONS (3/8)

Management Responsible
Issues/Observation
Implementation Plan Party/Timing
Remittance Function: The remittance processing function is not automated • Conduct a cost benefit (Name) (Date)
between the lockbox provider and System B. analysis to determine
(Name) (Date)
3. The implementation of System B in (Month) (Year) has helped the accounts receivable the potential cost
department to process transactions more efficiently; however, certain aspects of the savings of automating (Name) (Date)
accounts receivable function still require manual processing. Cash receipts are manually the remittance
posted to customer accounts. According to the accounting manager, XX and XX processing function
remittances were manually posted in (Month) and (Month) (Year), respectively. The between the lockbox
amount of manual processing will increase as Company X grows and the number of provider and System
remittances increases. B.

Company X is considering automating the accounts receivable process to allow the • Until the remittance
lockbox detail provided by the bank to be automatically matched against the open function is automated,
invoices using the customer’s ABA number. This automation would allow the department ensure that
to be more efficient and decrease the number of processing errors. reconciliations
between the bank
Internal audit reviewed ten remittance checks to ensure that the remittances could be accounts and System
matched to the corresponding invoice in the system. Of the ten transactions reviewed, B are being completed
two could not be located in the accounting system. Until the payment posting process is on a regular basis.
handled more efficiently, employee accountability for all transactions must be
maintained and reconciliations between the bank accounts and System B must be
completed frequently to ensure that payments are not being overlooked.
The results of the detailed testing is documented in Appendix F.
Business Impact: Decreased frequency of processing errors; Reduction in time
between lockbox deposit and application of payments to customer accounts; Increased
processing efficiency.

9
 ISSUES & OBSERVATIONS (4/8)

Management Responsible
Issues/Observation
Implementation Plan Party/Timing
Credit Scoring: A formal credit scoring system does not exist. • Consider developing a (Name) (Date)
Company X started utilizing Dun and Bradstreet (D&B) to assist with customer credit credit scoring system
(Name) (Date)
4. checks in (Month) (Year). Credit reports are requested from the credit and collections and establish metrics
department during the sales cycle. The department retrieves the credit report from and credit criteria that (Name) (Date)
D&B’s website and obtains the Paydex rating that measures a company’s ability to make are relevant to
timely payments to vendors. This rating is communicated to the requestor of the credit Company X’s
report and the legal department via email within XX hours from the time of the request. If customer base and will
a customer’s Paydex score is XX or less, the customer must provide payment prior to decrease bad debt
the close of the deal. exposure.

Company X relies solely on the Paydex rating to determine a potential customer’s credit • Determine and monitor
worthiness; however, this rating is not a true barometer of a potential customer’s credit a credit limit based
history and may not assist Company X in mitigating its exposure to bad debts. For upon relevant metrics
example, if a small company has an account with Home Depot and purchases and by customer to
repays only $100 a (Month), the company will have a very high Paydex score. decrease bad debt
Additionally, many of Company X’s customers are foreign and or do not have adequate exposure.
credit history to generate a credit report or a Paydex score. Finally, a credit file that • Develop a credit check
contains relevant customer information, including the Paydex score, is not being policy that outlines
maintained. According to the Company X accounting staff, the implementation of the credit approval
initial credit check procedures took a significant amount of effort. process and the
A credit scoring system should be established and implemented to assign values to appropriate metrics
various elements of the credit check to quantify the customer’s creditworthiness. Credit that must be used.
scoring models permit a systematic approach to credit approval and account monitoring.
These models can be used to automate the credit approval process, set credit limits,
check account status before accepting a sale, and determine appropriate action should
the account become delinquent.

10
ISSUES & OBSERVATIONS (5/8)

Management Responsible
Issues/Observation
Implementation Plan Party/Timing
Credit Scoring: (continued)
To ensure payment from customers in other countries, Company X should ensure that
its current credit service can provide credit checks for global companies. Management
should also consider utilizing a letter of credit that is provided from an accredited bank.
Letters of credit "lend" stability and creditworthiness for a fee.
Business Impact: Increased risk of customer payment default.

11
 ISSUES & OBSERVATIONS (6/8)

Management Responsible
Issues/Observation
Implementation Plan Party/Timing
Employee Turnover: The accounting and credit/collections departments are using • Determine the On Hold
a significant number of temporary staff. feasibility of replacing
TBD
5. Company X’s accounting and credit/collections departments are utilizing temporary staff the temporary staff
due to the recent high employee turnover. The ratio between full time employees and with full-time
temporary employees for the domestic credit/collections and the accounts receivable employees personnel
departments are X to X and X to X, respectively. who are more likely to
commit to a lasting
The high use of temporary staff coupled with the high turnover these departments have relationship with
recently been experiencing may be a contributing factor to the areas with a low percent Company X and who
of compliance that was noted during the testing performed by internal audit and for the can increase a
aging of legacy receivables. The results of the detailed testing is documented in department’s
Appendix F. See the aging statistics on Page 4. efficiency. The
Business Impact: Increased inefficiencies; Loss of knowledge exchange; Increased company currently has
frequency of processing errors. a hiring freeze on for
all non-revenue
producing positions for
Q1 and Q2. This is
estimated based on
the financial
performance of the
company during this
period. Accounting
does not have any
control and is unable
to determine when it
will be able to staff full
time positions in credit
and collections.

12
 ISSUES & OBSERVATIONS (7/8)

Management Responsible
Issues/Observation
Implementation Plan Party/Timing
Training Invoices: Web-based registration and prepayment is not used for training • Determine the (Name) (Date)
classes. feasibility of requiring
6. Company X customers can sign up for training classes through the following three prepayment for all
methods: training classes.
Coordinate efforts with
• Company X’s website
the IT and professional
• Direct sales by representatives services departments
• At the class location as needed.
According to the accounting and collections personnel, both departments spend a
significant amount of time invoicing and collecting for training classes.
Internal audit noted that the average training class cost from (Date) through (Date) was
$XX. The accounting department also processed XX invoices totaling $XX. The training
invoices accounted for XX or XX% of the invoice volume, but only $XX or XX% of the
total invoiced revenue. See graph on Page 5.
Management should review the possibility of requiring all training classes to be prepaid
through Company X’s online website. The prepayment of training classes would allow
the accounting and collection departments to focus on the higher dollar amounts and
other accounting related work.
Business Impact: Processing inefficiencies; Account processing slowdown;
Unnecessary collections efforts.

13
 ISSUES & OBSERVATIONS (8/8)

Management Responsible
Issues/Observation
Implementation Plan Party/Timing
System Interfaces: The System B accounting and Onyx customer data/billing status • Determine the ability (Name) (Date)
systems do not interface with System B. to establish interfaces
7. The System B accounting system relies on the data provided by two other systems: between the systems
Onyx (customer data/billing status for license contracts) and a web-enabled Access that provide the data
database that tracks all consulting time and expenses. Without integration between for accounting and
these systems, duplicate data entry is performed, which increases the exposure for System B. Coordinate
error. Additionally, reconciliations are not completed between the consulting time and with IT as needed.
expense database and the billings in System B.
The project accounting module of System B is expected to be implemented in (Month)
(Year). This implementation will improve data integrity and allow accounting personnel
better access to consulting invoice data. Additionally, Company X has considered
replacing the Onyx system in the future so that a new system will have the ability to be
integrated with the System B system.
Business Impact: Decreased data integrity; Increased frequency of processing errors;
Processing delays while data is being transferred between systems; Limited data
sharing between departments.

14
APPENDIX A: INTERNAL CONTROL ASSESSMENT

The following matrix lists best internal controls and process controls present within the accounts receivable and credit/collections processes.
An evaluation of Company X’s internal controls and processes is noted in each instance. Where possible improvement can be made, a
reference has been made to the Detailed Issues and Observations where management’s change implementation plan is described, along
with the responsible party and estimated implementation timing. Company X’s process was evaluated as follows:

Good/World Class: “Best Practice” currently in use.

 Moderate Use: Improvement possible in order to achieve “Best Practice” status.

6 Limited/Some Use: Improvement recommended to improve process efficiency/effectiveness.

Issue
Internal Control Practice Evaluation
Reference
Policies and procedures are documented, communicated and followed. 6 #2

Proper segregation of duties exists.  #2

Cash receipts, credit memos and bad debt write-offs are properly authorized, accurately recorded and
posted in a timely manner and in the proper period.  #2

A/R, credit and collections records, and cash receipts are adequately maintained and safeguarded.  #2

Accounts receivable aging reports are prepared and used to manage follow-up of overdue accounts.

Credit limits are properly approved prior to entry of a sale.

6 #3

Performance measures used to control the credit and collection process are reliable.

Best Practice Rating: Good/World Class Moderate Use  Limited/Some Use 6

15
APPENDIX B: LEADING PRACTICES SCORECARD

Leading practices are based on XXX’s Global Leading Practices Knowledge Base. The Knowledge Base has been gathered through
numerous special studies and the continuous input of our personnel and clients. As part of this review, Company X’s practices were
benchmarked against the leading practices. Where possible improvement can be made, a reference has been made to the Detailed Issues
and Observations where management’s change implementation plan is described, along with the responsible party and estimated
implementation timing. An evaluation of Company X’s processes is noted in each instance. Leading practices were evaluated as follows:

Good/World Class: “Best Practice” currently in use.

 Moderate Use: Improvement possible in order to achieve “Best Practice” status.

6 Limited/Some Use: Improvement recommended to improve process efficiency/effectiveness.

Issue
Internal Control Practice Evaluation
Reference
Identify and act on distressed and delinquent accounts.  #2

Assign and update customer credit ratings. 6 #2

Automate the remittance processing function. 6 #4

Use the credit and collections process to enhance customer satisfaction.  #2

Develop, motivate and monitor collections specialists..  #2, #5

Best Practice Rating: Good/World Class Moderate Use  Limited/Some Use 6

16
 APPENDIX C: LEADING PRACTICES DETAIL (1/5)

Best Practice Company X Practice Evaluation

Identify and act on distressed and delinquent accounts.
Collections—like sales—requires constant attention. The company that
1. persists is the one that collects payment. The situation is further
compounded by a customer in financial distress. Under those
circumstances, the company that reaches the customer before other
creditors do is more likely to collect payment.
• Track signs of financial distress.
• Develop a treatment time line for delinquent accounts and identify the
risk category and total account exposure of the customer.
• Initiate corrective action for persistently delinquent accounts.
• Give collectors authority to settle delinquent accounts at their
discretion.
Benefits:
• Minimized collection costs.
• Improved collection efforts.
• Reduced risk from persistently delinquent accounts.
• Company X’s credit and collections
personnel perform follow-up on all

delinquent accounts over $XX. Credit and
collection personnel utilize an aging report
#2
and collection efforts are manually
distributed between collectors. Collections
activity was performed and documented on
XX% of the customer accounts reviewed;
however, of the XX accounts where the
tracker sheet with the collection
documentation was available, an average of
XX days had passed from the most recent
contact made by the collection department
until the time of testing.

Best Practice Rating: Good/World Class Moderate Use  Limited/Some Use 6

17
 APPENDIX C: LEADING PRACTICES DETAIL (2/5)

Best Practice Company X Practice Evaluation

Assign and update customer credit ratings
Maintaining ongoing credit information on its customer base enables a
2. company to anticipate and prepare for contingencies. Segmenting the
customer base by risk category high, medium and low allows a company
to achieve collection efficiencies by better prioritizing accounts and
identifying customer trends.
• Create cost-effective procedures for credit investigation.
• Use credit and behavioral scoring models to grant credit, assign credit
limits and monitor payment behavior.
• Process credit applications promptly using online credit reference
services.
• Segment the accounts receivable portfolio by high, medium and low
risk to better focus on the high-risk portion of the portfolio.
Benefits:
• Mitigated risk.
• A decline in bad debt.
• Reduced collection costs.
• Increased cash flow.
• Company X does not assign a credit rating
for each customer; however, beginning in
(Month) (Year), Company X utilizes Dun 6
and Bradstreet (D&B), a third-party credit
#2
reporting agency. From the D&B reports,
the collection departments utilize the
Paydex score that measures the timeliness
of payment. This measure is requested
during the sales cycle by sending an email
to Company X’s credit department. A
Paydex score is generated by the credit
department and communicated back to the
requestor with a copy sent to the legal
department via email within XX hours from
the time of the request. If a customer’s
Paydex score is XX or less then they will be
required to provide payment prior to the
release of product. Although the Paydex
score is one way to mitigate risk, many of
Company X’s companies do not have
adequate credit history to generate a
Paydex score and determine credit
worthiness. Finally, a credit file that contains
relevant customer information, including the
Paydex score, is not being maintained.

Best Practice Rating: Good/World Class Moderate Use  Limited/Some Use 6

18
 APPENDIX C: LEADING PRACTICES DETAIL (3/5)
Best Practice
Automate the remittance processing function.
With automated remittance processing, employee intervention is minimal.
3. As a result, the company can direct additional resources toward working
with customers to collect payment rather than processing paperwork.
Technology enables the credit and collections staff to identify and track
the accounts that require follow-up by freeing up their time. It also allows
them to analyze such variables as average days to pay, days sales
outstanding (the number of days it takes to collect receivables), and
discounts earned for each account. Create cost-effective procedures for
credit investigation.
• Use lockboxes to reduce processing float.
• Ensure that the lockbox provider can provide electronic payment
information to the company.
• Reconcile mismatched payments and deductions as quickly as
possible by using automated remittance processing.
• Ensure employee access to real-time remittance information through
the use of an automated remittance processing system and imaging
technology.
Benefits:
• Accelerated cash flow.
• Minimized “float” through expedited processing.
• More efficient use of staff time on actual collections.
Best Practice Rating: Good/World Class
19
Company X Practice Evaluation
• Company X utilizes one lockbox for the
remittance processing function. This
6
lockbox is located at Bank X in Location Y.
Company X is currently evaluating the
#4
benefit of relocating the lockbox to a more
strategically located bank in order to
expedite the mail delivery of remittances
and take advantage of remittance
processing technology.
• A remittance report from the bank is
generated daily by the accounts receivable
department. This report details any
wire/ACH payments that were received and
lists the total of the lockbox deposits from
the prior night. After Bank X has deposited
all remittances, the remittance detail is
collected and sent to Company X via
FedEx. Once the FedEx detail is received
by the accounts receivable department, the
remittance information is entered into
System B manually.
Moderate Use  Limited/Some Use 6
 APPENDIX C: LEADING PRACTICES DETAIL (4/5)
Best Practice
Use the credit and collections process to enhance customer
satisfaction.
4. Satisfied customers pay their bills on time. Conversely, any source of
dissatisfaction—from an invoicing error to shipping delays—can quickly
escalate into an unresolved dispute, resulting in an unpaid bill. An
unresolved dispute may end in customer defection.
• Document, communicate and evaluate the credit policy message.
• Discuss and document credit terms with customers at the beginning of
the business relationship.
• Identify and eliminate sources of customer dissatisfaction.
Benefits:
• Clear communication of credit policies to customers.
• Strong customer relationships.
• Faster turnaround of receivables.
Best Practice Rating: Good/World Class Moderate Use
20
Company X Practice Evaluation
• There is no credit and collection policy for
employees to adhere to or for management
6
to enforce. As a result, credit procedures
are not always appropriately communicated
#4
to customers. In addition, the bonus
structure for sales personnel focuses on
obtaining sales rather than obtaining quality
customers, which can lead to customer
dissatisfaction and ultimately, a refusal to
pay. However, the invoice tracking
documents utilized by the collections
department did adequately identify the
sources of the outstanding payment.
 Limited/Some Use 6
 APPENDIX C: LEADING PRACTICES DETAIL (5/5)

Best Practice Company X Practice Evaluation

Develop, motivate and monitor collections specialists. • A report that details the collections by
collector is generated biweekly. This
Recruiting and retaining effective collectors has always presented a

5. challenge for companies. That challenge has been further compounded performance measure is reviewed by
management and directly relates to bonus
by the gradual uptick in slow payers over the past few years, a national #2,#5
trend documented by the X Foundation in Location Z. compensation.
The lingering stigma that collections work is somehow distasteful • Several aspects of the follow-up process
presents another obstacle. In light of these issues, best practice are highly manual. For example, System B
companies work hard at establishing a high level of professionalism does not have the functionality to alert
among their collections staff. By doing so, they can impel them to achieve Collectors to make a phone call or
peak performance, resulting in faster collection of receivables and automatically send a Dunning letter to
increased cash flow. Document, communicate and evaluate the credit customers with overdue accounts.
policy message. Consequently, collections must exert
• Empower and train credit and collections staff. additional time following up on aged
• Assign responsibility for servicing all aspects of a major account to a accounts.
cross-functional account team.
• Automate the collection process where possible.
• Establish realistic performance goals.
Benefits:
• Enhanced collections performance.
• Improved retention of seasoned collectors.
• Reduced amount of aged receivables.

Best Practice Rating: Good/World Class Moderate Use  Limited/Some Use 6

21
APPENDIX D: ACCOUNTS RECEIVABLE
BENCHMARKING ANALYSIS
The matrix below compares Company X’s current accounts receivable, credit and collections process performance
measures with a multi-industry group that includes companies from a broad range of industries. Benchmarking was
evaluated as follows:
Benchmark Group: Multi-Industry Group, 108 Companies
Cost Statistics
Total Accounts Receivable Cost as a % of Revenue X% X X% X%
Staff per $1 million in Revenue XX X XX XX
Total Accounts Receivable Cost per $X $X $X
Total Remittance Processing Cost per Remittance $X X $X $X
Processed
C & C Cost per Account Requiring Credit Activity $X X $X $X
Note:
C & C Cost per Account Requiring Collections Activity $X X $X $X
Receivable Statistics Many of the items at left
Bad Debt as a Percentage of Sales X% X X% X% where Company X shows
Percentage of Write-Offs to Total Receivables X% X X% X% below-median performance
may be due to employee
Average Write-Off Bill $X X $X $X
turnover, credit/collections
Account Receivables Turnover XX X XX XX
policies, remittance
Staff to Management Remittance Processing XX X XX XX automation and system
Staff to Management Credit and Collections XX X XX XX integration issues.
Days Sales Outstanding XX X XX XX
Workload Statistics See Issues #2, #3, #5 and
#7.
Annual Volume of Remittances per FTE XX X XX XX
Number of Active Accounts per FTE XX X XX XX
Credit Application Turnaround X Hours X Hours X Hours
% of Customers Requiring Credit Activity X% X X% X%
% of Customers Requiring Collections Activity X% X X% X%
% of Customers Referred to OCAs X% X X% X%
Remittance Processing Statistics
Average Remittances Processed per Day XX X XX XX
%of Remittances that are a First Time Match X% X X% X%
% of Remittances with Errors X% X X% X%
%of Remittances Received on or Before Due Date X% X X% X%
% of Same Day Credit to Customer Account X% X X% X%

Indicates Above-Median Performance 6Indicates Below-Median Performance (Opportunity for Improvement)

22
 APPENDIX E: ACCOUNTS RECEIVABLE/CREDIT
COLLECTION PROCESS FLOW (1/2)
Sales requests a credit check
1. from credit and collections
2.
 Sales representatives request credit
checks from the credit and
collections department to determine
the credit worthiness of a potential
customer.
 Credit and collections staff logon to
the Dunn and Bradstreet website
and run the customer credit report.
 The report is printed and results are
emailed to legal and the requesting
sales reps.
• Company X relies only on the Paid
Ex rating provided by D&B to
determine the customer credit
worthiness. See Issue #4.
• Company X requires the customers
to have at least a 60 Paid Ex rating.
See Issue #4.
 If customer has a Paid Ex lower
than XX, the customer is required to
provide payment prior to the
release of the ID and password.
• Company X does not utilize
established credit limits for
customers. See Issue #2.
 Process Point o Internal Control Strength
23
3.
Invoices are generated
 Invoices are generated in
accounting and mailed for three
service categories:
− Professional Services
− Licensing & Maintenance
− Training
 Company X Professional Services
Group (PPSG) sales are generated
from an Invoice Request Form
(IRF). PPSG captures all time and
expense data in a T&M program
that is a web-based Access
database. Time and expense detail
is then manually transferred to an
IRF and delivered to the AR
department for invoicing.
• Licensing and maintenance fees
are invoiced per customer
contracts. A report is generated
from Onyx (customer database)
and contracts are pulled for deals
that are referenced as complete or
almost complete and invoicing is
generated from the contract’s
payment schedule. See Issues #1
and #7.
 Training revenues are invoiced
upon receipt of an IRF from the
training department.
• Window of Opportunity for Increased Controls/Increased Efficiency
Invoices are sent to the
collections department
4.
• The accounts receivable
department sends copies of
invoices to the collections
department with little
information. See Issue #1.
 Invoices are sorted into two
categories: first time collections
and existing collections.
 New invoices are randomly
distributed to the three
collection temps.
 Existing customers are
forwarded to the collection
personnel who has handled the
work before.
 The collection staff establishes
a collection tracking sheet that
is utilized to track all customer
contact attempts.
• There is no standardization in
the manual tracking of customer
contact attempts. See Issues #1
and #2.
 Collections personnel give all
customers an initial courtesy
call.
 Collection efforts continue until
the balance is paid, or the item
must be written off.
AR reviews payment details and
applies payments
 Payments are accepted in the
from of cash, check, wire, Visa,
MasterCard, and AMEX.
o Payments are remitted to one of
two locations: directly to lockbox
at Fleet Bank X or to the
corporate headquarters in
Location X.
 Payments received at the
corporate headquarters are
forwarded to the lockbox for
deposit.
 Fleet Bank X receives
payments from customers in a
lock box account and processes
all deposits the same day they
are received.
• A bank report is generated each
morning that details all wire
payments received and
documents total lock box
receipts for the prior day. See
Issue #3.
 Fleet Bank X assembles the
checks after they are deposited
and forwards the payment
details, including a copy of the
check, the check stub and any
other information included with
the payment, to Company X
overnight via FedEx.
 APPENDIX E: ACCOUNTS RECEIVABLE/CREDIT
COLLECTION PROCESS FLOW (2/2)
AR reviews payment details
5. and applies payments
6.
 Payment details from the daily
FedEx package are entered into
System B manually by matching the
invoice number and customer
name/ID.
• When a payment can not be traced
to a specific invoice, it is either
placed into the customer account
as unapplied or put into the
unapplied cash account. Unapplied
cash is flagged on the cash log and
collectors are responsible for
contacting the customer.
• The general ledger lead reconciles
the monthly bank statement and
notifies AR of any discrepancies via
email.
 Process Point o Internal Control Strength
24
Credit memos are
processed
 Credit memos are requested by the
collections department.
 An invoice adjustment authorization
form is completed and must have
the proper approvals as noted on
the form’s authorization table.
 The accounts receivable
department processes the credit
memos and System B posts them
to the account.
 Unapplied credit memos remain on
the aging report until they are
applied.
• Window of Opportunity for Increased Controls/Increased Efficiency
7. Bad debt write-offs are
approved and processed
 The credit and collection
department determines
accounts that are to be written
off as bad debt.
 An invoice adjustment
authorization form is completed
and must have the proper
approvals as noted on the
form’s authorization table.
• The accounting operations
manager reviews all bad debt
transactions.
 AR writes off immaterial
differences between customer
payments and the invoice to a
general expense account.
 The accounts receivable policy
documents the approval levels
for write-offs and credit memos.
APPENDIX F: SUMMARY OF TESTING RESULTS (1/2)

The following matrix documents the audit tests performed (relating to the accounts receivable, credit and collection process review) and the
results of these tests. Overall, opportunities exist to improve the process. These improvements will ensure that internal controls are operating
effectively and efficiently in order to mitigate risks associated with the process.

#
% in Issue
Test Attribute Items Comments/Detail
Compliance Reference
Tested
Customer Credit Current balance does not exceed XX X% Credit limits are not being #2
credit limit assigned.

Customer Credit Customers’ credit worthiness is XX X% Credit limits are not being #2
reviewed periodically assigned or reviewed.

Collection Process Collection efforts were XX X% #2, #3

performed on aged accounts

Collection Process Collection efforts were XX X% #2, #3

documented on tracker sheet

Credit Memos Reason for credit memo is XX X% The detail for one transaction #2, #3
properly documented was not found.

Credit Memos Credit memo is properly XX X% Of the XX credit memos #2, #3

authorized reviewed, only XX had the
proper authorization. The detail
for one transaction was not
found.

25
APPENDIX F: SUMMARY OF TESTING RESULTS (2/2)

#
% in Issue
Test Attribute Items Comments/Detail
Compliance Reference
Tested
Credit Memos Credit memo is properly linked to XX X% The detail for one transaction #2, #3
corresponding invoice was not found.

Cash Application Invoice amount agrees with XX X% Two of the ten transactions #3, #4
remittance amount were unable to be traced from
the remittance detail to the
invoice amount.

Cash Application Cash is applied in a timely XX XX% The time between the deposit is #3, #4
manner made in the lockbox until the
cash is applied, varied between
X - X days. The detail for X
transactions was not found.

Write-Offs Write-offs are properly approved XX XX% Of the XX write-offs tested, XX #2, #3
did not have proper approvals.
The detail for one transaction
was not found.

Write-Offs Write-offs are properly XX XX% The detail for one transaction #2, #3
documented was not found.

26
APPENDIX G: ACKNOWLEDGMENTS
We are pleased to take this opportunity to thank various management and staff of Company X for courtesies extended to our
representatives and for their considerable cooperation.

Internal Audit Director (Name)

Assistant Controller (Name)

Accounting Operations Manager (Name)

Revenue Manager (Name)

Accounts Receivable
(Name)
Accountant

Senior A/R Accountant (Name)

Collections Manager (Name)

Collections Temporary Staff (Name)

This review was completed by ABC, BCD and CDE of XXX.

27