Accounts payable audits play a crucial role in the financial health of businesses. They ensure compliance in financial reporting and can cut discrepancies and inefficiencies.
This article covers why accounts payable audits are important to maintain financial health and the steps in an AP audit process. We will also cover how automation helps to streamline the AP audit procedure.
What is an AP Audit?
An accounts payable audit is an in-depth assessment of a company’s accounts payable records and procedures. Auditing accounts payable involves:
- Verifying the accuracy of transaction records
- Adherence to internal policies and external regulations, and
- The detection of opportunities for enhancement.
By performing routine accounts payable audit procedures, businesses can uphold their financial integrity. It helps reduce the likelihood of errors, fraud, and non-compliance with regulations.
Why are AP Audits important?
Auditing accounts payable is a crucial aspect of maintaining a company’s financial health. At its core, an AP audit is an independent and methodical examination of an organization’s accounts payable records.
To Ensure Accurate Records of a Business’s Finances
A well-prepared AP audit report offers insights into the organization’s performance and highlights areas for improvement. To ensure accuracy in financial statements, auditors conduct accounts payable audit procedures.
These procedures involve checking if transactions from the fiscal year are included in the year-end financial statements. This includes reviewing invoices, purchase orders, and other relevant documents to verify that transactions are recorded in the appropriate accounting period.
By performing these tests, auditors can check how well the company’s internal control system documents transactions and adheres to the reporting timeline.
Required by Law
For many U.S.-based companies, auditing accounts payable are mandatory. The Sarbanes-Oxley Act of 2002 necessitates that most public companies undergo external auditing to ensure their records comply with the Generally Accepted Accounting Principles (GAAP). Doing so helps prevent large-scale corporate scandals and promotes transparency in financial reporting.
Although GAAP regulations may vary by state, auditors examine several aspects of a company’s accounts payable. They verify completeness, accuracy, validity, compliance of records, and proper disclosure to ensure that the organization’s records reflect its financial standing.
Accounts payable audits are often seen as essential yet challenging. AP audits may reveal errors, fraud, or other issues that could lead to repercussions for employees.
However, there is no need to fear the accounts payable audit procedure if there is nothing to hide. They are like safety inspections that help identify potential problems before they escalate.
What To Look For in an AP Audit?
The specifics of an AP audit depend on various factors such as company size, industry, location, and the intended depth of the audit. The accounts payable audit procedure aims to flag unusual transactions, detect potential fraud, and enhance business processes to ensure financial health. AP auditors often hold credentials from the Association of Certified Fraud Examiners (ACFE).
Generally, there are four key areas that an AP audit focuses on:
1. Completeness
Auditing for completeness involves verifying account payable balances against general ledger balances. This is to ensure they are based on genuine payable journal entries, purchase orders, and invoices.
This is a critical stage in the AP auditing process. Auditors create an audit trail that connects payments to recorded payables. It includes electronic payments. It also includes open records with unmatched documents.
2. Compliance
An AP audit evaluates whether a company’s accounts payable processes adhere to GAAP practices. Compliance requires following GAAP procedures, which includes reviewing a company’s audit trail in detail at the transaction level to confirm that correct accounting methods are employed.
Auditors examine a wide range of financial documents, such as period-end financial statements and balance sheets. They also check cash flow and income statements, tracing general ledger entries back to their origins.
3. Validity
Assessing validity means verifying the legitimacy of AP transactions. This often involves contacting third-party suppliers and vendors for specific transaction confirmations.
Auditors typically exercise discretion in deciding which suppliers to contact. However, they commonly reach out to frequently used third parties.
4. Accuracy
Ensuring the accuracy of a company’s financial records is crucial. An AP audit aims to confirm the precision of accounts payable practices. During this stage, auditors carry out various procedures, including examining standard operating procedures and recalculating supplier invoices and payments.
What are the key steps in an AP Audit Procedure?
The AP audit procedure will differ based on company size, industry, and the intended depth of the audit. Generally, the key steps involved in the AP audit are as follows.
Planning for the Accounts Payable Audit
The first stage in an accounts payable audit is the planning phase. The company receives notification of the upcoming audit.
A meeting follows to discuss standard operating procedures (SOPs), the scope, and the objectives of the evaluation. Based on this discussion, the auditor develops a plan for the audit itself.
Conducting the Fieldwork
During the fieldwork stage, the auditor spends several days or weeks going through the company’s financial records. They use a “cut-off test” to make sure transactions are recorded in the right time frame.
Auditors look at different documents like balance sheets, check registers, purchase orders, vendor invoices, and general ledgers. They check all these records for details such as transactions, payments, and dates to ensure accuracy and reliability. This information is then used to complete the final report.
Preparing the Final Audit Report
Once the fieldwork is complete, the auditor consolidates their findings into a final audit report.
This report summarizes the auditor’s findings and provides an evaluation of those findings. Any disparities or areas for revision are highlighted.
Conducting the Follow-Up Review
The audit process doesn’t end with the submission of the final report. The auditor conducts a follow-up review, usually one year later, to ensure that all recommendations have been implemented.
They also check that the desired results have been achieved. This follow-up ensures the ongoing effectiveness of the company’s accounts payable processes and internal controls.
How to Plan For an Accounts Payable Audit?
An accounts payable audit allows you to verify recorded transactions, invoices, purchase orders, and other documents. It ensures everything is in good order.
Regular internal audits can help maintain financial integrity. Instead of panicking, it’s essential to be organized and well-prepared.
The AP team and senior management should develop a plan outlining the audit’s objectives. These include:
- Confirm that standard operating procedures (SOPs) are in place and followed
- Identify potential fraud, and
- Discuss areas for improvement.
To prepare for accounts payable audit, companies, and teams should have the following documents ready:
- A review of internal controls regarding accounts payable.
- A comparison of budget-to-actual expense reports with a detailed analysis and explanations of any deviations or variances
- Accounts payable and expenses risk assessment
- A detailed period-end accounts payable ledger
- An overview of procedures for auditing accounts payable and expenses.
- A report documenting any deficiencies in accounts payable and expense controls
- Documentation detailing unrecorded liabilities
- Documentation about any fraud investigation related to control absence or weaknesses (such as lack of segregation of duties)
By having these documents prepared, you can ensure a smoother audit process and demonstrate your commitment to maintaining accurate and compliant financial records.
Can Accounts Payable Audit be Automated?
Accounts payable audits can be time-consuming and stressful, but they yield significant benefits in identifying and mitigating financial risks. Embracing automation in AP audit procedures will streamline day-to-day operations and substantially improve the AP audit process.
By leveraging advanced AP automation software solutions, organizations can achieve greater efficiency, accuracy, and compliance. Nanonets’ AP automation tool can streamline the accounts payable audit procedure with its AI-enabled data extraction and customized workflow features.
Why Should AP Audits Be Automated?
Reducing manual data entry and errors
Automation eliminates the need for manual data entry, which can be both costly and time-consuming. It also significantly reduces the likelihood of human errors, resulting in a more accurate and efficient audit process.
Eliminating human error
A significant portion of issues discovered during AP audits arises from human errors, including misstatements, duplicate payments, overpayments, and errors in maintaining the check register.
Automation minimizes human inputs, thereby substantially reducing the occurrence of such errors and mitigating the risk of fraud.
Increased compliance and fewer disputes
AP automation optimizes the flow of invoices and payments, replacing paper-based complexity with frictionless efficiency. This improved process makes AP auditing faster and more streamlined.
Automation across all stages — from purchase orders (PO) to invoicing, approvals, three-way matching, and payments — enhances compliance and transparency with accounting standards and regulations.
This results in fewer disputes and the elimination of duplicate tasks, streamlining the accounts payable audit procedure.
Standardizing and accelerating processes
Automation standardizes and speeds up various AP processes, making them faster and more accurate. This allows your AP team to have complete visibility into invoices and POs in real-time.
Seamless integration with ERP systems
Integrating AP automation software with existing ERP platforms ensures greater data consistency and accuracy, enabling a smoother and more efficient audit process.
On-demand reporting capabilities
AP automation facilitates on-demand reporting, ensuring that your organization is always audit-ready and able to respond quickly to any audit requests or inquiries.
Conclusion
Accounts payable audits are crucial for maintaining the financial health of businesses. They ensure compliance in financial reporting and identify discrepancies and inefficiencies.
This helps prevent errors, fraud, and non-compliance with regulations. AP audits verify the accuracy, completeness, validity, and compliance of transactions. They play a key role in ensuring accurate financial records. For many companies, auditing accounts payable is mandatory to comply with regulations.
By embracing AP automation, businesses can enhance their audit process and ensure compliance while eliminating the inefficiencies of paper invoices and manual processing.
If you’re looking to automate your manual AP Processes, schedule a demo to see how Nanonets can help you.
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- Source: https://nanonets.com/blog/accounts-payable-audit/
