Unrecorded and duplicated payments, frauds, unclear separation of accountant duties. These are severe and evident problems your company might encounter if you have a flawed account payable audit procedure. These errors can create a serious drawback to your financial situation or infrastructure.
Naturally, every company, entrepreneur, or small business owner wants to avoid that. To do that, it’s best to get familiar with the account payable audit procedure and ensure the safety of your business. So let’s get into it, shall we?
Importance of the Account Payable (AP) Audit
Why is AP Audit so important, and why do so many companies invest thousands of dollars in improving it? The answer is simple. Because it secures their finances, strengthens the infrastructure of their company, prevents fraud, and “errors” in transactions.
The biggest dangers of inefficient AP audits are, of course, fraud and misplacement of payments. This can create tremendous problems and setbacks that can even put a company in bankruptcy in extreme cases.
How can that happen, you may ask? Well, it’s quite simple. The term payable refers to the amount the company needs to pay for rendered services or goods. So let’s say that you need website optimization services from another company. The services are provided at the end of the year, but the invoice won’t be sent until the start of the next year. So naturally, the amount owed for the services is recorded as payable at the end of the year.
But because accounting includes regulating a vast list of transactions, sometimes these payable records can get mixed up and lost. This is naturally a bad thing, because, by the time the matter resolves, you’ll end up having unjustified expenses and fees. So it’s easy to notice the importance of how to audit accounts payable.
Signs of Effective Account Payable (AP) Audit Procedure
Account payable auditing is essential for every business. Whether small and on the uprise or large, already established, corporations, AP audits are the front line of defense in a war against fraud and error. But how do we spot an effective AP audit, methods, and procedures? Here are some hallmarks of an effective AP audit.
- There should be proper disclosure of all expenses, including the end-of-the-year financial statement. Every transaction should be recorded and documented. No matter how small or irrelevant the sum may seem, the financial statement should include each and every one.
- The management should review these statements and double-check them. After that, they must verify and approve them as completed. This is the only way to make sure nothing gets overlooked.
- A proper AP audit should follow the rules established by the GAAP (Generally Accepted Accounting Principles). There should be no exceptions. By reviewing every recorded transaction, the auditor can track the process and spot potential flaws in the system.
- The only accurate transactions are those that are recorded and verified. The entire roster of transactions should be cross-checked. This is performed by contacting every company that provided services to the one that’s being audited.
- The audit carefully examines every information regarding transactions that went through. To do this, they use cutoff tests. It’s a standard audit procedure performed to confirm the dates of transactions match. Once they focus on one trail, they can backtrack it to confirm that the payment matches those found by the account payable audit.
What Actions Can You Take to Help Account Payable (AP) Audit?
There are more than a couple of things you can do to help the accounts payable audit procedures go smoothly. From inspecting your payment sheets to backtracking entire payment logs and double-checking with your accounting team, everything is being recorded. Here’s a complete list of things you can do to help AP audit.
Your accounting team should have a functioning SOP (standard operating procedure). This will help you and them maintain error-free financial statements. If they haven’t created one, or have one that isn’t as effective as it should be, it has to be monitored and corrected as they create a new one. The SOP functions are a layered guide on how to trace, verify and complete every group of transactions. The audit team will ask for the SOP and check whether it helps your team track finance reports, but only if they follow the established rules in it. They will check every sheet and payable in it to make sure it’s completed according to SOP. The SOP is the foundation of a successful AP team. So once again, make sure that it exists, and that your team follows it.
Prepare for the Paper Trails Analysis
When it comes to paper trails, the auditing unit will most definitely ask for the verification of the validity of each transaction. Depending on how successful your company is and how many business deals you make, collecting all activities and events on paper may prove challenging. But with good organizing skills, this shouldn’t prove to be a problem. To help them with that, you should prepare the following:
- A complete list of purchase and vendor invoices
- Inventory and journal entries for AP
- Bank records
It can be complicated to arrange them in an organized manner. What’s important is to avoid grouping them altogether, but separating them by type, class, volume, etc. This way, not only will you present your exceptional management skills, but save time and energy for both your and the audit team. By having everything ready and organized, you’ll look professional, but more importantly, help the process finish faster and with great results.
Confirmations with Company’s Vendors
Another thing that the auditors may do is send forms to your company’s vendors. These forms will be either completely blank or already filled with the amounts that are due. They will ask them to confirm the amounts or write the entire list again. They have the records of every payment but will ask your accounting team to write them again, thus confirming that the numbers match.
If the numbers don’t match, the audit will make a note and ask for a reason. Depending on how you resolve this matter, they will either rate you as qualified or adverse. Some of these discrepancies can be justified indeed.
Financial Statement Verification
The auditors will also review and compare all the numbers in the annual as well as monthly financial statements. They will look through every single receipt from vendors paid in cash, but also unrecorded liabilities. These can include received items, goods, and products that are not processed for payment yet.
Once you’ve prepared everything for them to review, inspect and compare, be sure that nothing’s missing. Yes, this means double-checking every record, sheets, payables and invoices.
If you need any info on digital checks regarding some of your invoices, be sure to visit our website and contact us.