A thorough accounts payable audit helps ensure financial accuracy, prevent fraud, and maintain compliance with regulations.
Whether you're preparing for an external audit or conducting internal reviews, having a systematic approach to auditing AP can make the difference between a stressful experience and a smooth process.
This quick guide walks you through everything you need to know, from key objectives and steps to streamlining the process with today’s automation tools.
Definition of accounts payable audit
An accounts payable audit is a systematic examination of an organization's AP processes, transactions, and internal controls. This review ensures that all payments are legitimate, well-documented, and recorded accurately in the company's financial statements.
The audit can be conducted internally (often as a preventive measure) or externally as part of a broader financial audit.
The importance of auditing accounts payable
Regular AP audits enhance your organization's financial health and integrity by identifying potential issues before they become major problems. They help protect your company against fraud while ensuring strong relationships with vendors through accurate, timely payments.
These audits also help companies stay compliant with tax regulations and accounting standards while providing insights that can lead to improved efficiency and cost savings in AP operations.
Key objectives of an AP audit
Think of your AP audit in two distinct sections: (1) auditing your AP transactions, and (2) auditing your AP processes.
Auditing your accounts payable records and transactions
Audits of your AP transactions should perform these 4 checks.
Accuracy
Make sure all amounts are correctly calculated and recorded. This includes checking payment amounts, dates, vendor information, and account coding for each transaction.
Completeness
Ensure that all transactions are properly recorded and that nothing is missing from your financial records. This includes verifying that all vendor invoices, credit memos, and payments are accounted for in the correct reporting period.
Compliance
Check that all AP processes and procedures follow relevant regulations, accounting standards, generally accepted accounting principles (GAAP), and internal policies. This includes proper documentation, appropriate approvals, and accurate tax reporting.
Validity
Confirm that all recorded transactions are legitimate and properly authorized. This helps protect against fraud by making sure that every payment corresponds to actual goods or services received by the company.
Auditing your AP processes
Audits of your accounts payable process should look for strong internal controls, such as:
- Segregation of duties—separating transaction recording from transaction approval
- Strict access controls—restricting access to your AP and accounting systems
- Robust approval procedures—ensuring validity before approving payments
Preparing for an audit: practical guidance
Getting your organization audit-ready goes beyond accounting and calculations. Be sure to involve the right people and set up regular communication checkpoints for a smooth audit experience.
Key stakeholders
Successful accounts payable auditing requires coordination across multiple levels of your organization.
The AP staff who handle daily transactions will work closely with the finance managers who oversee AP operations. Internal auditors or external audit firms will need to collaborate with the personnel who manage financial systems, and the department heads who approve purchases and payments will want to be updated throughout the process.
These are just a few examples. Remember, what your audit uncovers will affect key stakeholders throughout the organization. Make sure they’re all “in the loop” and know what to expect — especially the people whose time you’ll need during the audit process.
Communication strategies
Clear communication helps ensure a smooth audit. Schedule regular updates with all stakeholders throughout the audit timeline, and maintain thorough documentation of all audit procedures and findings.
Also, create clear channels for addressing questions or concerns as they arise, with specific protocols for requesting and sharing documentation among team members.
What documents do you need for an AP audit?
Here are the documents you'll need to perform an AP audit. Your AP department may want to add to this list, so don't consider it exhaustive. Think of it more as a place to get started:
1. Financial records
- Payable ledger of payable transactions
- Expense reports
- Statements from bank accounts
- Vendor invoices
- Accounting records and AP journal entries
2. Unrecorded liabilities
- E.g. signed vendor contracts that haven't yet been entered into your AP records
3. Year-end financial statements
- Balance sheet
- Cash flow statement
- Income statement
4. Standard operating procedures documentation
- Internal controls
- Approval procedures
- Payment process
Key steps in an accounts payable audit
Following a structured approach will help make sure you cover all the necessary areas during the auditing process.
1. Planning for the AP audit
Start by defining the audit scope, timeline, and objectives. Create a detailed plan for the AP audit process that outlines the specific areas of review, along with the required documentation and system access you’ll need.
Your plan should clearly define team assignments and responsibilities as well as key milestones and deadlines for completion.
2. Fieldwork procedures
The fieldwork phase of an AP audit involves the hands-on examination of your accounts payable processes and documentation. This requires systematically collecting and analyzing transaction data to identify any inconsistencies, errors, or potential fraud risks.
Success in this phase depends on thorough data collection as well as strategically sampling your accounts payable transactions for detailed review.
Data collection
First, collect the data you’ll need by gathering comprehensive documentation for review. This includes both vendor files and payment records with their supporting documents.
You'll also need AP aging reports and internal control documentation, along with relevant bank statements and reconciliations for the audit period.
Sample selection
Then, choose sample transactions for detailed review. Be sure to consider any factors that might indicate higher risk or require special attention.
Risk assessment criteria should guide your selection, along with transaction size and frequency patterns. Consider vendor history and relationships, and pay special attention to any unusual patterns or anomalies in the transaction data.
3. Reporting on AP audit findings
Document and communicate your audit results through a comprehensive audit report that includes detailed findings supported by evidence.
Your reports should outline specific recommendations for improving your accounting procedures and include actionable plans for addressing any deficiencies identified during the audit.
4. Follow-up reviews and corrections
When implementing changes, pay attention to any issues identified by your audit and thoroughly document the actions you take to correct them.
Conduct regular follow-up reviews to ensure the implemented changes are effective, and continue to update your procedures based on future audit findings and lessons learned.
Automate your AP and simplify AP audits with BILL
BILL Accounts Payable can significantly improve the audit process while strengthening controls and compliance.
- Apply 3-way matching automatically. BILL’s AP automation performs automated three-way matching of purchase orders, receipts, and invoices while maintaining a digital audit trail for all transactions.
- Detect duplicate invoices and anomalies. BILL can automatically detect duplicate invoice numbers or duplicate payments and flag data anomalies for your AP department to review, like an unexpected vendor address.
- Ensure approval adherence. Add your organization’s unique approval rules and BILL can enforce those standard operating procedures, making sure each payment has the right authorization.
- Establish strong internal controls. Maintain strict user permissions, segregation of duties, detailed transaction audit trails, and more, with real-time visibility into your AP process.
FAQs about accounts payable audits
Here are quick, easy answers to some commonly asked questions about accounts payable audits.
How often should we conduct AP audits?
Many organizations conduct internal AP audits quarterly with a more comprehensive review annually. However, audit frequency may vary based on your transaction volume, risk factors, and regulatory requirements.
What are common red flags in AP audits?
Common warning signs include duplicate payments, missing documentation, unusual payment patterns, unauthorized changes to vendor information, and payments to vendors that aren’t listed in the master file.
How long should we retain AP audit documentation?
While requirements vary by jurisdiction and industry, most organizations should retain audit documentation for at least seven years. However, some jurisdictions and regulated industries may require longer retention periods. Always consult with your legal and compliance teams for specific requirements.
