The Critical Steps for a Comprehensive, Compliant AP Auditing Process
Let’s start by defining what a payable is: the amount a company owes for goods or services received.
An accounts payable audit is a normal part of financial due diligence in any company, and using the most effective auditing methods ensures that ledger transactions match general ledger entries and payable records to eliminate risk of fraud and reveal any errors. I.e., what was actually paid is the same as what is actually owed.
Periodic AP audits are standard practice to review procurement invoices, statements, liabilities, and other expenses have been recorded correctly using an accounting software program or manual methods and are accurately reflected in year-end financial statements.
There are significant money flows through the accounts payable department, so it is critical for companies to get audits done right.
What is an accounts payable audit?
Accounts payable auditing is the process of reviewing, in detail, all the related financial information that resides on a company’s accounts payable records. The actual AP audit is generally performed by an independent firm in order to provide an objective assessment of how accurately and comprehensively accounts payable invoice and other transactions reflect actual business operations.
In other words, are AP transactions faithfully and fully recorded, and do financial statements, the balance sheet, and general ledger all tally.
The AICPA – American Institute of Certified Public Accountants – lays out the standards for how audits are performed through guidance from the Auditing Standards Board (ASB). Based on their criteria around auditing, attestation, and quality control, auditors look for veracity in AP records with a focus on potential fraud, risk, malfeasance, and any general mistakes.
Based on that, AP departments should think of audits as an opportunity to inspect and uncover any issues or problems before they become serious.
The importance of auditing accounts payable on a regular basis
As mentioned, it’s important for AP to make sure that transaction recording is complete and valid, and auditing accounts payable is an opportunity to verify and rectify those records. Here’s why it’s critical to complete AP audits on a regular basis:
- It’s all-too easy to boost net income by not recording period-end payables, so these need to be verified.
- Search for unrecorded liabilities in period-end accounts payable details.
- Many types of theft can occur in accounts payable – regular audits mitigate the possibilities of fraud, duplicate payments, illegitimate payments and related risks.
- Companies need to authenticate complete recorded accounts payable against related purchase transactions and invoices.
- Evaluate internal control procedures, evaluate AP transactions and financial statements for accuracy, ensure compliance with laws, regulatory policies (such as Sarbanes-Oxley), industry standards, and other guidelines.
- Establish audit procedures to respond to weak or non-existent controls.
Best accounts payable audit procedures
Following the best accounts payable audit procedures, whether a business is large or small, is critical to show that the AP department has robust internal controls and is accurately depicting the year-end financial statement.
An effective AP audit procedure includes:
- Disclosure of all recorded transactions expenses, regardless of how big or small, including the year-end financial statement. Management’s review, verification, and approval these statements as complete.
- Strictly adhering to GAAP (Generally Accepted Accounting Principles) guidelines, auditors will create an audit trail in general ledger entries to identify internal control or compliance weaknesses by examining financial statements, cash flow statement, and the balance sheet.
- A cross-check of every payment process transaction by contacting every vendor providing goods and/or services to verify transaction data during the period in question.
- Use cut-off tests to confirm that transaction dates and payments match, and identify any unmatched documents.
Step-by-step process of an accounts payable audit
The exact AP audit process is usually guided by factors including company size, corporate structure, geographical locations, etc. Generally Accepted Account Principles are not uniformly applied the same way across all states in the US, and depending on the location there can be additional reporting requirements.
The objectives of an AP audit are to evaluate internal control processes, review and evaluate transactions for accuracy, and determine compliance with applicable laws, regulations, policies, and procedures. The audit trail is looking for validity and consistency in vendor invoices, bank records, and other records — as well as accounting procedures — to ensure that the AP balance provides full disclosure on year-end statements, and that the company is presenting an accurate view of itself.
Here are the stages of a typical AP audit:
1. AP Audit Planning
When a company is notified that there will be an upcoming audit, the goals and parameters will be established with the auditor, who will create the precise AP audit plan.
2. AP Records Examination
The heavy lifting of an AP audit is when the auditing team deep dives into accounts payable records and documentation. Depending on company size, this can last a few days or a few weeks, after which an audit report will be generated that compiles and analyzes the research.
3. AP Audit Reporting
Based on the AP auditor’s findings, an audit report is created which provides a summary, and details the areas examined and processes involved, provides feedback and guidelines, and highlights any immediate concerns.
4. AP Audit Review
An AP audit and report aren’t the end of the audit process, but just the initial stage. Based on the auditor’s findings, there will be a follow-up to determine that highlighted issues and concerns have been dealt with and the company has achieved satisfactory results.
Planning for your accounts payable audit
As we mentioned, an accounts payable audit is an opportunity to ensure your recorded transactions, invoices, purchase orders (PO), and other documents and practices are in good order – regular internal audits will reveal this. It’s a time to be organized, not a time to panic.
The AP team and senior management should have a plan for what they want the audit to achieve, ensure the standard operating procedures (SOPs) are in place and being followed (otherwise audit fieldwork risks being stopped), identify any potential fraud, and discuss areas for implementing improvements.
Here is a broad selection of documents that auditors will look for in an accounts payable audit that teams need to have prepared:
- An internal controls review related to accounts payable
- A comparison budget-to-actual expense reports with detail analysis and explanations of any deviations or variances
- Accounts payable and expenses risk assessment
- A detailed period-end accounts payable ledger
- Overview of accounts payable and expense audit procedures
- A report documenting any deficiencies in accounts payable and expense controls
- Documentation detailing unrecorded liabilities
- Documentation about any fraud investigation related to controls absence or weaknesses (such as lack of segregation of duties)
Access to records
Easy access to payable records is critical for a smooth, comprehensive audit process. This is where AP automation, e-Invoicing and electronic payments can make the audit preparation and completion much faster and easier.
Switching to AP automation software ensures faster, cheaper, and simpler auditing because your records will be easier to find.
Simplifying and speeding access to records for auditors – invoices, POs, supplier lists (including new vendors) will ensure the accuracy of the audit, and the completeness of the resulting report. The time saving from AP automation can also translate into cost savings since the actual audit should take less time than a paper-based AP process.
What to look for in an AP audit?
The specifics of an accounts Payable audit depends on a number of factors, including whether a company is a large or small business, industry, location, and depth of audit intent. AP auditors will monitor and flag any unusual transactions uncovered, as well as identify any fraud detection (many auditors have Association of Certified Fraud Examiners (ACFE) credentials). Generally speaking, there are four areas that an AP audit will be looking for:
Auditing for completeness is the process of verifying payable balances against general ledger balances – that they are “complete” based on real payable journal entries, purchase orders, and invoices. This is the most critical stage of the AP auditing process, and auditors will be looking for an audit trail that matches payments to recorded payables, including electronic payments, (auditors generally use cutoff tests to determine timeliness) as well as open records with unmatched documents.
An AP audit will determine whether a company’s accounts payable process adheres to the strictures of Generally Accepted Accounting Principles (GAAP) practices. Compliance demands that GAAP procedures are followed, which includes reviewing a company’s audit trail in detail at a transaction level to confirm the right accounting methods are used. The auditors will look at the full range of financial documents, including period-end financial statements, balance sheets, and cash flow and income statements, tracing general ledger entries backwards to follow the precise transaction path.
When auditors look for “validity,” it means they are checking the legitimacy of AP transactions. This usually entails contacting third-party suppliers and vendors for specific transaction confirmations. While commonly used third-parties are most often the ones contacted, auditors will use their discretion around which suppliers are contacted.
Obviously, the accuracy of a company’s financial records is critical, and an AP audit will look to confirm the accuracy of the accounts payable practices. Auditors will perform a number of procedures at this stage, including examining the Standard Operating Procedures, and a recalculation of supplier invoices and payments.
How often should you conduct an AP audit?
There is no strict schedule for how often a business should conduct the AP auditing process, but typically a company will go through a process of accounts payable auditing to review year-end financial reporting. An audit may also happen more frequently depending on the size and complexity of the organization, or if it has undergone significant changes, such as adopting new accounting software or auditing standards, or implemented an AP automation solution, ERP, and / or other financial tools.
Automation: The benefits of accounts payable audit automation
Getting organized for an accounts payable audit report can be time-consuming, stressful, and disruptive, but the results can have significant benefits: According to The Association of Certified Fraud Examiners risk assessment, the median loss to companies from financial statement fraud in 2020 was $954,000, with the largest percentage of cases – 14% – coming from the accounting department.
Being audit-ready is made significantly easier when an AP organization has committed to digital transformation, implementing and adopting an advanced AP automation software solution. As software solutions become ever-increasingly capable (AI and machine learning will be taking a lead role before long) a technology-forward strategy not only simplifies and speeds the day-to-day accounts payable process, it almost entirely removes the need for human inputs along the way.
AP audit automation:
- Eliminates costly, time-consuming manual data entry and improves accuracy
- Helps ensure greater compliance, fewer disputes, and elimination of duplicate tasks
- Standardizes and accelerates processes so they’re faster, and with fewer errors
- Gives your AP team complete visibility into invoices and POs in real time
- Integration with an existing ERP platform means greater data consistency
- Facilitates on-demand reporting capabilities so you are always audit-ready
Avoiding human error
Most of the issues found during the AP audit process – intentional or not – are due to human error. Simple misstatements, duplicate payments and overpayments, errors in maintaining the check register – not to mention actual fraud – can be substantially mitigated or eliminated through the AP automation process.
The digitization of accounts payable provides outstanding levels of efficiency, responsiveness, agility, and speed, but when it comes to AP audits it’s the accuracy across the process – thanks to automation – that stands out. As detailed in the steps above, audits are looking for compliance, completeness, accuracy and validity. It turns out that AP automation is much better at achieving these consistently and quickly, avoiding human error by avoiding human inputs.
Automating accounts payable auditing for compliance
Since accounts payable automation means leveraging AP software solution technology to optimize the flow of invoices and payments through your business, trading paper-based complexity for frictionless efficiency provides the type of process visibility and access that make AP auditing faster and more streamlined.
The digital advantage of automation across all stages, from purchase orders (PO) to invoicing, approvals, three-way matching, and payments, helps Accounts Payable teams ensure compliance through transparency, aiding Finance and bookkeeping in adhering to GAAP standards. This not only creates a more fluid AP process – and optimizes cash flow – it takes the angst out of AP audit preparation and reporting. Consider these benefits of automating accounts payable:
- It allows you to process invoices up to 70% faster
- Reduces invoice processing costs by up to 80%
- Can handle 100% of payment disbursements
- Enables AP departments to scale for growth without increasing headcount
- Improves supply chain visibility
- Frees up AP teams to focus on adding value
Ultimately, AP automation enables the kind of agility that empowers Accounts Payable to play a much more strategic role in enterprise success. Regardless of your organization’s size, learn more about how accounts payable automation from Corcentric can unleash more value by eliminating the inefficiency of paper invoices and manual processing.