A traditional accounts payable audit can be a daunting task for organizations as they are often a stressful and resource-intensive process. However, by properly preparing financial documents and utilizing efficient solutions, your business can ease the burden and improve the outcome of an audit. In this guide, we’ll explore the intricacies of AP audits, understand the various stages, the common challenges they present, and how automation solutions can help revolutionize the auditing process.
Understanding Accounts Payable Audits
Accounts payable (AP) audits are independent assessments of financial data, essential for maintaining financial integrity and compliance within organizations. Audits examine how transactions are recorded and whether they accurately represent the organization’s operations. These audits typically involve thoroughly examining financial records, invoices, and payment processes to ensure accuracy, accountability, and adherence to regulations. Accounts payable audit procedures serve as a critical component for accounting department leaders to assess the financial health of their organization and identify any discrepancies or irregularities.
The Stages of an AP Audit
Navigating through an accounts payable audit involves several key stages, each crucial for ensuring accuracy, compliance, and financial integrity within organizations. Whether you’re a small business or a corporate enterprise, an effective internal control system must be established through a four-stage audit trail:
Audit Scheduling
Audit scheduling is the initial stage, involving planning and coordination between your auditing team and the accounts payable department. Your business will receive a notification before the audit, requiring a scheduled meeting to discuss standard operating procedures. This stage involves several responsibilities, including:
- Defining the audit scope: Determine the extent of the audit, including the timeframe, examination areas, and specific objectives.
- Providing access to documents: Ensure the auditors have access to all relevant financial records, invoices, contracts, and other supporting documentation.
- Scheduling interviews: Arrange interviews with all key personnel involved in the accounts payable process, including AP staff, finance managers, and vendors, to gather insights and clarify any questions.
- Outlining audit timelines: Establish a timeline for conducting fieldwork, compiling findings, and presenting the audit report.
Effective audit scheduling sets the foundation for a smooth and organized audit process, enabling stakeholders to align expectations and allocate resources efficiently.
Fieldwork Tasks
During this stage, the work truly begins. This phase often takes auditors anywhere from several days to weeks to sift through financial reporting to identify potential risks or issues with on-site examination, invoice reviews, accounts reconciliation, and internal control assessments. Auditors will generally examine documents such as balance sheets, check registers, purchase orders, vendor invoices, and the general ledger. In the AP audit, several function aspects are explored, including:
- Reviewing invoices: Invoice documentation is scrutinized to verify accuracy, completeness, and adherence to company policies and regulatory requirements.
- Reconciling accounts: Thorough accounts payable balance reconciliations are conducted with supporting documentation, purchase orders, and vendor statements.
- Assessing internal controls: The effectiveness of internal controls and segregation of duties within the accounts payable process are evaluated to identify any weaknesses or deficiencies.
- Sampling transactions: A representative sample of transactions is selected for detailed testing to assess the overall accuracy and integrity of the accounts payable process.
Fieldwork tasks require attention to detail, analytical skills, and the ability to identify potential risks or anomalies that may impact the audit outcome.
Audit Report Completion
Once the fieldwork is complete, the auditors will compile their findings into a comprehensive audit report. The report serves as a critical document that summarizes observations, conclusions, and recommendations. Some of the components that make up this audit report include:
- An executive summary: This report section provides an overview of audit objectives, scope, methodology, and key findings.
- Detailed findings: This area presents detailed findings related to the accounts payable processes, controls, compliance issues, and any identified exceptions or discrepancies.
- Recommendations: The report offers actionable recommendations to address areas of improvement, strengthen internal controls, and enhance compliance.
- Management responses: The report also includes documentation of management’s responses to the audit findings, including action plans and timelines for implementing corrective measures.
The audit report serves as a valuable tool for stakeholders, providing insights into the organization’s financial health, compliance status, areas for improvement, and action plans.
Follow-Up Review
The final stage of the process involves a review of the AP audit findings with key stakeholders. The auditor will perform the follow-up review usually one year after the audit to verify all recommendations have been implemented and the desired results have been achieved. Some key tasks that occur during this stage include:
- Reviewing audit findings: The audit findings are discussed with accounts payable staff, finance managers, and other relevant stakeholders to ensure clarity and understanding.
- Implementing corrective measures: Action plans are developed and executed to address identified deficiencies, strengthen controls, and improve processes.
- Monitoring progress: The implementation of corrective actions is tracked and progress toward addressing audit recommendations is monitored.
- Reporting outcomes: The outcomes of the follow-up review are communicated to senior management and audit committees, highlighting achievements and areas requiring further attention.
Effective follow-up reviews ensure that audit recommendations are addressed promptly, leading to continuous improvement in AP processes and controls.
Common Challenges in Traditional Accounts Payable Auditing Processes
The traditional AP audit procedures have been successful for decades, but modern processes present this approach with some challenges. Previously, the goals of an organization or the products they offered rarely changed within the timeframe of an audit beginning and ending. Risks were consistent every year, so audit teams could repeatedly conduct the same audit.
While this does hold true in some areas of accounts payable, today’s work environment is encountering rapidly changing risks that create unique auditing challenges, such as:
- Difficulty adjusting the approved scope in a way that accommodates changes once fieldwork begins
- Limited feedback during the audit
- Communication breakdowns
- Long time periods between gap identification and gap communication to the client
These challenges can result in stressful situations for both the auditor and the client, difficulties achieving objectives, and challenging relationships between the auditor and client. Additionally, such challenges can create inefficiencies, increased costs, and compliance risks for organizations.
The COVID-19 pandemic and digital revolution have altered the way organizations conduct business and operate, drastically changing the potential risks. Many of the risks businesses encounter today were not present or less prevalent just a few decades ago. Today, however, organizations have risks associated with:
- Large-scale remote or hybrid workforce models
- Global cybersecurity
- Connected devices and the Internet of Things (IoT)
- Organizational reliance on artificial intelligence, machine learning, and automation
- Transitioning from on-premise technology infrastructure hosting models to cloud-based or hybrid hosting models
In response to the growing list of risks, the accounts payable audit procedures have expanded to include several types of audits, such as assessing risks beyond compliance and financial reporting risks, like operational, strategic, and environmental risks. Some audits may cover unique, less-predictable areas than those found in Sarbanes-Oxley Act (SOX) or compliance-focused audits. Simply expanding the scope of an audit is no longer enough as the approach will also need to be modified with each one.
Improving the AP Audit Process
Overcoming the challenges and improving the accounts payable audit process requires organizations to implement AP audit programs focused on enhancing internal controls, ensuring invoice compliance, and leveraging automation solutions. The process to audit accounts payable can be much easier by implementing the right technology solutions. The following solutions can streamline accounts payable audits:
- Optical Character Recognition (OCR): Transitioning from manual data entry to a paperless workflow can be quite cumbersome, but Intelligent Document Processing (IDP) or OCR software can help make it easier. OCR will scan invoices and other documents to create digital copies and sort the data by recognizing text-based characters. The business-ready data created can then be reformatted to fit what is needed for your accounting and audit procedures.
At the same time, OCR software has frequent inaccuracies when it isn’t supported by additional checks. Make sure that any OCR solution your team uses has a way to address reviewing the digitized invoices and verifying that data is mapped accurately.
- Document Management: Digital accounts payable paperwork needs a storage location. Document management software offers a central location for OCR-gathered data for easy access and use. AP staff can quickly find necessary documents for easy sharing across teams and departments, and management gets better visibility into business data, driving decision-making processes and offering a comprehensive view of company operations. Compliance rules can also be built into document management software to improve adherence throughout the organization.
- AP Automation Software: Automating accounts payable eliminates time-consuming manual processes and can store various information such as bills and invoices. Automated processes free up the AP department’s time, reduce the risk of human error, ensure invoice compliance, and make it easier to identify duplicate invoices and detect fraud.
By adopting best practices and utilizing technology-driven approaches, organizations can streamline processes, mitigate risks, and enhance audit outcomes without dreading the mandatory accounts payable audit.
Automation’s Role in AP Auditing
AP automation is pivotal to streamlining auditing processes by automating repetitive tasks, reducing manual errors, and improving efficiency. The right automation platform will help organizations store data for faster, more efficient auditing. AP automation software can help store important data, including but not limited to:
- Vendor files
- Transaction history
- Purchase orders
- Invoice numbers
- Expense reports
- Other important data fields customized to your business needs
In addition to storing important information, automation can help facilitate an accounts payable audit. Electronic invoicing and payments provide everything an auditor needs right away, sometimes in a matter of hours rather than weeks.
No longer using paper documentation also means records are easier to track, monitor, measure, and organize, as well as more visible to those in the company and vendors.
Automation also helps detect potential fraud and mitigate risk. The right solution can catch misstatements, invoice tampering, and other issues such as:
- Duplicated or photocopied invoices
- Invoices below approved amounts
- Vendors or suppliers with PO box addresses
- Invoices using rounded dollar amounts
- Missing information from documents
AP automation offers one of the quickest, most effective ways to deal with fraud as there’s less room for human error. It essentially places another set of eyes on your current checks and balances and keeps critical information organized while immediately flagging anything suspicious. Automation also builds an audit trail that won’t be misplaced or lost, keeping all data in one, protected location.
Making Real Change: How AP Automation Helped White-Rodgers Streamline the Audit Process
When we began working with White-Rodgers, a global manufacturer of products for HVAC and refrigeration systems, they were facing the growing challenge of managing their accounts payable process. Plagued with lost invoices, unpaid bills, and an excessively time-consuming tax audit process, the process became a serious drain on their resources and posed a risk to their financial accuracy and compliance.
The DataServ Solution: Comprehensive Accounts Payable Automation
To take these challenges head-on, our approach included designing a new electronic workflow through the Invoice Processing Machine, which handles the receipt and scanning of all paper invoices. This new process allowed White-Rodgers to access invoice images quickly and securely and route them to managers for approval regardless of their global location.
The Result: An Improved Audit Outcome
White-Rodgers was able to gain real-time visibility into every process stage by digitizing and automating their accounts payable workflow. Documents became accessible within seconds, greatly simplifying tax audits and resulting in a 100% reduction in client-side paper invoice processing.
After initialization, the total efficiency gains were approximately 30 percent, largely due to the new ability to electronically route documents and monitor productivity using new metrics.
An Accounts Payable Audit Checklist: The Key Components of an Effective AP Audit
To conduct an effective audit, organizations can utilize a comprehensive accounts payable audit checklist to cover key components including invoice validation, vendor verification, payment reconciliation, and compliance verification. Here’s a checklist of the minimum documentation you’ll need to ensure an effective accounts payable audit:
- Financial records:
- Payable ledger of payable transactions
- Expense reports
- Bank statements
- Vendor invoices
- Accounting records
- Unrecorded liabilities, such as signed vendor contracts not yet entered into AP records
- Year-end financial statements:
- Balance sheet
- Cash flow statement
- Income statement
- Standard operating procedures documentation:
- Internal controls
- Approval procedures
- Payment process
By following a structured checklist to gather the right documentation and incorporating best practices for testing AP audits, your organization can ensure a thorough and accurate auditing process.
Make AP Audits Less Daunting with Automation by DataServ
Undergoing a successful AP audit process requires careful planning, meticulous execution, and leveraging the right tools and technologies. An AP audit can be challenging, but through solutions such as automation, the auditing process can become much more efficient. At DataServ, we offer tailored AP automation solutions that empower organizations to streamline audit processes, improve accuracy, and achieve compliance to transform operations, reduce costs, skyrocket visibility, and enhance overall efficiency.
Don’t let the daunting nature of AP audits hold your organization back — embrace automation and unlock new possibilities for success. To learn more about how DataServ can help streamline your AP audit process, contact us today or schedule a demo.
