Performing an accounts payable audit is crucial to ensure financial accuracy, prevent fraud and maintain regulatory compliance. AP audits verify the legitimacy of invoices, the accuracy of recorded expenses and adherence to payment terms. They uncover discrepancies, unauthorized payments or errors that could impact financial statements.
By scrutinizing supplier contracts and payment processes, audits mitigate risks, improve operational efficiency and strengthen internal controls. Additionally, they enhance transparency, fostering trust among stakeholders and ensuring that an organization’s financial obligations are met responsibly, ultimately safeguarding its reputation and financial health.
Embarking on an accounts payable audit may seem daunting, but the benefits ultimately outweigh the drawbacks. Auditing accounts payable can expose fraud, mistakes and other problems that might be jeopardizing your business – saving your organization valuable time and resources in the long run.
What Is an Accounts Payable Audit?
An accounts payable audit is an independent and systematic examination of an organization’s accounts payable records. It checks whether transactions are properly recorded and whether those recordings present an accurate view of your business.
An accounts payable audit report reflects on the success of your AP processes and identifies areas for improvement. Consider an accounts payable audit preventative maintenance for your AP department.
Are AP Audits Mandatory?
For many U.S.-based companies, AP audits are mandatory. 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, these requirements are intended to prevent corporations from practicing fraudulent financial reporting.
How to Audit Accounts Payable
There isn’t a standardized method for auditing accounts payable. An auditor may customize their approach based on the size and type of business being audited and the intricacies of its finance department.
Though there’s not a consistent set of steps for AP audits, every company typically experiences an accounts payable audit in a series of phases.
Accounts Payable Audit Phase 1: Planning
During the planning stage, auditors notify the business that an audit is about to take place. Both parties usually hold a formal meeting where the scope and objectives of the evaluation are discussed. Based on this meeting, the auditor composes a plan for the AP audit.
Accounts Payable Audit Phase 2: Fieldwork
This is where the auditor dives in and spends several days to weeks validating the company’s records.
Accounts Payable Audit Phase 3: Reporting
After the fieldwork, the auditor summarizes their findings in an audit report. This includes data and an evaluation of the company’s AP practices.
Accounts Payable Audit Phase 4: Review
After one year, an auditor typically performs a follow-up review to check on whether process improvements have been implemented successfully, achieving their desired results.
Accounts Payable Audit Checklist
To prepare for an accounts payable audit, AP teams should consider completing the items on this accounts payable audit checklist. Prepping in advance will help ease the process.
⬜ Organize Documents
Ensure invoices, purchase orders, receipts and contracts are properly filed and easily accessible.
⬜ Review Vendor Records
Confirm that your master vendor file is complete, including contract terms and payment agreements. Validate information for accuracy.
⬜ Reconcile Accounts
Perform a thorough reconciliation of AP balances, three-way matching invoices with corresponding purchase orders and receipts.
⬜ Check Internal Controls
Evaluate internal control procedures and confirm compliance with company policies and industry regulations.
⬜ Validate Payment Accuracy
Verify the accuracy of recorded expenses and payment amounts. Investigate, resolve and document discrepancies or irregularities.
⬜ Prepare Reports and Documentation
Generate relevant reports and supporting documentation that may facilitate the AP audit. Address any queries or requests for information promptly.
⬜ Engage Staff
Ensure employees involved in the AP audit understand their roles and responsibilities.
Auditing Accounts Payable the Easy Way
Even though we’re well into the digital age, some companies are still auditing accounts payable manually. This often involves the dreaded task of finding an invoice “needle” in a paper “haystack.”
Digitizing your AP processes with electronic invoicing and payments not only improves your day-to-day AP work, but it makes the AP audit process more efficient. Documents can be located with a simple search and click.
Investing in AP automation software ensures faster, simpler and less expensive auditing because your records are easier to find. By giving auditors read-only access to your system, their job may be done in as little as two or three hours, compared to the weeks they might spend in your office for a manual audit. And members of your AP team can focus on their core work – they won’t have to devote time to helping hunt down necessary documents.
AvidXchange offers AP automation software that lets AP teams create customizable routing rules, tracking every action and invoice with a detailed audit trail for full historical accounting visibility.
If your organization is wary of letting go of paper-based processes, keep in mind that paper only offers an illusion of control. Records can be misplaced, accidentally shredded or simply lost. Paper is the antithesis of efficiency: It makes the invoice and payment process less visible, and thereby harder to track.
Detecting Fraud in an Accounts Payable Audit
According to our 2024 Trends Survey, security, fraud and phishing attempts are the top concerns of finance leaders. AP departments are particularly vulnerable to fraud because they process a high volume of transactions.
A common form of fraud is tampering with invoices. Fraudsters may treat paper invoices with correction fluid or photocopy invoices to create realistic fakes. Moving to an electronic AP system will help your company easily detect fraudulent invoices with the help of technology.
Regularly auditing accounts payable is crucial to prevent fraud due to the inherent vulnerability of financial processes. AP audits help detect irregularities, such as fictitious vendors, duplicate payments or unauthorized transactions, flagging potential fraud risks.
By scrutinizing invoices, payments and vendor records, audits ensure compliance, accuracy and transparency in financial operations. This proactive approach not only deters fraudulent activities but also fosters a culture of accountability, improving financial controls and safeguarding the organization’s assets, reputation and overall financial health.
Final Thoughts on Accounts Payable Audits
Regular AP audits support a culture of transparency and accountability while encouraging your team to stay updated on industry regulations. These audits ensure compliance with policies, accuracy in payments and proper record-keeping, safeguarding against financial losses. Follow an accounts payable audit checklist to prepare for and ease the process.
Digitizing accounts payable with AP automation software makes auditing your department faster and easier. It streamlines the overall accounts payable workflow by automating invoice processing, approvals and payments. It reduces manual errors, accelerates workflows, enhances accuracy, provides real-time visibility into financial data, improves compliance and increases productivity. Click below to learn more about streamlining AP work with automation software.
