Accounts Payable Auditing: The 8-Step Process
Validity testing identifies possible fraud and errors and ensures the audit trail and financial statements are free from material misstatements. Auditors will verify the validity of AP transactions to confirm they are accurate and legitimate. Validity testing usually involves contacting suppliers to verify the transaction data is accurate and legitimate and identifying and investigating any exceptions. Conducting regular AP audits is crucial for maintaining financial accuracy, compliance, and operational efficiency. With multiple stakeholders involved in the accounts payable process, errors can easily slip through the cracks. From detecting fraud to preventing duplicate payments, an AP audit ensures that your company is not losing money due to oversights or manual mistakes.
Common Challenges in Traditional Accounts Payable Auditing Processes
Ensure a clear separation of duties for these roles so a single individual isn’t handling critical tasks. When we began working with White-Rodgers, a global manufacturer of products for HVAC and refrigeration systems, they were facing the growing challenge of managing their accounts payable process. Plagued with lost invoices, unpaid bills, and an excessively time-consuming tax audit process, the process became a serious drain on their resources and posed a risk to their financial accuracy and compliance.
The Trouble with Manual Approvals
- We test right and obligation assertion to see whether the client actually has liability for accounts payable reported.
- Platforms can also uncover insights by analyzing vendor spend by category, location, and other criteria.
- Also, periodically verify user access levels and promptly revoke access for individuals who no longer require it.
- Tax compliance records ensure the company adheres to tax laws and regulations.
- Auditors reconcile this ledger with the company’s general ledger to confirm that all liabilities are accurately recorded.
Ensure that all documentation is securely stored in an accessible location, preferably a cloud storage platform with password protection and limited access based on job functions. Compare current-period expenses to prior periods to detect inconsistencies that may signal errors or irregularities. Consider a cash flow multinational organisation dealing with currency exchange rates and varying tax regulations across regions.
Accounting Systems
This ensures all liabilities owed to suppliers are properly recorded, preventing future disputes or errors in financial reporting. Testing vendor accounts and invoices provides a closer look at the accuracy of transactions. Match invoices with purchase orders and receiving reports to verify payments reflect goods or services received.
Automating this process makes it easier to gather and share data, avoiding unnecessary delays. Keep your documentation clear and actionable so stakeholders can easily see what’s working well, what needs attention, and the specific steps required to address any problems you’ve uncovered. Determine the period the audit will cover, e.g., quarter-end, year-end, and your timeline for audit fieldwork. An electronic invoicing system is one of the quickest and most effective ways to deal with fraud because there is much less room for human error. A 2016 study by the Association of Certified Fraud Examiners found that organizations lose an average of 5% annual revenue every year due to fraud. Some states allow public companies to push extra reports that don’t need to follow GAAP standards or rules.
Accounts Payable (AP) Audit Checklist
- Review the process for adding, modifying, and deactivating vendor accounts to prevent unauthorized changes and potential fraud.
- Your auditors worked independently while keeping us informed with weekly progress reports and they required very little involvement of our staff.
- Review and update access controls to restrict access to sensitive financial data.
- If the department lacks formal SOPs or has outdated ones, auditors pause the audit until proper procedures are created or updated.
- See how forward-thinking finance teams are future-proofing their organizations through AP automation.
The auditor applies unique audit procedures to verify the assertions used in the balances, such as existence, rights and obligations, completeness, accuracy, classification, and presentation. Audit procedures guide the auditors Bookkeeping 101 to look at the balances and verify them from different ends to make their opinion on the accuracy of those balances. Therefore, these audit procedures will help the auditor outline any discrepancies.
Certified Systems
Automation also builds an audit trail that won’t be misplaced or lost, keeping all data in one, protected location. AP fraud can appear in many forms, including ghost vendors, inflated or altered invoices, round-dollar invoices without supporting details, and rush payments pushed through without approvals. Auditors confirm proper sign-offs, multi-level approvals for high-value transactions, and adherence to tax requirements. Strong internal controls ensure that all payments are authorized according to company policy and relevant regulations. Using digital filing or a document management system reduces errors and allows auditors to access records efficiently. According to the Association of Certified Fraud Examiners (ACFE), businesses lose an estimated 5% of revenue annually to fraud.