An accounts payable internal audit is a common procedure conducted by businesses to ensure accuracy and protect the business against fraud. However, accounts payable auditing may occur as part of an external process by a governing agency or for certification by organizations and associations. In this post we are going to explain some best practices so you can be ready to audit accounts payable at any time.
Accounts Payable auditing is critical to the financial due diligence process of any business. This audit procedure ensures that all ledger transactions match the general ledger and payables records. This matching process can significantly reduce the risk of fraud and costly errors like duplicate entries.
Accounts payable audits are most often performed by an independent auditing firm to ensure objective and accurate review of payables transactions. This review will usually include invoices, statements, liabilities and almost all other expenses incurred by a business to ensure that what was paid in a given period was actually owed by the company.
Without proper preparation and documentation accounts payable audits can cause major headaches, lasting anywhere from a week to a month. The good news is businesses can eliminate those headaches and streamline audits by implementing best practices for their daily processes.
With the following best practices, AP departments can use the AP audit process as an opportunity to discover any issues within the department. An internal accounts payable audit report can help AP teams build a list of to-dos to resolve issues before they become problems.
Maybe it seems obvious to say, keep your financial record in good shape, but good record keeping can cut your audit time significantly and reduce stress.
All of the heavy lifting involved in an AP audit happens when auditors do a deep dive into AP records and documentation. We sell AP automation software at Fidesic, so naturally you will want to take this advice with a grain of salt, but whether you choose our solution or not, an AP automation software solution is the best way to ensure a smooth AP audit process. No manual accounts payable management can compete with a software solution's ability to keep your records tidy and make them easily accessible and ensure traceability.
This ties into the previous item, so let’s take a look at these three critical things to track. Successful AP audits really come down to your company’s ability to track payables activity on invoices, approvals and actual payments. It is critical to accurately track all invoices including received dates, PDF copies, and any record of payment. For approval history, you'll need to keep a record of all approvals made on a document with a time and date stamp. For payment history, you'll need to keep track of what was paid, and when for a given period.
How often are audits done? There is no single right answer, but most accounts payable audits happen on an annual basis. Of course, running internal accounts payable audits on a quarterly basis helps ensure a smoother annual audit. And because accounts payable is the primary source of debits for a business, it is vulnerable to many types of fraud and theft. The AP audit process helps mitigate the risks associated with duplicate payments, illegitimate payments and external scammers.
If you complete the AP audit process and find issues you will of course need to evaluate your procedures, workflows and controls. But even if your audit comes off without a hitch, this is your opportunity to establish better procedures and respond to weaknesses in your controls. It is always best practice to evaluate your process regularly to ensure your AP department is complying with industry standards, laws and other compliance guidelines.
Here are the key items auditors will be checking during your audit. Understanding these items will help you establish processes to ensure your records are in order when auditing time comes.
GAAP is a set of guidelines created by the Financial Accounting Standards Board (FASB). Public companies in the United States must follow GAAP guidelines as a required compliance issue in their financial reporting. Many non-public companies use them as a set of best practices.
Adhering to GAAP guidelines is one of your best tools in audit-preparedness. These guidelines ensure financial reporting processes are transparent and standardize assumptions, terminology, definitions and methods, making it easier for auditors to review financial statements. GAAP guidelines seek to ensure good faith accounting practices by creating standards for regularity, consistency, sincerity, methodology, continuity and more.
You can learn more about these standards on the FASB website.
Checking for errors like duplicate payment issues and issues with incorrect or invalid invoices being paid is very likely going to be part of any AP audit. Auditors are also going to be looking for fraudulent activities like credit card or wire fraud. Learn more about the Latest Trends in Payments Fraud.
Auditors will also likely check for unrecorded liabilities. Auditors look at a sampling of post year-end checks and verify they were not issued in payment of liabilities that were created pre-yearend. If they discover one of these discrepancies they will check for a payable entry at year-end, and an adjustment may have to be posted.
An AP Audit will look to see if accounting records of approvals and payments are being properly created and entered. Giving auditors viewing access to approvals and original invoices so they can quickly run the reports they need can reduce a huge amount of strain in the audit process.
They will also likely want to check for any issues with vendors actually receiving payment. Using a direct ACH transmission utility within an accounting software suite as part of regular payment processing will greatly reduce the risk of being flagged on these issues during an audit
With the following software tools, financial managers can gain 100% visibility and control over invoices, approvals and payments. And when audit time comes, the right AP software allows administrators to grant portal access to auditors to streamline their efforts and reduce strain on the company.
It is unlikely that any mid-sized or large organization doesn’t have an ERP or other centralized accounting software, but it is still worth mentioning that this software is absolutely necessary in today’s business landscape. With increasingly complex markets, regulatory requirements, supply chains and diversification, businesses without a modern accounting solution face an impossible task.
We already mentioned this above, but allow us to reiterate--AP automation software is your ace card for easier accounts payable internal audit processes or when facing external audits from outside agencies. The right AP automation will allow you to establish controls to adhere to GAAP guidelines. With approval workflows, digitized invoices, approvals tracking, duplication checking and automatic alerts, AP automation software protects your business against the very things audits seek to identify: fraud and errors.
MEM technology makes it easier for complex organizations to centralize and streamline their accounting process, including accounts payable. With MEM, businesses can eliminate manual syncing of master records between databases, automate intercompany processing, reduce errors in month-end consolidated reporting and maximize organizational access and control of data.
The accounts payable auditing process can create a lot of strain, but this strain can be reduced or eliminated by working within best practices for audit-readiness. By following the best practices listed above, organizations can greatly reduce the stress associated with AP audits by maintaining GAPP principles on an ongoing basis while reducing errors and fraud through automation and audit traceability. Embracing digital as much as possible will help organizations achieve this.
Fidesic AP is the go-to Great Plains Accounts Payable Solution to help you modernize your financial processes.