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Accounts Payable Audit Program

Accounts Payable Audit Program

The accounts payable department of your company and a home workshop may not, at first glance, have many things in common. But a piece of advice often employed in the latter—i.e., “Measure twice, cut once”—can be just as useful in the former, with a few modifications.
Accounts payable is one of the most important components in the financial machinery of a business, and the concept of measuring twice isn’t so much about double-checking one’s work before a payment’s made as it is verifying that payment was made, recorded, and reconciled properly. The second “measurement,” as it were, comes after the check is, er, cut.
No matter the size of your organization or your industry, establishing a thorough and effective accounts payable audit program can help minimize risk and maximize compliance while trimming fraudulent activity and ensuring your general ledger is accurate.

Why Establish an Accounts Payable Audit Program?

Without effective internal controls and auditing standards for every stage of the procure-to-payment process, your company is exposed to excessive risk. What kind of risk? For payables, it’s the risk of fraudulent behavior—both inadvertent and intentional—as well as the regrettable ease with which a company’s bottom line can be boosted by overlooked and unrecorded period-end or year-end payables.
Auditing procedures are designed to minimize the occurrence of these problems, and quickly illuminate common, and potentially costly, errors in your year-end financial statements, such as:

  • Understated accounts payable amounts (intentional or inadvertent)
  • Payments made to the wrong suppliers
  • Duplicate payments made on vendor invoices

Naturally, this task is greatly simplified if your company has already integrated procurement software with strong support for accounts payable management and reporting.

While it might seem daunting, creating your own internal audit program for accounts payable is a fairly straightforward endeavor. The audit procedure itself can take the form of a word processing document, formatted in sequential steps.

Sample AP Audit Program

While it might seem daunting, creating your own internal audit program for accounts payable is a fairly straightforward endeavor. The audit procedure itself can take the form of a word processing document, formatted in sequential steps.

The Basics

The header of the first page of the document should include the title, the names of the members of the audit committee or team along with their respective roles, and any internal coding required to link the audit into your procurement software or ERP package.
Establishing not only the audit work to be done, but the individuals who will be doing it, strengthens the audit trail in general and makes it easier to break down roles and responsibilities in the working areas of the document.
An example header might look like this:

Period: XXXX
Balance Sheet Date: XX/XX/XXXX


Accounts Payable Audit Program


Audit Committee:

T. Smith (Role)

J. Brown (Role)

S. Templeton (Role)

C. Rodriguez (Role)



Audit Procedures

This section of the AP audit report outlines the practices to be followed while conducting the audit. It may be as detailed as your individual organization requires, but in general will look something like this:


●     The audit committee will refer to existing internal audit planning documentation to inform their actions and ensure they have a complete understanding of COMPANY NAME’S financial reporting system and the evaluation methodology to be applied to accounts payable.

●     All audit work should be recorded in the relevant working papers (attached as necessary), and recorded on this document in the columns indicated.

●     If modification to existing auditing procedures is necessary to complete audit objectives, document all changes and include working papers as necessary.

Audit Objectives and Financial Assertions

Beneath the header, list the goals of the audit, also called the audit objectives. These are paired with assertions, or statements believed to be absolutely true based on context and content, as they relate to the audit and the company’s financial reporting.

Sample objectives and assertions might include:

Obtain complete documentation of actual obligations held by COMPANY NAME, including current liabilities and unprocessed invoices for products and services received but not billed as of period end.

●     Existence/Occurrence

●     Rights and Obligations

●     Completeness of Information

Confirm entry amounts provided by accounts payable match paired invoices, purchase orders, and other supporting documentation. All transactions are correctly recorded with regard to account, amount, and period.


●     Existence/Occurrence

●     Rights and Obligations

●     Allocation and Valuation

Ensure accounts payable are correctly classified as current liabilities.

Verify that debit balances above established threshold are moved and processed as other assets.

Establish sufficient disclosures for payables with specific payment terms, assets used as collateral via accounts payable, and related-party transactions in accounts payable.

●     Presentation

●     Disclosure

Identify internal controls in need of improved risk management and suggest modifications as necessary.●     Compliance

Audit Procedures

Think of this section of the audit as a checklist, walking your team through the process. Assigning roles properly and creating support documentation are critical to the success of the audit. Every company is different, but a basic set of procedures you can use as a starting point might include:

1. Obtain (or prepare) a balance sheet from accounts payable for the indicated date.  

a. Verify the accuracy of the amounts in the listing and reconcile it with the general ledger.

b. Review the balance sheet to identify large debit balances. Confirm these balances with vendors and reclassify to other assets as relevant.  
c. Identify and transfer from trade accounts to accounts payable in prepared financial statements any related-party transactions as determined by their amounts.  
d. Isolate and discuss past due and/or disputed balances with the accounts payable team and determine what assets, if any, have been promised to ensure payment of these outstanding balances.  
2. Determine whether confirmation of the accounts payable balance sheet, as of the date listed, is required. If so:  
a. Create a list of the major suppliers from whom confirmation is required and to whom requests should be sent. Discuss any objections made to contact the companies on this vendor list and, if necessary, perform alternative confirmation procedures as required.  
b. Create and send the confirmation requests to the companies on the vendor list.  

c. Collect confirmation replies and use the information provided to create a summary worksheet that includes:

  • Date of receipt
  • Vendor name
  • Outstanding balance to vendor per balance sheet
  • Outstanding balance per vendor confirmation
  • Difference (if any)
  • Analysis and explanation, e.g. payment in transit or unrecorded liability

d. If a vendor confirmation is not returned, use alternative confirmation methods, such as:

  • Reviewing unpaid vendor invoices and paired purchase orders and receiving documentation
  • Confirming payment of the outstanding liability was made after the date listed on the sheet.
3.Search for unrecorded liabilities falling between the balance-sheet date and the execution of the AP audit:  

a. Search the cash disbursements journal for all payments exceeding a pre-defined amount and review accompanying documentation (e.g., purchase order, vendor invoice).

  • For products or services received before the date on the balance sheet, ensure the liability is recorded correctly by that date.
  • For those received after the date on the balance sheet, confirm that the amount listed has been excluded from accounts payable by the date on the sheet.
b. Collect all unprocessed invoices and vendor statements as of the audit date. For amounts exceeding a predetermined value, confirm the amount on each invoice is correctly included or excluded from accounts payable as of the date on the balance sheet.  

c. Collect all receiving reports that have not been cross-matched with vendor invoices. Confirm if the goods and services listed were received as of the date on the balance sheet.

  • For received goods and services, confirm the liability has been recorded.
  • If an invoice has not been received from a vendor, consult the related purchase order, prior invoices for the same goods and services, or contact the vendor directly.
d. Consult the accounts payable team regarding their knowledge of any unrecorded liabilities.  
e. Compare the trade accounts payable listing from the end of the current period to the one from the period before. If any monetarily significant items were included in the previous period but don’t appear in the current listing, determine whether they have been overlooked and should in fact be recorded in accounts payable by the date on the balance sheet.  
4. Identify and confirm any amounts in trade accounts payable with specified payment terms. Reclassify these liabilities to notes payable as appropriate and, if they do not bear interest, discuss with your team whether these items should be listed at their current (likely lower) values for the purposes of financial reporting.  
5. Consult the accounts payable team regarding any assets currently utilized as collateral on accounts payable and ensure they are adequately disclosed on financial statements.  
6. Ensure vendor credit memos received after the date on the balance sheet are recorded for the correct period.  
7. Analyze the records provided by accounts payable and thoroughly investigate any significant deviations from expected values.  

a. Compare current balances with the previous year’s for:

  • Gross payables
  • Discounts

b. Calculate these ratios and compare them to the previous year’s values:

  • Accounts payable turnover rate
  • Accounts payable days outstanding
  • Value of current accounts payable as compared to current liabilities
  • Purchases as compared to purchase returns and allowances
8. If fraudulent behavior is a concern, consider performing the following additional audit procedures:  

a. Contact all the suppliers on the vendor list and request full information regarding any outstanding invoices as well as payment history, terms, etc.

Be sure to include old and new vendors, as well as supplier accounts with small or no outstanding balances.

b. Confirm supplier contact information as pertains to invoices invoices using this master vendor list.  
c. Track down any strange or unusually large year-end transactions or adjustments that didn’t (for example) go through normal approval processes or are lacking in support documentation.  

d. Carefully examine all vendor files for non-standard or modified documentation, including:

  • Hand-written forms (especially in an automated environment)
  • Multiple, incomplete, or inaccurate addresses for a single vendor.
  • Disbursements issued for transactions without any associated goods.
  • Suspicious or thin documentation for payments made in amounts just under those requiring approval.



During the auditing process, you’ll be creating and referencing a range of supporting documentation to provide additional clarity and context. These documents, called work papers, provide more comprehensive information about varying aspects of the audit, including:

  • The role of internal controls as applies to accounts payable and expenses
  • AP risk assessment at the assertion level of the audit
  • Identification and documentation of potential improvements to be made to internal controls for accounts payable
  • Documentation of any fraudulent behavior as related to control deficiencies
  • Documentation of any search for, and identification of, unrecorded liabilities
  • A comparison of budgets to actual expense reports, any significant differences between the two, and an accompanying analysis seeking to explain the discrepancy
  • Documentation of the audit program itself

Reduce Risk and Strengthen Spend Management

Measure twice, cut once. It’s good advice, whether you’re crafting a masterpiece or building a better bottom line. By taking the time to create and implement an internal audit program for accounts payable, you’ll be able to establish stronger internal controls, ensure accurate financial reporting, and shield your company from unnecessary risk, today and in the future.

What’s your goal today?

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