According to a 2020 report on the study on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE), the amount of money lost to occupational fraud each year represents a staggering drain on the global economy, and it directly impacts organizations’ abilities to create jobs, produce goods and services, and provide public services. According to the study, the industry’s most common occupational fraud schemes include billing schemes. A billing scheme is a fraudulent disbursement scheme in which a person causes their employer to issue payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases. 

With scams like this, it makes sense to be better safe than sorry. In this blog, we’ll delve into what invoice audits entail and why they are crucial for the financial integrity of businesses.

What is an Accounts Payable Audit? 

An Account Payable Audit is a process by which the financial records of the accounts payable department are examined by an auditor. In this process, the auditors examine the accuracy, completeness, compliance with Generally Accepted Accounting Principles (GAAP), and validity of the transactions.

Do All Businesses Need to be Audited? 

The Sarbanes-Oxley Act of 2002 makes it necessary for publicly held companies to provide all their records for an independent audit. After examining the procedures and records, the auditor gives their opinion on the financial statements. The external auditor tests the company’s accounting procedures and internal controls, sharing their opinion on how well they work. This means publicly held companies cannot avoid having their accounts audited.

Although small businesses may not be required to audit by law, it is in their best interest to see that atleast their invoices are properly audited. 

What is an Invoice Audit?

Invoice audits involve a meticulous examination of financial documents to verify their accuracy, adherence to company policies, and compliance with industry standards and regulations. These audits play a pivotal role in maintaining financial transparency and preventing discrepancies.

Through invoice auditing, businesses can effectively minimize the risk of fraud and theft, both by customers and employees. 

Who Conducts an Invoice Audit? 

Invoice auditing and Account Payable Auditing can be undertaken internally by the employees or through third-party external auditors.

Internal Auditors

Internal auditors have certain advantages, such as understanding the peculiar needs of the establishment as compared to external auditors. Their services are less expensive. However, the internal auditors may not be objective in their assessment and tend to have prejudices. 

External Auditors

External auditors are objective and independent in their assessment, and they have wider knowledge about the operation of the businesses’ financial systems. They are also equipped with better and practical knowledge of laws and regulations. Therefore, external auditors have an edge over internal auditors in the overall outcome of the audit.

It is to be noted that a statutorily ordained Account Payable Audit has to be undertaken only by external auditors. The business can undertake an internal audit in addition to the audit by an external auditor.

The Invoice Audit Checklist

1. Receipt and Documentation: Invoices are received from vendors and suppliers. All relevant documentation, including purchase orders, contracts, and receipts, is collected and associated with the invoices.
2. Data Entry and Verification: Invoice details, such as amounts, dates, and item descriptions, are entered into the accounting system. Verification of entered data against supporting documents is performed to ensure accuracy.
3. Coding and Classification: Invoices are coded based on the nature of the expense or service. Classification ensures proper allocation to the correct cost centers or accounts.
4. Compliance Check: Invoices are checked against the company’s policies, purchase orders, and contractual agreements to ensure compliance. Any discrepancies or deviations are flagged for further investigation.
5. Accuracy Assessment: Mathematical accuracy of invoice calculations is verified. Quantities, unit prices, and any applicable taxes or discounts are cross-checked.
6. Internal Control Evaluation: The company’s internal control procedures related to invoice processing are assessed. This includes reviewing authorization processes, segregation of duties, and approval workflows.
7. Optimization Analysis: Experts may analyze invoices to identify cost savings or efficiency improvement opportunities. This can involve negotiating with vendors for better terms or discounts.
8. Communication with Stakeholders: If discrepancies are found, communication with relevant stakeholders, such as vendors or internal departments, is initiated for clarification. Discrepancies may be resolved through negotiation or by updating the accounting records.
9. Audit Trail Documentation: A comprehensive audit trail is maintained, documenting each step of the audit process. This documentation is evidence of the audit and is crucial for compliance and reporting purposes.
10. Reporting and Analysis: A summary report highlights the audit findings and any corrective actions taken. Trends or recurring issues may be analyzed to enhance future invoice processing efficiency.

The Most Crucial Part of Invoice Auditing

Checking the accuracy of an invoice is a pivotal aspect of the invoice audit process, and there are three primary methods for manual verification:

• Two-Way Matching

In this method, the details of the invoice are compared to the shipping receipt. The goal is to confirm that the line items on the invoice accurately represent what was delivered. This ensures that the goods or services listed on the invoice align with the actual receipt of items.

• Three-Way Matching

This approach involves comparing the invoice details not only with the shipping receipt but also with the purchase order. The three-way matching process verifies that the goods or services were both ordered and received. It ensures alignment among the data on the invoice, purchase order, and shipping receipt, providing a more comprehensive verification process.

• Checking Without Purchase Order

In cases where a purchase order was not issued, the accounts payable department can still verify the invoice. This may involve direct confirmation with the purchasing department, shipper, or reference to other transaction documents like the freight bill. This method is an alternative to the traditional two-way matching when a formal purchase order was not part of the transaction.

If discrepancies are identified during the verification process, the standard practice is to reject the invoice and send it back to the supplier for correction. This ensures that accurate and valid information is maintained in the financial records. In cases where there is evidence of fraud or suspicious activity, the flagged invoice is typically set aside for further investigation to determine the nature and extent of the issue.

Once the Accounts Payable (AP) team has successfully validated the invoice, confirming its accuracy and compliance with relevant documents, they can proceed to send it for approval and initiate the payment processing. This step marks the final stage of the invoice audit, ensuring that only legitimate and accurate invoices are approved for payment, contributing to financial integrity and compliance within the organization.

How does AP Automation Improve Invoice Auditing? 

Accounts Payable (AP) automation plays a pivotal role in enhancing the efficiency and accuracy of the invoice auditing process. One significant advantage is accelerating invoice processing through features like optical character recognition (OCR), eliminating the need for manual data entry. This speed not only expedites the overall process but also allows for more frequent and timely audits.

Furthermore, AP automation reduces the risk of manual data entry and processing errors. Automating data extraction and validation ensures that relevant information is accurately captured, minimizing the likelihood of discrepancies during the audit. This accuracy is critical in maintaining the integrity of financial records.

The matching capabilities of AP automation are another noteworthy benefit. The system seamlessly matches invoices with supporting documents, such as purchase orders and shipping receipts, ensuring that all details align. This comprehensive matching capability enhances accuracy and minimizes the chances of overlooking discrepancies during the audit process.

Real-time visibility and transparency are facilitated through AP automation. Stakeholders can track the status of invoices, approvals, and payments, providing insights into the workflow. This transparency is essential for identifying bottlenecks, addressing issues promptly, and ensuring compliance with established guidelines.

Additionally, AP automation offers strategic analytics that provides insights into spending patterns and vendor performance. These analytics empower organizations to make informed decisions during the audit process, identifying areas for cost optimization and efficiency improvement.

Moreover, AP automation enforces compliance with company policies and regulatory requirements. Automated workflows can be configured to follow predefined rules and approval hierarchies, reducing the risk of non-compliance. This ensures that invoices are audited consistently and in accordance with established guidelines.

Maintaining a comprehensive audit trail is a key feature of AP automation. This detailed history of actions taken, approvals, and any modifications provides a robust documentation trail, facilitating internal and external audits. The automated system ensures that all activities related to invoice processing are recorded for accountability and transparency.

Revolutionize Your Business with Nanonets AP Automation Solution

In the fast-paced world of finance, the need for streamlined and error-free accounts payable processes is more critical than ever. Nanonets brings you an advanced AP automation solution designed to transform your invoice auditing experience and drive efficiency across your organization.

• Unlocking Efficiency with OCR Technology: Nanonets leverages cutting-edge Optical Character Recognition (OCR) technology to eliminate manual data entry hassles. Our system seamlessly extracts and validates crucial information from invoices, accelerating the processing speed and reducing the risk of human errors. Experience faster and more accurate audits with Nanonets at the helm.
• Comprehensive Matching Capabilities: Our AP automation solution boasts comprehensive matching capabilities, ensuring that invoice details align seamlessly with supporting documents such as purchase orders and shipping receipts. This meticulous matching process enhances accuracy, leaving no room for discrepancies during your audit. 
• Real-Time Visibility and Transparency: Nanonets provides real-time visibility into your invoice processing workflow. Easily track the status of invoices, approvals, and payments, empowering your team with insights to make informed decisions. Say goodbye to bottlenecks and welcome a new era of transparency in your financial processes.
• Strategic Analytics for Informed Decision-Making: We understand the importance of strategic decision-making in finance. Nanonets offers powerful analytics that provide insights into spending patterns and vendor performance. Identify cost optimization opportunities and enhance efficiency during your audit process with our intelligent analytics.
• Enforce Compliance with Automated Workflows: Nanonets AP automation ensures strict adherence to your company policies and regulatory requirements. Our automated workflows follow predefined rules and approval hierarchies, reducing non-compliance risk. Rest easy knowing that your invoices are consistently audited in line with established guidelines.
• Comprehensive Audit Trail for Accountability: With Nanonets, you have a comprehensive audit trail of all activities related to invoice processing. This detailed history of actions, approvals, and modifications provides a robust documentation trail for both internal and external audits. Ensure accountability and transparency in every step of your financial operations.

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• Source: https://nanonets.com/blog/invoice-audit/