Whether small businesses or global giants, all companies must follow the same basic accounting principles — the Generally Accepted Accounting Principles (GAAP) standard in the US or International Financial Reporting Standards (IFRS) abroad.
Accounting according to these principles helps companies dutifully manage their cash flow to maintain stability and give employees confidence in the future of their workplace. These standards also protect investors and banking institutions by creating a trustworthy reporting standard for financials.
These standards reassure current and prospective suppliers that your company is trustworthy for supplying goods on credit. This makes it easier to develop relationships and negotiate mutually beneficial deals. Without these partnerships, it becomes difficult for the business to maintain growth.
A healthy accounts payable balance starts with an accounts payable audit program. This helps growth-minded companies detect and avoid damaging financial irregularities such as misreporting, overspending, and fraud.
To help AP audit procedures run as smoothly as possible, it’s integral to modernize your workflow. This article answers the following common questions about implementing an AP audit program:
- What is an accounts payable audit program?
- Why is an accounts payable audit program important to your business?
- How is an accounts payable audit conducted?
- What standards should you adhere to when conducting an accounts payable audit?
What is an audit program for accounts payable?
An accounts payable audit is a research activity that certifies the accuracy of financial statements. It ensures your accounts payable transaction reports are accurate representations of the financial activity in the company.
Typically, audits are conducted by professional auditors, certified public accountants (CPAs), or internal accounting employees. External audits are sometimes required for publicly traded companies to certify financial activity to investors. These audits are reported using an SEC reporting website called Edgar.
Why are accounts payable audit programs important?
Audit procedures are used by the AP department to verify the amount of money listed in the balance sheets and accounts of companies. Any discrepancy or lack of information will cast a poor light on your company if the problems aren’t caught and resolved. Therefore it's important to support auditors and give them the best resources for their job.
Accounts payable can be a particularly high-risk item to audit because of its subjectivity. This can lead to financial misstatements due to intentional fraud or accidental errors. Without proper internal controls, things like unrecorded liabilities, expense fraud, and duplicate payments could happen at any time — in businesses big and small.
While the traditional methods of crunching these numbers are still fine and good, now is the time to modernize the process into something more efficient, more accurate, and more cost-effective than using a paper-based system.
Moving to a totally paperless format can be difficult, and some companies aren’t in the position to do so. But even moving some of your accounts payable processes to a digital space will benefit your company.
Here’s why going paperless is so essential and how to enact these changes within your business.
What is the most important objective when conducting an accounts payable audit?
The goal of every audit, internal or external, is the same — a “clean” audit result. Clean audits are achieved when the auditor certifies that there are no material misrepresentations or issues with the review of the financial statements.
Depending on the type of audit, companies may also need to demonstrate the effectiveness of their internal controls. For instance, a Sarbanes-Oxley (SOX) audit result (called an opinion) certifies that the company uses sufficient internal controls in handling financial information and transactions.
How to conduct an AP audit
Before beginning an internal AP audit, it’s important to schedule a meeting with management and other stakeholders to nail down the scope and desired outcome. Planning ahead creates an outline for use during the fieldwork, reporting, and follow-up stages.
Collect essential work documents
Some examples of essential work documents include:
- A review of existing internal controls for accounts payable
- A detailed period-end accounts payable ledger
- A comparison and comprehensive analysis of budgets as compared to expense reports, with clarifying information on any unexpected deviations
- Complete documentation of any unrecorded liabilities
- A detailed risk assessment of AP and expenses
- A summary of potential weak points in accounts payable controls
- An overview of planned audit procedures for accounts payable
- Documentation related to any fraud investigation required by weak or absent controls
You can also ask internal questions to further detail the goals of the audit:
- What is the company’s annual expense budget?
- Who receives budget and expense reports?
- Is there a policy in place to ensure all payables are recorded within the proper period?
- Are purchase orders digital, physical, or both?
- What is the numbering system used for POs?
- Who authorizes purchase orders?
- Are purchase orders made by any methods other than PO? If so, what other methods are used in the payment process?
- Does the accounts payable department have a clear separation of responsibilities for approving, paying, and recording payables, as well as reconciling bank statements?
- How are new vendors evaluated and added to the approved vendor file?
- Who can authorize adding new vendors to payables?
- Are purchases limited to approved vendors?
- Is there a software solution in place to simplify the audit? If so, does the system support three-way matching?
- Is the software used in conjunction with a purchasing policy that follows generally accepted accounting principles (GAAP)?
- Are credit card purchases recorded and tracked by the system to avoid invisible spending? If not, how are credit card purchases approved, and what considerations are in place to limit or eliminate maverick spending?
- What methods, such as Automated Clearing House (ACH) or wire transfers, does the company use to make electronic payments?
Accounts Payable audit assertions
An accounts payable audit can also include tests for these four main audit assertions:
1. Audit for completeness
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.
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.
Auditors use accounts payable audit trails to match payments to recorded payables. They look for open files with unmatched documents.
2. Audit for validity
Auditors use accounts payable audit procedures for validity to ensure the legitimacy of AP transactions. The most common way of accomplishing this is to reach out to vendors and suppliers to get a confirmation request.
The number of requests sent out varies depending on the business. Most auditors contact regular vendors and suppliers regardless of whether there is an outstanding balance.
If there are one or more open invoices, they will also reach out to a percentage of the business's partners.
3. Audit for compliance
When evaluating compliance, auditors must discover proof that GAAP for AP transactions is being followed. This proof is often found by working backward, starting with the inspection of end-of-year financial statements like purchase orders, balance sheets, journal entries for both AP and inventory, and cash flow statements.
Auditors then choose random entries in the general ledger to trace back to their origin, creating an audit trail. This form of tracing allows auditors to examine the exact path of a transaction. They can then evaluate if the accounting procedures were used.
4. Audit for disclosure
The final step of the accounts payable audit process is to ensure that your accounts payable balance is properly disclosed in your year-end financial statements. Auditors do this by inspecting financial statements to verify things such as current liability. They also verify if purchases are included in the cost of goods calculations.
Using footnotes provides additional details regarding unusual transactions that may require further explanation beyond simply recording the transaction.
A final method auditors use is asking a business to disclose a mandatory management representation letter attesting that all their financial statements fully represent accounts payable and purchase figures.
Why going paperless is the present and the future
All of these steps are easier to complete via a paperless process. But going paperless is a real challenge.
Transitioning the entire department all at once isn’t always practical, and you may find out that your business isn’t equipped to go completely digital. But the benefits of a partly paperless accounts payable system are too substantial not to use.
Going paperless helps your company in the following ways:
Cheaper processing and storage costs
Fees to keep paper records storage add up fast, and records take up valuable space if stored on-site. It also takes more time and money to process physical invoices.
Incorporating automation to digitize vendor invoices allows your team to focus their energies on more important daily matters.
Records are easier to access
Even if you have the best filing system in the world, finding that one piece of paper you need can take a frustrating amount of time. It takes even more time if you keep your records at an off-site location. Invoices can also get lost in the AP department and lead to:
- Unpaid orders
- Late fees
- Accounts payable audit issues in the future
By changing to a paperless system, information is easily accessible through a search engine built to serve up digital documents at a moment’s notice. Automated systems also initiate much faster invoice processing than doing so manually.
Environmentally friendly processes
Going paperless isn’t just good for business — it’s good for the environment. A substantial amount of the paper used in accounts payable processing eventually ends up in the landfill once it’s no longer useful. Moving to a more digital system means fewer trees are harvested to support paper-based systems.
Use Order.co to bring automation to your company
AP automation is the best way to give your accounting team the ability to stay ahead of the competition and work in a less stressful environment. 2022 is the year to drop the paper trail.
Order.co provides the perfect tools to automate and simplify many aspects of your business and allow you to focus on more pressing daily operations:
- Automatic general ledger (GL) coding for correct accounts every time
- Three-way matching to ensure accuracy in the procurement process
- Vendor payments and consolidated billing to handle hundreds of payments with just a few clicks
These features decrease the number of invoices and other paperwork you’ll need to conduct your business, making the auditing process smoother than ever. If you are ready to take your accounts payable program to the next level, request a demo of Order.co.
Schedule a demo to see how Order.co can simplify buying for your business.
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