The details may change, but all audits have the same goal: to review the accuracy of financial records and reduce the risk of exposure to potential fraud.
Whether you’re a small business or a global giant, all companies must follow the same basic principles first and foremost. Companies must dutifully manage their cash flow to maintain stability and give employees confidence in the future of their workplace.
A good-looking financial statement isn’t just good for the ego. It’s an emblem of confidence that shows current and prospective suppliers that your company is worth investing resources in. This makes it easier to develop relationships and negotiate mutually beneficial deals. Without these partnerships, company growth becomes much more fraught, making it more difficult, if not impossible, for your business to succeed.
A good-looking financial statement isn’t just good for the ego.
The necessity of a healthy balance sheet makes the accounts payable departments so vital in keeping track of your financial dealings. To ensure that these processes are up to standard and that mistakes are minimized, you must follow up with an Accounts Payable Audit program. This is crucial for any respectable company, as the program helps protect you from damaging financial irregularities such as fraud.
In order to help AP audit procedures run as smoothly as possible, you should modernize your workflow. This article will help you get there by explaining:
- What accounts payable audits entail and why they’re necessary
- How businesses conduct audits and what to prioritize within them
- Why a paperless process is a great way to push your business forward
Many of these changes are much easier said than done. But the arguments for implementing them are too good to ignore. First, here is a rundown of what makes accounts payable audit programs so valuable in the first place.
Why Are Accounts Payable Audit Programs Important?
Audit procedures are used by the AP department to verify the amount of money listed in the balances and accounts of companies. Any discrepancy or lack of information will shed a poor light on your company if the problems aren’t caught and solved. So it’s important to support auditors and give them the best available 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 payment 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 in practice, 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 important and how to enact these changes within your business.
How to Conduct an AP Audit
The details may change, but all audits have the same goal. They want to review the accuracy of financial records and reduce the risk of exposure to potential fraud. Before beginning the process, 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 to follow 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, such as:
- Is there a software solution in place to simplify the audit? If so, does the system support three-way (PO, receiving document/packing list, and invoice) matching?
- Is the software used in conjunction with a purchasing policy that follows generally accepted accounting principles (GAAP)?
- What is the company’s annual expense budget, if any?
- Who receives budget and expense reports?
- Is there a policy in place to ensure all payables are recorded in 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?
- 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?
- Does the accounts payable department have a clear separation of responsibilities for approving, paying, and recording payables, as well as reconciling bank statements?
- How do you evaluate and add new vendors to the approved vendor file?
- Who can authorize adding new vendors to payables?
- Are purchases limited to approved vendors?
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 disbursements cut-off tests determine if a company’s end-of-year financial statements include the 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 that need to be sent out varies depending on the business. Most auditors contact regular vendors and suppliers regardless of whether there is an outstanding balance or not.
If there are one or more open invoices, then they will reach out to a percentage of your business partners, as well.
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 will 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 can do this by inspecting financial statements to verify things such as current liability. They can also verify if purchases are included in the cost of goods calculations.
They can also use footnotes to provide additional details regarding unusual transactions that may require further explanation beyond simply recording the transaction.
A final auditing method auditors can use is to ask a business to disclose a mandatory management representation letter attesting that all of their financial statements fully represent accounts payable and purchase figures.
Why Going Paperless Is the Present and the Future
All of these steps would be 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
The fees to keep paper records storage can add up fast, and the records take up important 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 That 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 can take 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 can be found through an easily accessible search engine built to serve up your digital documents at a moment’s notice. Automated systems can also initiate invoice processing much faster than having to do so manually.
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 a landfill once it’s no longer useful. Moving to a more digital system means fewer trees need to get cut down. Also, digital systems release less carbon dioxide into the air.
Use Negotiatus to Bring Automation to Your Company
Automation is the best way to give your employees the ability to stay ahead of the competition and work in a less stressful environment. 2021 is the time to drop the paper trail.
Negotiatus provides the perfect tools to automate and simplify many aspects of your business and allow you to focus on more pressing daily operations. You can complete orders 95% faster by browsing one all-encompassing catalog, placing all of your purchases into one cart, and letting us take it from there.
Businesses can consolidate vendor transactions into one single payment. You can arrange to pay at the time of the order, once per week, or once per month, depending on what fits best for your company.
All of these features decrease the number of invoices and other pieces of 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, feel free to request a demo of our software through this link.