How to Audit Your Cash Flow and Accounts Receivables

Last Updated on September 13, 2023

Creating accurate reports on your company’s cash flow is an essential part of running a successful business. A cash flow statement can show how your accounts receivables, inventory, and accounts payable line up yearly.

By analyzing these trends, you’ll be better prepared to help your business grow. Falling behind on auditing your cash flow and receivables can significantly affect your business’s overall trend, so it is better to get ahead of the game and start thinking about managing your auditing tasks early to avoid any costly mistakes.

Here you can learn about efficiently auditing your cash flow and accounts receivables simply and painlessly.

What Is Cash Flow, and How Do I Audit It?

Cash flow refers to the total amount of money being transferred in and out of a company. The cash flow statement of a company can be categorized as cash flow from operations, investing, and financing.

Assessing the timing and where it originates and goes in financial reporting is essential in evaluating your company’s liquidity, flexibility, and overall financial performance. This financial statement that you’ll create to assess your company is called your Statement of Cash Flows.

A Statement of Cash Flows is created using a balance sheet and income statement. A balance sheet shows your company’s assets, liabilities, and shareholder equity, while the income statement shows your company’s revenue and expenses during a particular period.

Related: Statement of Cash Flows vs. Cash Budget

How to Audit Cash Flow

1. The first step in auditing your cash flow is auditing the balance sheet and income statement for accuracy.
2. Once you’ve reviewed each of these statements, you’ll be able to tell if the values have correctly transferred to the cash flow statement.
3. The next step is then checking to see if any non-cash transactions need adjustments or if there are any complex financial transactions that need to be reviewed.
   • i.e. Non-cash transactions that have hybrid debt
4. The final step is recalculating all the amounts on the statement to make sure everything is accurate.

Once you’ve done all of these steps, you’ve successfully completed a cash flow audit.

Common Risks/Vulnerabilities

Although most cash flow audits go smoothly, it is worth being aware of some of the possible risks and vulnerabilities most companies face. Here are a few examples:

• Changing Interest Rates – When interest rates vary quickly, company’s may have to borrow more, leading to decreased asset values.
• Financial Market Changes – If a company’s stock price changes, this could affect the company’s ability to gain capital.
• Commodity Prices – A company might risk trading losses depending on fluctuating commodity prices.
• Risk of Material Misstatement – Cash flow forecasting is based on assumptions from data. These assumptions leave a lot of room for error. If you use the wrong set of data or assume trends incorrectly, you might risk material misstatement.
• Detection Risk – You will be at a detection risk if you miss material misstatement within your audit.

What Are Accounts Receivables, and How Do I Audit Them?

Accounts receivables are the total amount of money that a company is owed for products or services already delivered or given to a customer. Customers would use credit to pay for the product or service. Accounts receivables are the opposite of accounts payable, which is when a company owes money. Some businesses choose to sell their receivables to a third party in exchange for cash up front (also known as accounts receivable financing.)

By looking at your accounts receivables, you’ll be able to measure your company’s liquidity and ability to cover short-term obligations through the income you receive from the credit owed.

Since account receivables are generally the most significant asset a company has, and auditing can take quite some time due to this fact.

How to Audit Accounts Receivables

1. First, you will need to trace the total amount of receivables back to the general ledger.
2. You will then calculate the total invoices to verify the accuracy of the receivables in the general ledger.
   • The invoice can take the form of any method of documentation informing the customer of the total amount they owe the company.
   • This action is called calculating the receivable report total.
3. The next step is investigating the reconciling items.
   • For more significant amounts of money, you will need to compare any journal entries and the data set to ensure they check out.
   • Fully documented journal entries are best when doing this task.
4. After investigating the reconciling items, you will need to randomly choose invoices and match the invoices to the paired documentation to ensure the customers were billed correctly.
   • To confirm your accounts receivable, you may need to directly get ahold of clients and get a motion of financial confirmation by the latter part of the auditing quarter. Usually, this would only be for those who owe more significant balances.
5. Next, check the receiving log and related party receivables.
   • The receiving record will show any significant amount of money that was unauthorized to be shipped in the latter part of an audit period.
   • Checking this part of the receivables shows whether the amount of money given by the company was all adequately authorized.
6. Lastly, you will need to look at your financial trends. Checking this part of your audit will guarantee that your business is on the right track. Once you perform this last step, you’ve successfully audited your account receivables.

Common Risks/Vulnerabilities

Here are some risks and vulnerabilities you may face while performing your account receivables:

• Missing receivables – If invoices that don’t exist are created to increase your sales, and receivables are recorded on the current year instead of after the year ends, this can bring up issues.
• Receivables do not reflect their economic value – If allowance for doubtful accounts is not made, the receivables may not be accurate to their economic values.
• Your company might not have control over receivables – If a company pledges as collateral for loans from the bank, they may not have as much control over receivables as they’d like.

How Often Should I Audit my Cash Flow and Account Receivables?

Although it’s tempting to wait until the last minute to start auditing your cash flow and account receivables, it is recommended that you audit your cash flow and receivables every two weeks.

Auditing every two weeks will mean that you’ll be keeping track of fewer factors and, in return, have a higher likelihood of creating a detailed and accurate report. You won’t have to worry about risk as much as if you had put off the auditing until the last minute.

The Bottom Line

Auditing your cash flow and accounts receivables efficiently and accurately will not only help you become a better business owner. It will also help you recognize trends in your business that will give you a better idea of where you should be putting your money.

Understanding the trends produced by your cash flow statement is also essential. If you don’t have enough cash on hand to pay debts, you’re at risk of going out of business. When you can anticipate when you’ll receive your money, you can better prepare to pay off what you need to in tight financial situations.

Don’t be intimidated by your finances. Start practicing good financial health to take your business to the next level.

FAQs

What is a cash flow audit?

A business’ cash flow is the amount of money moving in and out of a company. A cash flow audit is simply a review of your cash inflows and outflows to help you better understand your finances. Not only does auditing ensure accuracy, but it acts as a cash flow analysis to help your company stay financially health. Additionally, this tool can help you identify areas to improve your cash flow, such as encouraging your customers to pay sooner to reduce the number of outstanding invoices you have or paying your vendors slower to keep more cash on hand to pay your most urgent expenses.

What are the types of cash flow?

There are three types of cash flow: operating cash flows, investing cash flows, and financing cash flows. All three of these cash flows should be included on your Statement of Cash Flows and be a part of your cash flow audit.

How do you improve cash flow?

There are several tactics that you can use to improve cash flow. Some of the simpler methods include paying your vendors more slowly or invoicing your customers more quickly. Depending on your business needs, you may need to take larger steps to enhance your working capital, such as factoring your invoices or increasing the prices of your products or services. Conducting a cash flow audit should help you better understand which solution is the best for your company.