The Most Important Elements of an Accounts Payable Audit
Duplicate payments. Fraud. Unrecorded liabilities. These are just some of the issues a streamlined accounts payable audit will uncover. Undetected, these risks can damage the success and longevity of your business.
Properly conducted audits are critical for the performance of your accounting department and the health of your company as a whole. Using the right AP procedures ensures the finance department is accurate, transparent, and highly efficient.
What is an Accounts Payable Audit?
There is no universal way to perform an audit. The size and industry of a business can help determine the methodology. Auditors are generally looking for accuracy, compliance, and proper disclosure. They want to establish an effective internal control system. An AP department will work with them on the audit trail in four stages:
- You’ll receive a notification of an AP audit, and a meeting will be scheduled to discuss logistics.
- An auditor will spend days or weeks going through paperwork and collecting data.
- An auditor will create a detailed audit report based on the collected data.
- A follow-up review will take place after one year to ensure ongoing compliance with the report.
There are a variety of documents that should be readily available before the audit takes place. Consider some of the following to align with auditing standards:
- A review of internal controls
- A detailed AP ledger
- Analysis of budgets compared to expense reports
- Documentation of any unrecorded liabilities
- A comprehensive risk assessment of accounts payable and expenses
- A summary of possible weak points in AP controls
- Overview of planned audit procedures
- Documents on any fraud investigation
Generally accepted accounting principles can vary by region, so it’s essential to schedule a meeting as soon as possible to discuss what you need. You never want to be surprised by an internal audit. It’s also important to consider the company goals for a well-planned AP audit. Consider the following questions when reviewing your internal processes:
- What is the annual expense budget?
- Is there a software solution in place?
- Who receives budget and expense reports?
- Is there a policy to ensure the proper recording of all payables?
- Are purchase orders digital, paper, or both?
- Are credit card purchases recorded and tracked by software?
- How are new vendors evaluated?
- Are purchases limited to approved vendors?
Remember, it’s crucial to establish your criteria before the audit takes place.
The Importance of AP Audits
Auditing your accounts payable department is an essential weapon against inaccuracy and fraud. If you are doing business within the US, the American Institute of Certified Public Accountants (AICPA) typically guides the AP audit procedures.
Remember, an audit is a systematic and independent look at a company’s AP records to ensure the proper documentation of all transactions. If you haven’t done anything wrong, it works more as a risk assessment and is a process that should be appreciated.
In the US, depending on the state, most accounts payable audits are not optional. The Sarbanes-Oxley Act in 2002 requires companies to submit records for a third-party examination. Auditors must then ensure the company records adhere to the Generally Accepted Accounting Principles (GAAP). The audit should achieve four critical benchmarks:
- Providing the proper disclosure of documents, including year-end financial statements and bank statements
- Ensuring complete AP compliance with GAAP
- Verifying transactions for accuracy and legitimacy
- Examining all data and reconciling all transactions
Auditors typically use a “cut-off” test to determine the proper recording of a transaction in the correct period (and fiscal year). They also look at items like the check register, balance sheet, purchase orders, vendor invoices, and the general ledger. The more prepared you are, the smoother the audit will run.
Automating the Process
Auditing is cumbersome when done traditionally. You need the right type of software to automate tasks and store data—especially if a business has a high volume of transactions.
Rather than sifting through stacks of paperwork (which is highly inefficient), an auditor could quickly access the database online. Utilizing AP automation software ensures you are running faster and more cost-effective. It also means you can store data, such as:
- Transaction history
- Vendor files
- Company name
- New vendors
- Credit card data
- Invoice numbers
The right kind of digital tool will completely restructure the payment process and make an auditor’s job easy. It will also serve as a massive repository for all of a company’s financials in one spot.
Using a software platform to manage the audit also means it’s easier to detect fraud. A 2016 study by the Association of Certified Fraud Examiners found that on average, an organization loses 5% of annual revenue each year due to fraud. There are many simple ways in which fraud detection can occur in AP auditing, including:
- Invoices that were manually tampered with
- Duplicate or photocopied invoices
- Invoices that were below the approved amounts
- Invoices that have a rounded dollar amount
- Vendors with PO boxes
Using an automated accounts payable software with an auditor is like having a three-way system of checks and balances. An electronic invoicing solution is one of the best methods to quickly and effectively deal with fraud. It creates less room for human error and neatly organizes essential information. Plus, automation develops an audit trail that can’t be misplaced—smart software means the data will always be in the same spot.
The sooner a business goes digital, the less they will have to worry about fraud and error—especially for companies that deal with a high volume of invoicing. The more you can digitize tasks, the less likely you will be surprised by a negative audit.