A complete guide to accounts payable audits

According to the 2023 AFP Payments Fraud and Control Survey, 65% of businesses were victims of attempted payments fraud. And business email compromise (BEC) continues to be the leading cause of payments fraud - with 71% of businesses reporting such incidents.

Accounts payable departments are prime targets for BEC attacks, where fraudsters impersonate vendors, suppliers or employees to request fraudulent payments. Accounts payable audits play a crucial role in highlighting and documenting such instances of fraudulent payments. AP audits, thus, help in setting up more robust internal accounts payable controls and preventive measures.

This article covers why accounts payable audits are important to maintain financial health and the steps in a typical AP payment audit process. We will also cover how automation helps to streamline the AP audit procedure.

What is an Accounts Payable audit?

An accounts payable audit is an independent examination of an organisation's financial records including statements, balance sheets and general ledgers. AP audit examines the accuracy of payments and transactions, ensuring they truthfully represent the business's financial status. This audit scrutinizes accounts payable department practices to ensure transparent and precise financial reporting.

By performing routine AP audits, businesses can reduce the likelihood of errors, fraud, and non-compliance with regulations. Auditing accounts payable involves verifying the accuracy of transaction records, adherence to internal policies and external regulations, and detecting opportunities for enhancement.

Why are accounts payable audits important?

For many U.S.-based companies, auditing accounts payable is mandatory. The Sarbanes-Oxley Act of 2002 necessitates that most public companies undergo external auditing to ensure their records comply with the Generally Accepted Accounting Principles (GAAP).

Compliance with these standards helps prevent large-scale corporate scandals and promotes transparency in financial reporting.

Objectives of an AP audit

All accounts payable audits broadly have the same objectives. Auditors check for completeness, compliance, validity and accuracy in accounts payable procedures followed by organisations.

These objectives verify whether company records represent a true view of the business' financial state:

• Completeness - Through detailed audit trails, cut-off tests and reconciliations, auditors ensure that all payments and recorded payables have been captured in the audit.
• Compliance - Auditors must also check whether accounting prcedures and methods adhere to the GAAP and local laws (if any).
• Validity - Checking for validity involves confirming the legitimacy of transactions by reaching out to a sample of external suppliers/vendors.
• Accuracy - AP audits must verify and ensure the accuracy of a company's financial records - since that is what the audit rests on.

Key stages in an accounts payable audit

There is no one prescribed method of carrying out AP audits.

Local laws, the size of the business, corporate governance structures, additional reporting requirements and industry standards are all taken into consideration to decide the specifics of an accounts payable audit.

Despite differences, on a broad level here are 4 key stages that AP audits must touch upon:

Planning for the accounts payable audit

The company receives a notification of the upcoming audit. A meeting will then be scheduled to discuss standard operating procedures (SOPs), the scope, and the objectives of the evaluation. Based on this discussion, the auditor develops a plan for the audit.

Conducting the fieldwork

During the fieldwork stage, the auditor spends several days or weeks going through the company's financial records and internal control framework.

Auditors look at different documents like AP ledgers, budgets and expense reports, balance sheets, check registers, purchase orders, vendor invoices, general ledgers. They also look for documentation on unrecorded liabilities, fraud investigations, internal risk assessments and planned audit procedures.

They check all these records for details such as transactions, supplier payments, and dates to ensure accuracy and reliability. This information is then used to complete the final report.

Preparing the final audit report

Once the fieldwork is complete, the auditor consolidates their findings into a final audit report. Any disparities or areas for revision are highlighted.

Conducting the follow-up review

The audit process doesn't end with the submission of the final report. The auditor conducts a follow-up review, usually one year later, to ensure that all recommendations have been implemented.

They also check that the desired results have been achieved. This follow-up ensures the ongoing effectiveness of the company's accounts payable processes and internal controls.

Automating accounts payable audits

Accounts payable audits can be time-consuming and stressful, but they yield significant benefits in identifying and mitigating financial risks. Embracing automation in AP audit procedures will streamline day-to-day operations and substantially improve the AP audit process.

By leveraging advanced AP automation software solutions, organizations can achieve greater efficiency, accuracy, and compliance. Nanonets' AP automation tool can streamline the accounts payable audit procedure with its AI-enabled data extraction and customized workflow features.

Here are some of the immediate benefits of automating AP audits with AP automation or similar software:

Reducing manual data entry and errors

Automation eliminates the need for manual data entry, which can be both costly and time-consuming. It also significantly reduces the likelihood of human errors, resulting in a more accurate and efficient audit process.

Eliminating human error

A significant portion of issues discovered during AP audits arises from human errors, including misstatements, duplicate payments, overpayments, and errors in maintaining the check register.

Automation minimizes human inputs, thereby substantially reducing the occurrence of such errors and mitigating 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 auditing faster and more streamlined.

Automation across all stages — from purchase orders (PO) to invoicing, approvals, three-way matching, and payments — enhances compliance and transparency with accounting standards and regulations.

This results in fewer disputes and the elimination of duplicate tasks, streamlining the accounts payable audit procedure.

Standardizing and accelerating processes

Automation standardizes and speeds up various AP processes, making them faster and more accurate. This allows your AP team to have complete 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, enabling a smoother and more efficient audit process.

On-demand reporting capabilities

AP automation software facilitates on-demand reporting, ensuring that your organization is always audit-ready and able to respond quickly to any audit requests or inquiries.

Conclusion

Accounts payable audits are crucial for maintaining the financial health of businesses. They ensure compliance in financial reporting and identify discrepancies and inefficiencies. This helps prevent errors, fraud, and non-compliance with regulations.

AP audits verify the accuracy, completeness, validity, and compliance of transactions. They play a key role in ensuring accurate financial records. For many companies, auditing trade payables is mandatory to comply with regulations.

By embracing AP automation, businesses can enhance their audit process and ensure compliance.

If you're looking to automate your manual AP Processes, schedule a demo to see how Nanonets can help you.

Read More: The Guide to Invoice Audits

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