Accounts payable (AP) audits can often seem daunting. Companies prefer to find rewards in the future and not dwell on the past. But don’t let your fears hold you back. Auditing accounting can expose fraud, mistakes, and other problems that might be jeopardizing your business—saving you invaluable time and money in the long run.
If performed properly, an AP audit not only confirms whether you’re playing by the rules, but it also shows how you can run your business more efficiently. Remember, paying an external auditor to spend days roaming your paper archive is now a thing of the past Smart software solutions save all of your data in one place, which enables you to carry out an extensive accounting audit just by tapping a button.
AP Audits: Why They Matter
Simply put, an AP audit is an independent and systematic examination of an organization’s accounts payable records. It checks whether your transactions are properly recorded and whether those recordings present an accurate view of your business. A well-prepared audit report will tell you how your business is doing and where you can improve.
For many U.S.-based companies, accounts payable audits are not optional. Since the implementation of the Sarbanes-Oxley Act in 2002, most public companies need to submit their records for external auditing. Auditors check whether company records adhere to the standards specified in the Generally Accepted Accounting Principles (GAAP). Although compliance creates extra work for businesses, large-scale corporate scandals are much less likely to occur now than in the past.
Many financial professionals regard AP audits as a necessary evil. Accounting audits may uncover errors, fraud, or other issues that could get employees in trouble. In practice, there’s no reason to be afraid unless you actually have something to hide. Treat audits like a vehicle safety inspection—You’d want to know if your brakes were on the verge of giving out, right?
AP Auditing 101: A Guide for Beginners
There’s no set way to perform an AP audit. Auditors pick their methods based on the size and shape of a particular business and the desired thoroughness of the audit. The implementation of GAAP regulations varies per state, with some states allowing public companies to publish additional reports that don’t need to follow GAAP standards.
Despite these differences, auditors will generally look for completeness, validity, and compliance of records, and see if the accounts payable balance was properly disclosed on the end-of-year statement. Together, these confirm whether the company’s records actually do present an accurate view of the business.
An AP audit usually consists of four stages: planning, fieldwork, audit report, and follow-up review.
Planning for an Accounts Payable Audit
During the planning stage, auditors notify the business that an audit is about to take place. The next step is usually a formal meeting where the scope and objectives of the evaluation are discussed. Based on this meeting, the auditor will draw up a plan for the examination itself.
Accounts Payable Audit Procedures
The fieldwork phase is when auditors dive in. They will spend several days or weeks sifting through the company’s records before they compile their data into a report that summarizes their findings and evaluation of those findings.
Accounts Payable Audit Reporting
Once the fieldwork has been completed, the findings are put into the final audit report.
Accounts Payable Audit Follow-Up Review
Just because the report has been completed doesn’t mean the job is over. The final step is for the auditor to perform a follow-up review after one year to check whether the desired results have been achieved.
How To Make Your Audit a Breeze
Even though we’re well into the digital age, many accounting audits are still done by hand. If you can’t face the sight of an auditor searching for an invoice needle in a paper haystack, you are not alone. Thankfully, there’s now a more efficient way to perform audits. Electronic invoicing and electronic payments make it a breeze.
Switching to an AP automation software ensures faster, cheaper, and simpler auditing because your records will be easier to find. By giving auditors read-only access to your records, their job may be done in as little as two or three hours, as opposed to the days or weeks they would spend in your office by auditing accounting the traditional way.
Still wary to let go of your paper records? Keep in mind that paper-only offers an illusion of control. Records can be misplaced, accidentally shredded, or simply lost. Paper is actually the antithesis of efficiency: It makes the invoice and payment process less visible, and thereby harder to track.
How to Detect Fraud in an AP Audit
If you’re still not convinced that an automated accounts payable solution is right for you, consider one of the main purposes of audits: fraud detection. AP departments are particularly vulnerable to fraud because they process a high volume of transactions. The Association of Certified Fraud Examiners estimates that an average organization loses 5% of its annual revenues to fraud.
The most mundane form of fraud is tampering with invoices. If an invoice has been treated with correction fluid or if important information is missing, alarm bells should go off. The same goes for duplicate or photocopied invoices. Implementing an automated electronic invoicing solution is the easiest way to make these types of fraud things of the past.
Other types of fraud can be harder to detect. Fraudsters know that auditors don’t have time to check every single invoice, which allows opportunities for successful manipulation of information. This is where automation can once again provide additional security. Automated procedures create an instant audit trail and make it easier to search for common indicators of fraud, such as invoices just below approval amounts, rounded-amount invoices, and vendors with P.O. Box addresses. No system is completely fraud-proof, but digital solutions do make it simpler to spot and prevent fraud.
With a strong AP department in place, there’s no need to fear the accounting audit procedures any longer. Going digital will make auditing faster, easier, and cheaper. Most importantly, staying on top of your game will be a breeze and will offer you more time to pursue progressive strategy —like planning for your company’s financial future.