Accounts Payable Audit Procedures

How Do You Audit Accounts Payable?

Auditors are tasked with examining accounts payable-related records for authenticity while also looking for signs of fraud along with general mistakes.

Rather than worry, provided that they are doing things properly, accounts payable departments should look at audits as an opportunity to uncover and correct any potential issues before they become serious.

Are you wondering exactly what auditors may want to look at during an AP audit? While it can vary, auditors will likely want to look at the following:

• A thorough review of accounts payable internal controls
• A detailed, period-ending accounts payable ledger
• Documentation for any unrecorded liabilities
• The process for handling expenses
• Is three-way matching used in accounts payable?
• How purchase orders are handled
• Is there clear segregation of duties used in accounts payable?
• How credit card purchases are handled
• Who reviews vendor activity?
• The process for handling new vendors
• The accounts payable approval process
• Does the company use electronic payments?
• If electronic payments are used, what method is employed?
• Relevant financial reporting including a balance sheet and cash flow statements

Once an audit has been scheduled, there are four separate analytical procedures involved in the accounts payable audit process.

1. Audit Planning

   Before the audit begins, the firm conducting the audit will contact the business, establishing goals and parameters.

   Once this is done, the auditing firm will complete an audit plan that will be shared with the business during an initial meeting where goals and audit objectives will be discussed.

   An initial checklist of items that will be looked at is usually shared with the business undergoing the audit at this time.

2. Examining the Records

   Considered the fieldwork phase, the most intense part of the audit is the examination of accounts payable records. The examination phase can last for several weeks, with numerous records examined during the audit, and can include any or all of the following:

   • Review of Original Documentation

     This includes vendor invoices, purchase orders, inventory documentation, and any related accounts payable journal entries. Bank records to examine payments, whether by check or ACH will also be reviewed.

     This is done to ensure that payment has been made correctly to the appropriate vendor for the amount indicated.

   • Research Vendor Activity

     Look for any unusual activity that may need to be investigated further. Using the cutoff test, auditors will also look at any outstanding vendor balances and compare totals to those in the general ledger.

   • Review Current and Historic Budgets

     Check and note any discrepancies that need to be investigated further.

   • Review and Verify the Accuracy of Financial Statements

     The review should include the current payables balance. Auditors will also look at current accounts payable policies and procedures that are in place.

     Closing processes will be examined (monthly, quarterly, or annual) to ensure that expenses are recorded in the period in which the expense was incurred.

     Special attention will likely be paid to larger accounts payable transactions, with specific vendors chosen at random for more in-depth investigation.

   • Fraud Detection

     Auditors will search for any unrecorded or improperly recorded liabilities and will take measures to look for suspicious activity that may indicate potential fraud.

3. Reporting

   When the audit has been completed, the complete findings are analyzed and put into a report.

   The audit report, prepared by the auditing firm, provides an overview of the areas examined and the processes involved, including the financial accuracy of accounts payable, and how well it confirms to GAAP standards.

   The report also includes feedback from the auditor on any areas of concern and provides general guidelines for moving forward. The report is submitted to both management as well as other stakeholders if necessary.

4. Audit Review

   The audit and initial reporting is the final stage of the audit. However, depending on the auditor’s initial report, there is usually a follow-up audit scheduled to determine whether questions have been answered and concerns addressed properly.

Auditing accounts payable is particularly important because understatement of liabilities and theft are two main occurrences that directly impact accounts payable.