Accounts Payable Audit: Illuminating Your Weak Points

No business should be in the dark when it comes to the in and outs of its accounts payable department. Join us as we explore the benefits of accounts payable audits, how to perform them, and how AP automation software can help the process run more smoothly.

AP Audits: What They Are and Why They Matter

First, let’s explore a few basics of accounts payable audits, from a simple definition to their benefits.

Accounts Payable Audits, Defined

Simply put, accounts payable (AP) audits offer a comprehensive look at the way companies handle invoice management and bill paying processes, from procurement to the point payment is remitted, also known as the procure-to-pay (P2P) process.

Audits can analyze every step of the P2P process, looking for possible bottlenecks and inefficiencies along the way. They also help illustrate what an AP department is doing right, so that businesses can drill down further and reap greater benefits.

Auditors can be internal and/ or trained professionals who follow recommendations of the American Institute of Certified Public Accountants, or AICPA’s Auditing Standards Board. This can be particularly smart to do when the purpose of an audit is to ensure compliance or meeting a particular regulation, as professional auditors can arrive with certifications toward this.

More informal audits, though, can be performed by dedicated internal employees, whether CPAs (Certified Public Accountant) or not, who’ve been empowered to look through their company’s financial books and records with a comb.

Hidden Business Threats a Good Audit Can Uncover

Accounts payable audits help uncover accounting errors, unnecessary bills, and fraud. Even after an audit is performed, threats can remain if the audit isn’t done well or if there aren’t strong internal controls in place. Investopedia wrote recently about the concept of inherent risk, which comes about due to errors in financial statements and “is most likely to occur when transactions are complex, or in situations that require a high degree of judgment in regard to financial estimates.” This often falls into the realm of exception handling, where invoices are processed outside of the standard process.

There is also detection risk, which Investopedia defines as failure by an auditor to uncover material misstatements in financial records. A subset of inherent risk is a control risk, which the site notes can occur when proper accounting controls aren’t in place.

Really, opting for an audit is just a start for a company to ensure that its financial operations are in good order. It’s also vital to find the right people to perform the audit and have good technological tools in place, as we’ll explore in a bit, so companies have a clear view before the audit even starts.

A Boost for AP Performance and Company Health

For companies that perform their audits thoroughly, the benefits can be profound given the fact it’s an accounts payable best practice.

The first and most-immediately noticeable benefit of an accounts payable audit can be improved AP performance, which is sometimes a glaring issue in the accounting world. In short, paper invoice processing can move grindingly slowly through the approval process, sometimes several weeks, between the time to input data from paper invoices, match them with purchase orders and receipt reports to prove validity, and to gather necessary signatures for approval.

With an audit, though, companies can assess if there are bottlenecks in data entry, three-way matching, or approval flows. When these or other barriers get identified, companies can speed the invoice approval process up by adopting AP automation. Doing this will have ripple effects through the rest of a company, with personnel less consumed with AP manual processing paves way for other opportunities. One example is that AP departments are more likely to net a 2-3 percent early payment discount for invoices paid early.

How to Perform an AP Audit

Planning for an Audit

An audit can be a broad, no-stone-left-unturned effort to discover an AP department’s assets and liabilities. To ensure maximum benefit from the audit, however, it’s suggested that companies and their auditors, whether internal or external, identify the scope of the accounts payable audit first.

AICPA planning standards developed eight years ago and with copyright updated to 2020 include defining the scope of an audit and setting reporting objectives. More often than not, payment recovery audits are a controversial topic among organizations because of the high costs associated with an external auditor, which the organization can conduct internally. While true, sometimes time is a factor and worth it if the company has the resources to identify supplier overpayments among other findings. Otherwise, an external auditor might be the next best option. Outside of those, audits can uncover fraud, weaknesses in processes and areas to improve on.

The AICPA also recommends that auditors work with the teams they’ll be engaging and determine resources they’ll need “to deploy for specific audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of specialists on complex matters.”

It’s worth noting that a lot of the AICPA recommendations are tailored for auditors. Even when a company opts to bring in an external auditor, though, it can be useful for them to know and do some of the planning steps on their end.

Performing the Audit

Accounts payable audits should be conducted on a regular basis which is announced, and then at least one surprise audit every year which is not announced. The latter is beneficial because it doesn’t give people time to cover their tracks. Moreover, it’s suggested to enforce mandatory vacations for those that have a hand in the accounts payable or B2B payments processes. By having someone else take on the job, any signals of fraud will bubble to the top as the new person filling in will uncover discrepancies or erroneous actions performed in the past that don’t match up. The vacation also acts as a measure of good faith since overworked employees need time off, and are less likely to act maliciously against the company if they are able to enjoy some well-deserved rest and recuperation.

When it comes time for an AP audit, a detailed, though generally expeditious process is in order. While an IRS audit of an individual can take 3-6 months, one accounting firm notes on its website that corporate audits can be done much more efficiently.

“The time to start and complete an audit will vary with the size of the company and the quality of its internal bookkeeping, accounting and record keeping,” the company notes. “In general if a company’s records are in good order, the audit process should take anywhere from three to six weeks.”

Even when an audit moves quickly, though, it should be done thoroughly. One business author and finance analyst writes of the importance of auditing for:

• Completeness, through reconciliations, cutoff tests, and audit trails, which ensure all necessary documents are in order;

• Validity, by reaching out to vendors and suppliers to ensure transactions are real;

• Compliance, which ensures that generally accepted accounting procedures are being followed;

• Disclosure, making sure that proper balances are reflected on year-end accounting reports.

As could be expected, many surprises can be lurking within these steps. But it’s better for a business to know what they are than let them pop up later at an inopportune moment, with no time to remedy them.

Reporting and Review

An audit isn’t just about what an auditor uncovers. It’s also about making sure that the information gets properly reported and reviewed.

On the reporting end, the AICPA notes a number of generally accepted accounting standards for reporting to be cognizant of. This will ensure that important discoveries and recommended actions for companies are properly logged and that all of the data that should be there is. The standards are dry and technical, but following them closely can ensure an audit doesn’t need to be done again that soon.

Of course, a review session at some point after the audit has concluded is also important to verify that discoveries are being heeded and that companies have begun to take action on an auditor’s recommendations. Review can also happen in the form of supplemental annual or biannual audits, tracking if data trends are improving.

Improving Audits with AP Automation

Here’s the thing, though: Even the most detailed and fearless audit might not be enough for a business if it lacks accounts payable automation software.

Why an Audit is Insufficient Without Automation

Audits are conducted in a similar manner that the organization has its books organized. If invoices are processed manually, this can result in the process taking much longer at a higher cost than if conducted with AP automation. With automation, the images of the invoices are alongside the data in the systems fields, in addition to audit trails which log every invoice action from line item changes to approval communications. Auditing with AP automation provides context to each invoice and payment made; in addition to making the entire processes easier and more efficient in terms of time and cost.

Here are some of AP automation when it comes time for an accounts payable audit:

4 Benefits of Automation for Accounts Payable Audits

Needless to say, automation offers numerous benefits for accounts payable audits, including the following:

• Lessened risk: With automation, there’s control and less inherent risk, as accounting records are more likely to be in order. While auditors can face detection risk, the possibility they make a mistake in their work is not possible because AP Automation tools enable view-only access. This control measure mitigates risk and makes it easy for auditors to review audit-trails. Then auditors can dig deeper through advanced search functionality — where any text field from the invoice, payment information, and approvals can be searched.

• Risk mitigation: Speaking of risk, the AICPA Risk Assessment Resources notes that in a recent year, about half of 400 company audits surveyed did not comply with risk assessment standards. Accounting automation software helps preserve data that give companies a better chance to meet these standards.

Given how AP automation software tracks every invoice-related action, one can glean insights via a risk assessment. This would come in form of identifying areas of conflict, or conflicting roles where segregation of duties is not present or lacking. Or approvers that take too long to make a decision on an invoice can be result in a late payment, which is another risk.

• Easy records access: No auditor will have to wait anxiously for a financial record as some harried accounting clerk hunts frantically for it. With AP automation, all records are right there, easily accessible in view-only mode which helps secure an organization’s data.

• Up-to-date functionality: As any accounts payable worker might know, the field is changing quickly. Same goes for auditing. In both areas, people have an expectation for more detailed and quickly-available data. Automation can help ensure that auditors are able to keep up, with one accountant writing, “While much remains to be decided by the marketplace, the future of auditing will likely involve real-time transaction analysis, risk evaluation, and data validation.”

Audits can be a lot of work for the companies and individuals that perform them. But with the help of automation software and expert solution providers, no business should ever have to be in the dark about their accounting data again.

Shine a light on your company’s accounting strengths and weakness. Automate to illuminate with Stampli.