How to Conduct an Effective Accounts Payable Audit?

Analyzing accounts payable (AP) helps businesses understand how much money they owe suppliers. Reviewing balance sheets and identifying liabilities facilitates keeping records in order. By deploying dedicated tools, enterprises eliminate issues in documentation and detect strange activities. This facilitates adhering to current regulations and avoiding hefty non-compliance fines. As publicly traded companies must undergo an accounts payable audit conducted by reputable third parties, it’s imperative to prepare for this procedure and ensure its successful completion regardless of a venture’s size and scope of operations. In this guide, we will clarify the meaning of the process, analyze its steps, and demonstrate how a firm can ‍ use it to enhance the accuracy of its records.

What is an Accounts Payable Audit?

The term refers to the procedure of examining AP records. Its goal is to confirm the validity of payments made by a firm and check the liabilities it owns. Accounts payable audit enables businesses to remain fully compliant and avoid breaking regulations and rules. It confirms the validity of records and facilitates fraud detection. The procedure lets firms assess AP processes and analyze existing control mechanisms to discover areas for improvement.

Let’s consider AP audit goals:

• Confirm accuracy: When analyzing records, auditors check whether liabilities, payment, and account statement data are precise and correspond to the information in supporting documents.
• Find mistakes: Checking financial statements facilitates discovering errors in payments, detecting issues with unauthorized transactions, or flagging suspicious activity.
• Assess implemented control mechanisms: The procedure lets firms see whether it deploys efficient means of preventing fraud.
• Confirm completeness: Experts check if information about expenses and liabilities was recorded within the set timeframe and does not contain any mistakes.
• Achieve compliance: Financial records should be written in accordance with an organization’s policy and contain data stated in vendor contracts.

Fulfilling these objectives entails hiring experts with extensive experience in invoice processing and using professional accounting software. This is why many entities outsource the preparation to a reliable third-party provider.

Why Should You Audit Accounts Payable?

Enterprises rely on this procedure as it helps them manage deals and avoid issues associated with overpayments or unsanctioned access to sensitive data. Here are the main reasons to prioritize an accounts payable audit:

• Build trust: Establishing lasting relationships with stakeholders involves enhancing AP practices. It allows businesses to build a spotless image and gain credibility. Enterprises seek to inspire confidence as it helps them find investment sources.
• Detecting errors: Fixing issues with duplicate payments necessitates improving accountability and transparency. Enhancing workflow visibility mandates identifying errors that are causing issues.
• Counter threats associated with fraud: Firms discover inefficiencies and learn how to fix problems with control mechanisms to protect data. Such preemptive measures eliminate the possibility of accounts payable fraud.

While AP automation empowers ventures to avoid common mistakes, following clear guidelines facilitates identifying problems that may result in non-compliance issues.

Preparing for the Audit

Firms need to build viable strategies to keep their records mistake-free. Organizing reports and supporting docs is arduous without deploying dedicated software. Going through an accounts payable audit obliges entities to check their dealings. They are obliged to provide all the requested checks to confirm the information stated in the bills.

Grasping the scope of the checkup and its subtle nuances is also crucial to finalizing it successfully. Here are the main steps:

• Establish communication with the employees: The AP team must be aware of the planned audit. Everyone should accept their duties and fulfill them diligently. Entities provide incentives to employees to foster loyalty.
• Master the processes: Getting deep insights into AP practices is a must. Organizations should follow consistent procedures when preparing documentation.
• Use the best bookkeeping practices to maintain high precision: Updating files with actual data simplifies testing and enables businesses to achieve higher profits by streamlining processes.
• Ensure access to valuable data: Professionals tasked with auditing need to examine billing documents, contracts, and transaction records. They may also request access to communication logs. It’s critical to establish reasonable rules to simplify access to the data and expedite the annual checkups.
• Prioritize law adherence: Developing well-thought-out internal policies in accordance with regulations created by the American Institute of Certified Public Accountants (AICPA) is a prerequisite to avoiding issues. Reviewing the implemented procedures and identifying issues before they cause serious problems allows organizations to minimize unnecessary expenses and delays.

Liabilities listed on a balance sheet stand for short-term debt. Paying attention to them is necessary to ensure bills are paid on time. When reviewing AP procedures during preparation, it’s vital to understand an annual solution budget, use a modern document management system with convenient organization tools, set clear vendor evaluation criteria, ensure the recording of all expenses, and calculate accounts payable turnover.

Analyzing issues with negative liabilities is also necessary to avoid duplicate payments. Even if such transactions seem small and insignificant in the general ledger, they may add to the overall expenses. If a business expects to work with the same vendor in the future, it may agree to classify such records as prepaid expenses.

Key Audit Steps

Gaining a deep understanding of the stages of the procedure facilitates its successful completion. Conducting a thorough accounts payable audit entails paying attention to the documentation. Organizations should examine their bills to ensure the dates and amounts indicated in them are accurate. Besides, it’s necessary to collect all receipts and use them as supporting documents.

Checking vendor contracts facilitates avoiding repeating mistakes and adhering to deadlines and other conditions. Auditors must double-check all the information in the documents to see whether a business maintains transparency, follows the agreement terms, and pays for services on time.

Those who are wondering how to audit accounts payable must follow the main steps:

• Planning: After gaining an in-depth understanding of internal processes during the preparatory stage, auditors collect documents and select suitable metrics. During this phase, they identify the areas that need thorough examination and detect signs of potentially dangerous activities.
• Testing: Auditors focus on transactions, examine bills, and analyze operations in detail. It allows them to confirm the transparency of a firm’s policies and verify every scrutinized transaction to ensure there are no threats or signs of criminal activities. Checking invoice legitimacy may involve contacting vendors and confirming payments were made to existing ventures. It facilitates achieving higher accuracy and discovering fraudulent transactions. Auditors scrutinize vendors’ info to assess the authenticity of operations.

This procedure leads to quick finalization of the entire process.

Identifying Common Problems

During the accounts payable audit, specialists may notice multiple issues. They typically include repeat transactions or unauthorized operations. Discovering them on time empowers businesses to improve their practices. Companies face such problems:

• Limited segregation of responsibilities: When one person is tasked with various AP issues, it may be challenging for them to avoid errors and unauthorized operations.
• Lack of automation: When entering data manually, it’s impossible to minimize the occurrence of mistakes and optimize routines. The usage of outdated software also contributes to this issue, as managers have to rely on manual data entry.
• Convoluted approval procedures: Payments may be released without supporting documentation.
• Inefficient invoice matching: Firms pay for services twice or indicate inaccurate amounts. This issue is prevalent in corporations with large transaction volumes.
• Insufficient system integration: Before deploying AP software, it’s essential to integrate it with legacy systems, including ERP programs. It facilitates solving data integrity issues, improving incomplete reports by adding required information, and streamlining the end-to-end accounts payable process.
• Problems with extensive decentralization: If departments and subsidiaries have AP policies that do not align with each other, their workflows will differ as well. It makes it difficult to streamline internal controls.

Assessing these risks allows businesses to optimize operations and collect detailed information about vendors to prepare for an audit. When scrutinizing accounts payable transactions, professional auditors focus on these areas to estimate the possibility of manual entry errors, suspicious actions, and glaring inaccuracies.

Examining the AP ledger allows specialists to get a clear overview of a venture’s operations based on detailed information about transactions. The analysis of implemented internal controls is necessary to establish safety mechanisms and prevent capital loss. Experienced specialists thoroughly review established routines and provide recommendations, helping companies avoid issues with undocumented liabilities and enhance the quality of their financial reporting.

Learning how to fix discrepancies in statements and records is vital for reducing revenue losses. Advanced software enables firms to stop AP theft, detect missing data, and flag records with errors.

Reporting and Making Recommendations

After an accounts payable audit, a specialist compiles a professional report. They summarize the discovered information about the examined routines and highlight the concerns that should be addressed as soon as possible. Auditors also offer valuable feedback and detailed guidelines on how to fix the discovered issues. It helps companies to adjust processes and practices to meet GAAP regulations.

The actionable recommendations listed in the report enable ventures to develop a roadmap and transform their procedures to achieve better results and avoid paying non-compliance fines in the future. Professional auditors also perform follow-up reviews a year later to check whether an organization followed their recommendations.

Conclusion

An accounts payable audit is a multi-stage procedure that requires thorough preparation. Entities must adopt time-tested approaches when getting ready for the complete checkup. This approach enables them to boost efficiency, optimize processes, analyze deals, and avoid unnecessary expenses affecting their cash flow.

Achieving financial stability necessitates following the recommendations provided by auditors and eliminating problems impacting a company’s integrity. BooksTime has a team of experienced specialists who are knowledgeable about the ins and outs of the auditing process. They help clients maintain their records in order, organize files, and submit required documentation without delays. Get in touch with our professionals and discover how to get a detailed accounts payable audit report to optimize internal operations, avoid losses, and maintain compliance.