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Payables audits play a critical role in the financial health of a business. They ensure consistency in financial reporting and can reduce inconsistencies and inefficiencies.
This article covers why a payroll audit is important to maintaining financial health and the steps in the AP audit process. We will also cover how automation helps streamline the AP audit process.
What is AP Auditing?
A payables audit is an in-depth assessment of a company’s payables records and procedures. An accounts payable audit includes:
- Verifying the accuracy of transaction records
- Compliance with internal policies and external regulations and
- Identify opportunities for improvement.
By following routine procedures for auditing accounts payable, a business can protect its financial integrity. This helps reduce the likelihood of errors, fraud and non-compliance.
Why is AP Auditing Important?
Payables audits are a crucial aspect of maintaining a company’s financial health. At its core, an AP audit is an independent and methodical examination of an organization’s payment records.
To ensure accurate records of business finances
A well-prepared AP audit report offers insight into the organization’s performance and highlights areas for improvement. To ensure the accuracy of financial statements, auditors perform audit procedures for accounts payable.
These procedures include checking whether the fiscal year’s transactions are included in the year-end financial statements. This includes reviewing invoices, purchase orders, and other relevant documents to confirm that transactions are recorded in the appropriate accounting period.
By performing these tests, auditors can check how well the company’s internal control system documents transactions and adheres to reporting deadlines.
required by law
Payroll audits are mandatory for many US-based companies. The Sarbanes-Oxley Act of 2002 requires most public companies to undergo an external audit to ensure that their records conform to generally accepted accounting principles (GAAP). Doing so helps prevent large-scale corporate scandals and promotes transparency in financial reporting.
Although GAAP regulations may vary from state to state, auditors review several aspects of a company’s accounts payable. They check for completeness, accuracy, validity, consistency of records and proper disclosures to ensure that an organization’s records reflect its financial position.
Payables audits are often seen as essential but difficult. AP audits may reveal errors, fraud or other issues that could have consequences for employees.
However, there is no need to fear the audit procedure if there is nothing to hide. They are like safety inspections that help identify potential problems before they escalate.
What to look for in an AP audit?
The specifics of an AP audit depend on a variety of factors, such as company size, industry, location, and the intended depth of the audit. A payables audit procedure aims to flag unusual transactions, detect potential fraud, and improve business processes to ensure financial health. AP auditors often hold credentials from the Association of Certified Fraud Examiners (ACFE).
In general, there are four main areas that an AP audit focuses on:
1. Completeness
A completeness audit involves verifying accounts payable balances against general ledger balances. This is to ensure that they are based on actual accounts payable journal entries, purchase orders and invoices.
This is a critical step in the AP auditing process. Auditors create an audit trail that links payments to recorded payments. It includes electronic payments. It also includes open records with irrelevant documents.
2. Compliance
An AP audit assesses whether a company’s payment processes are in compliance with GAAP practices. Compliance requires following GAAP procedures, which include a detailed review of the company’s audit trails at the transaction level to confirm that the correct accounting methods have been used.
Auditors examine a wide range of financial documents, such as period-end financial statements and balance sheets. They also audit cash flows and income statements, tracing general ledger entries back to their origination.
3. Term of validity
Validity assessment means checking the legitimacy of AP transactions. This often involves contacting third-party suppliers and vendors to confirm a particular transaction.
Auditors generally exercise discretion in deciding which suppliers to contact. However, they usually refer to commonly used third parties.
4. Accuracy
Ensuring the accuracy of a company’s financial records is critical. AP audits are intended to verify the accuracy of billing practices. During this stage, auditors perform various procedures, including checking standard operating procedures and recalculating supplier invoices and payments.
What are the main steps in the AP audit procedure?
The AP audit procedure varies by company size, industry, and the intended depth of the audit. In general, the main steps involved in an AP audit are as follows.
Scheduling the audit of payments
The first stage of a payables audit is the planning stage. The company receives notice of the upcoming audit.
A meeting will follow to discuss standard operating procedures (SOPs), the scope and objectives of the assessment. Based on this review, the auditor himself develops an audit plan.
Conducting field work
During the fieldwork phase, the auditor spends several days or weeks poring over the company’s financial records. They use a “termination test” to ensure that transactions are recorded at the correct time.
Auditors look at various documents such as balance sheets, check registers, purchase orders, vendor invoices and general ledgers. They check all these records for details such as transactions, payments and dates to ensure accuracy and reliability. This information is then used to complete the final report.
Preparation of the final audit report
After completing the field work, the auditor combines their findings in the final audit report.
This report summarizes the auditor’s findings and provides an evaluation of those findings. Any inconsistencies or areas for revision are highlighted.
Conduct further review
The audit process does not end with the submission of the final report. The auditor conducts a follow-up review, usually after one year, to ensure that all recommendations have been implemented.
They also check that the desired result is achieved. This follow-up ensures the continued effectiveness of the company’s payments processes and internal controls.
How to plan a payments audit?
Payables auditing allows you to verify recorded transactions, invoices, purchase orders, and other documents. This ensures everything is in good order.
Regular internal audits can help maintain financial integrity. Instead of panicking, you need to be organized and well prepared.
The AP team and senior management should develop a plan that outlines the audit objectives. They include:
- Confirm that Standard Operating Procedures (SOP) are in place and followed
- Identify potential fraud and
- Discuss areas for improvement.
To prepare for a payments audit, companies and teams should have the following documents ready:
- Review of internal control over payments.
- Comparison of budgeted actual cost reports with detailed analysis and explanation of any deviations or differences
- Risk assessment of charges and costs
- Detailed period-end accounts payable
- Review of payment and expenditure audit procedures.
- A report documenting any deficiencies in payments and expense control
- Detailed documentation of unregistered liabilities
- Documentation of any fraud investigation related to the absence of controls or weaknesses (such as absence of duties)
By preparing these documents, you can ensure a smoother audit process and demonstrate your commitment to keeping accurate and relevant financial records.
Can the audit of payments be automated?
Payables audits can be time-consuming and stressful, but they provide significant benefits in identifying and mitigating financial risks. Using automation in AP audit procedures will streamline day-to-day operations and substantially improve the AP audit process.
By using advanced AP automation software solutions, organizations can achieve greater efficiency, accuracy and compliance. Nanonets’ AP automation tool can streamline the accounts payable audit process with its AI-enabled data extraction and customized workflow features.
Why should AP audits be automated?
Reducing manual data entry and errors
Automation eliminates the need for manual data entry, which can be expensive and time-consuming. It also greatly reduces the likelihood of human error, resulting in a more accurate and efficient audit process.
Eliminate human error
A significant portion of the issues discovered during AP audits arise from human error, including mistakes, duplicate payments, overpayments, and errors in keeping the check register.
Automation reduces human access, thereby substantially reducing the occurrence of such errors and reducing the risk of fraud.
Increased compliance and fewer disputes
AP automation optimizes the flow of invoices and payments, replacing paper-based complexity with frictionless efficiency. This improved process makes AP audits faster and more streamlined.
Automation at every step—from purchase orders (PO) to invoicing, approvals, three-way compliance, and payments—enhances compliance and transparency with accounting standards and regulations.
This leads to fewer disputes and elimination of duplicate tasks, which improves the process of auditing accounts.
Standardization and acceleration of processes
Automation standardizes and streamlines various AP processes, making them faster and more accurate. This allows your AP team to have full visibility into invoices and POs in real-time.
Seamless integration with ERP systems
Integrating AP automation software with existing ERP platforms ensures greater data consistency and accuracy, resulting in a smoother and more efficient audit process.
On-demand reporting capabilities
AP Automation facilitates on-demand reporting, ensuring that your organization is always audit-ready and able to quickly respond to any audit requests or requests.
conclusion
Payables audits are critical to maintaining the financial health of a business. They ensure compliance with financial statements and identify inconsistencies and inefficiencies.
This will help you avoid errors, fraud and non-compliance. AP audits verify the accuracy, completeness, validity and compliance of transactions. They play an important role in ensuring accurate financial records. Payroll audits are mandatory for many companies to comply with regulations.
By adopting AP automation, businesses can improve the audit process and ensure compliance by eliminating the inefficiencies of paper invoices and manual processing.
If you’re looking to automate your manual AP processes, schedule a demo to see how Nanonets can help.
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