OTC-12

Control Description

Management performs a periodic review of the Accounts Receivable aging report to assess customer account collectability, identify overdue balances, and evaluate the adequacy of the allowance for doubtful accounts

Risk

Uncollectible customer balances could go unidentified and unreserved, leading to an understated allowance for doubtful accounts and materially misstated financial statements.

Implementation Details

Implementation Details
• Periodic Execution Schedule: Establish a formal schedule in the financial close calendar requiring the accounting or credit management team to execute the standard SAP customer aging report (S_ALR_87012173 or FBL5H) at the close of each reporting period (e.g., monthly or quarterly).

• Review & Evaluation Criteria: Management reviews the generated aging report, focusing on pre-defined risk criteria such as balances exceeding specific aging buckets (e.g., greater than 90 days past due), high-risk customer accounts, or disputed items.

• Allowance Determination & Adjustment: Based on the review and historical collection trends, management calculates the required provision. Any necessary adjustments to the allowance for doubtful accounts are documented, approved in accordance with the corporate delegation of authority matrix, and posted to the General Ledger.

• Audit Trail Retention: Save the executed SAP aging report snapshot along with documented management review notes, sign-offs, and resulting adjustment entries in the financial close binder or compliance repository.

Test Procedures

A) Test of Design (TOD)
• Policy Inspection: Inspect the corporate accounting policy or standard operating procedure governing the allowance for doubtful accounts to verify that the required review frequency, thresholds, and responsibilities are clearly defined.

• Report Validation: Confirm that the standard SAP transaction used for the review (S_ALR_87012173 or FBL5H) pulls data directly from live subledger tables, ensuring the completeness of the open item and aging data presented to management.

B) Test of Operating Effectiveness (TOE)

• Execution Evidence Review: Select a sample of reporting periods (e.g., month-ends or quarter-ends) within the audit scope. Inspect the completed review package for each period, verifying:
◘ The standard SAP aging report was generated as of the period-end date.
◘ Evidence of review, annotation, and formal sign-off by the designated management owner within the required financial close timeline.