An effective accounts payable audit strategy isn’t just about fast retrieval of documents — it’s about building a framework of ongoing audit readiness. Organizations that rely on manual or semi-automated processes often scramble to compile audit documentation only when an audit is imminent. You won’t know what they need until they get started—and then you’ll have to work quickly to produce the required documentation. Depending on the type of audit, companies may also need to demonstrate the effectiveness of their internal controls.
Planning for your AP audit
Paper is the antithesis of efficiency, which is why it’s being edged out of business altogether. With the onslaught Suspense Account of cloud technology, the threat of losing everything when “the hard drive crashes” is no longer a reality. Electronic invoicing and electronic payments mean an auditor is never looking for a needle in a haystack. They have everything they need right there and can be out of your hair in no time. One quick way to prepare for an AP audit is to calculate your accounts payable turnover ratio. This is a short-term liquidity calculation that’s used to quantify the rate at which a business pays off its suppliers.
- Obviously, the accuracy of a company’s financial records is critical, and an AP audit will look to confirm the accuracy of the AP practices.
- For a basic accounts payable audit, you’ll need to provide invoices, purchase orders, contracts, check requests, and other transactional information.
- Moreover, these audits help you stay compliant with tax regulations and internal company policies, reducing the risk of penalties and improving your overall financial health.
- It’s an instant audit trail that makes it easier to search for documents and harder to fake them.
- This comprehensive review looks at every invoice, payment, and vendor relationship to ensure accuracy and compliance.
In general, an accounts payable audit encompasses 4 steps:
Auditing for completeness ap audit addresses the main auditing objective that is the most vital part of the accounts payable auditing process. This is because it is easy to increase a company’s net income by not recording period-end payables and many forms of theft occur in the accounts payable area. Auditors confirm proper sign-offs, multi-level approvals for high-value transactions, and adherence to tax requirements.
Company Overview
In 2021, Jane decided to create an AP audit program for her business, using an internal controls checklist of each of the areas that she wished to examine regularly. Jane used Word to create her audit template for her first audit, completing the first page as follows. By following these detailed procedures, auditors can provide assurance that the accounts payable process is robust, accurate, and aligned with organisational goals. Non-compliance can result in penalties, legal actions, or loss of investor confidence. For example, companies listed on stock exchanges must ensure that their financial reports are free of material misstatements, making audits essential for meeting these requirements. During an audit, these bottlenecks are identified, allowing businesses to refine workflows.
Ensure Compliance
A single duplicate payment or fraudulent transaction can cost more than an entire year of audit procedures. Successful businesses view AP audits as essential protection against financial losses and operational disruptions. To make your next audit easier for the auditors and the internal team, address past findings and consider adopting accounts payable https://www.bookstime.com/ automation for efficiency.
Enforce Internal Controls
This helps identify unrecorded debts or irregularities in financial reporting. Unrecorded debts can lead to inaccurate financial reporting and potential legal issues, making the reconciliation of the accounts payable ledger a critical step in the audit process. After thoroughly reviewing the accounts payable records, auditors compile their findings into an accounts payable audit report.
✅ Review Vendor Records
- For example, suppose the business has three unpaid invoices totaling $1.3 million that were due over ninety days ago.
- Common warning signs include duplicate payments, missing documentation, unusual payment patterns, unauthorized changes to vendor information, and payments to vendors that aren’t listed in the master file.
- The goal is to create an environment where compliance is seamlessly embedded in your day-to-day AP operations.
- Maintaining a solid audit trail can be particularly challenging for remote or hybrid organizations, especially if they are still using paper invoices or manual AP processes.
Special attention is given to high-value transactions, recurring vendor payments, and any discrepancies between purchase orders and invoices. For example, auditors may request bank statements or look for proof of payment methods while ensuring specific payments were authorized and processed correctly. In some cases, providing a voided check is necessary as extra verification for setting up direct deposit or linking a new company bank account.
Reporting on AP audit findings
If you identify internal control gaps or weaknesses, you’ll need to create audit procedures to address them. For example, say you find out one person prints checks, signs them, records payments, and reconciles the bank statement—in other words, there’s a lack of segregation of duties in AP. This often involves reaching out to your vendors and suppliers for a confirmation request that corroborates the payments and liabilities listed in your records. Your regular vendors are the biggest target, though the type and number of partners your auditors reach out to will vary based on your size and industry. Delivery receipts act as proof that goods or services were delivered as agreed.
You should also check for any unrecorded or understated liabilities, such as goods received but not invoiced, or invoices received but not entered. You can use cut-off tests, such as examining the invoices and receipts before and after the cut-off date, to verify the AP cut-off. Reconciliation procedures determine if accounts payable ledger transactions are identical to summary figures in the general ledger. Purchase and cash disbursement cut-off tests determine if a company’s end-of-year financial statements include all transactions for the fiscal year. Auditing for completeness focuses on the most fundamental auditing objectives and procedures during the accounts payable auditing process. Auditors use cut-off tests, reconciliations, and audit trails to verify the proper recording and calculation of AP documents.