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What are Audit Procedures?Audit procedures are used by auditors to determine the quality of the financial information being provided by their clients, resulting in the expression of an auditor’s opinion. The exact procedures used will vary by client, depending on the nature of the business and the audit assertions that the auditors want to prove. Several general classifications of audit procedures are noted below. A complete set of audit procedures is needed before the auditor has enough information to decide whether a client's financial statements fairly represent its financial results, financial position, and cash flows. Classification TestingAudit procedures are used to decide whether transactions were classified correctly in the accounting records. For example, purchase records for fixed assets can be reviewed to see if they were correctly classified within the right fixed asset account. Completeness TestingAudit procedures can test to see if any transactions are missing from the accounting records. For example, the client's bank statements could be perused to see if any payments to suppliers were not recorded in the books, or if cash receipts from customers were not recorded. As another example, inquiries can be made with management and third parties to see if the client has additional obligations that have not been recognized in the financial statements. Cutoff TestingAudit procedures are used to determine whether transactions have been recorded within the correct reporting period. For example, the shipping log can be reviewed to see if shipments to customers on the last day of the month were recorded within the correct period. Occurrence TestingAudit procedures can be constructed to determine whether the transactions that a client is claiming have actually occurred. For example, one procedure might require the client to show specific invoices that are listed on the sales ledger, along with supporting documentation such as a customer order and shipping documentation. Existence TestingAudit procedures are used to determine whether assets exist. For example, the auditors can observe an inventory being taken, to see if the inventory stated in the accounting records actually exists. Rights and Obligations TestingAudit procedures can be followed to see if a client actually owns all of its assets. For example, inquiries can be made to see if inventory is actually owned by the client, or if it is instead being held on consignment from a third party. Valuation TestingAudit procedures are used to determine whether the valuations at which assets and liabilities are recorded in a client's books are correct. For example, one procedure would be to check market pricing data to see if the ending values of marketable securities are correct. The Critical Steps for a Comprehensive, Compliant AP Auditing ProcessLet’s start by defining what a payable is: the amount a company owes for goods or services received. An accounts payable audit is a normal part of financial due diligence in any company, and using the most effective auditing methods ensures that ledger transactions match general ledger entries and payable records to eliminate risk of fraud and reveal any errors. I.e., what was actually paid is the same as what is actually owed. Periodic AP audits are standard practice to review procurement invoices, statements, liabilities, and other expenses have been recorded correctly using an accounting software program or manual methods and are accurately reflected in year-end financial statements. There are significant money flows through the accounts payable department, so it is critical for companies to get audits done right. What is an accounts payable audit?Accounts payable auditing is the process of reviewing, in detail, all the related financial information that resides on a company’s accounts payable records. The actual AP audit is generally performed by an independent firm in order to provide an objective assessment of how accurately and comprehensively accounts payable invoice and other transactions reflect actual business operations. In other words, are AP transactions faithfully and fully recorded, and do financial statements, the balance sheet, and general ledger all tally. The AICPA – American Institute of Certified Public Accountants – lays out the standards for how audits are performed through guidance from the Auditing Standards Board (ASB). Based on their criteria around auditing, attestation, and quality control, auditors look for veracity in AP records with a focus on potential fraud, risk, malfeasance, and any general mistakes. Based on that, AP departments should think of audits as an opportunity to inspect and uncover any issues or problems before they become serious. The importance of auditing accounts payable on a regular basisAs mentioned, it’s important for AP to make sure that transaction recording is complete and valid, and auditing accounts payable is an opportunity to verify and rectify those records. Here’s why it’s critical to complete AP audits on a regular basis:
Best accounts payable audit proceduresFollowing the best accounts payable audit procedures, whether a business is large or small, is critical to show that the AP department has robust internal controls and is accurately depicting the year-end financial statement. An effective AP audit procedure includes:
Step-by-step process of an accounts payable auditThe exact AP audit process is usually guided by factors including company size, corporate structure, geographical locations, etc. Generally Accepted Account Principles are not uniformly applied the same way across all states in the US, and depending on the location there can be additional reporting requirements. The objectives of an AP audit are to evaluate internal control processes, review and evaluate transactions for accuracy, and determine compliance with applicable laws, regulations, policies, and procedures. The audit trail is looking for validity and consistency in vendor invoices, bank records, and other records — as well as accounting procedures — to ensure that the AP balance provides full disclosure on year-end statements, and that the company is presenting an accurate view of itself. Here are the stages of a typical AP audit:1. AP Audit PlanningWhen a company is notified that there will be an upcoming audit, the goals and parameters will be established with the auditor, who will create the precise AP audit plan. 2. AP Records ExaminationThe heavy lifting of an AP audit is when the auditing team deep dives into accounts payable records and documentation. Depending on company size, this can last a few days or a few weeks, after which an audit report will be generated that compiles and analyzes the research. 3. AP Audit ReportingBased on the AP auditor’s findings, an audit report is created which provides a summary, and details the areas examined and processes involved, provides feedback and guidelines, and highlights any immediate concerns. 4. AP Audit ReviewAn AP audit and report aren’t the end of the audit process, but just the initial stage. Based on the auditor’s findings, there will be a follow-up to determine that highlighted issues and concerns have been dealt with and the company has achieved satisfactory results.  Planning for your accounts payable auditAs we mentioned, an accounts payable audit is an opportunity to ensure your recorded transactions, invoices, purchase orders (PO), and other documents and practices are in good order – regular internal audits will reveal this. It’s a time to be organized, not a time to panic. The AP team and senior management should have a plan for what they want the audit to achieve, ensure the standard operating procedures (SOPs) are in place and being followed (otherwise audit fieldwork risks being stopped), identify any potential fraud, and discuss areas for implementing improvements. Documents neededHere is a broad selection of documents that auditors will look for in an accounts payable audit that teams need to have prepared:
Access to recordsEasy access to payable records is critical for a smooth, comprehensive audit process. This is where AP automation, e-Invoicing and electronic payments can make the audit preparation and completion much faster and easier. Switching to AP automation software ensures faster, cheaper, and simpler auditing because your records will be easier to find. Simplifying and speeding access to records for auditors – invoices, POs, supplier lists (including new vendors) will ensure the accuracy of the audit, and the completeness of the resulting report. The time saving from AP automation can also translate into cost savings since the actual audit should take less time than a paper-based AP process. What to look for in an AP audit?The specifics of an accounts Payable audit depends on a number of factors, including whether a company is a large or small business, industry, location, and depth of audit intent. AP auditors will monitor and flag any unusual transactions uncovered, as well as identify any fraud detection (many auditors have Association of Certified Fraud Examiners (ACFE) credentials). Generally speaking, there are four areas that an AP audit will be looking for: CompletenessAuditing for completeness is the process of verifying payable balances against general ledger balances – that they are “complete” based on real payable journal entries, purchase orders, and invoices. This is the most critical stage of the AP auditing process, and auditors will be looking for an audit trail that matches payments to recorded payables, including electronic payments, (auditors generally use cutoff tests to determine timeliness) as well as open records with unmatched documents. ComplianceAn AP audit will determine whether a company’s accounts payable process adheres to the strictures of Generally Accepted Accounting Principles (GAAP) practices. Compliance demands that GAAP procedures are followed, which includes reviewing a company’s audit trail in detail at a transaction level to confirm the right accounting methods are used. The auditors will look at the full range of financial documents, including period-end financial statements, balance sheets, and cash flow and income statements, tracing general ledger entries backwards to follow the precise transaction path. ValidityWhen auditors look for “validity,” it means they are checking the legitimacy of AP transactions. This usually entails contacting third-party suppliers and vendors for specific transaction confirmations. While commonly used third-parties are most often the ones contacted, auditors will use their discretion around which suppliers are contacted. AccuracyObviously, the accuracy of a company’s financial records is critical, and an AP audit will look to confirm the accuracy of the accounts payable practices. Auditors will perform a number of procedures at this stage, including examining the Standard Operating Procedures, and a recalculation of supplier invoices and payments. How often should you conduct an AP audit?There is no strict schedule for how often a business should conduct the AP auditing process, but typically a company will go through a process of accounts payable auditing to review year-end financial reporting. An audit may also happen more frequently depending on the size and complexity of the organization, or if it has undergone significant changes, such as adopting new accounting software or auditing standards, or implemented an AP automation solution, ERP, and / or other financial tools. Automation: The benefits of accounts payable audit automationGetting organized for an accounts payable audit report can be time-consuming, stressful, and disruptive, but the results can have significant benefits: According to The Association of Certified Fraud Examiners risk assessment, the median loss to companies from financial statement fraud in 2020 was $954,000, with the largest percentage of cases – 14% – coming from the accounting department. Being audit-ready is made significantly easier when an AP organization has committed to digital transformation, implementing and adopting an advanced AP automation software solution. As software solutions become ever-increasingly capable (AI and machine learning will be taking a lead role before long) a technology-forward strategy not only simplifies and speeds the day-to-day accounts payable process, it almost entirely removes the need for human inputs along the way. AP audit automation:
Avoiding human errorMost of the issues found during the AP audit process – intentional or not – are due to human error. Simple misstatements, duplicate payments and overpayments, errors in maintaining the check register – not to mention actual fraud – can be substantially mitigated or eliminated through the AP automation process. The digitization of accounts payable provides outstanding levels of efficiency, responsiveness, agility, and speed, but when it comes to AP audits it’s the accuracy across the process – thanks to automation – that stands out. As detailed in the steps above, audits are looking for compliance, completeness, accuracy and validity. It turns out that AP automation is much better at achieving these consistently and quickly, avoiding human error by avoiding human inputs. Automating accounts payable auditing for complianceSince accounts payable automation means leveraging AP software solution technology to optimize the flow of invoices and payments through your business, trading paper-based complexity for frictionless efficiency provides the type of process visibility and access that make AP auditing faster and more streamlined. The digital advantage of automation across all stages, from purchase orders (PO) to invoicing, approvals, three-way matching, and payments, helps Accounts Payable teams ensure compliance through transparency, aiding Finance and bookkeeping in adhering to GAAP standards. This not only creates a more fluid AP process – and optimizes cash flow – it takes the angst out of AP audit preparation and reporting. Consider these benefits of automating accounts payable:
Ultimately, AP automation enables the kind of agility that empowers Accounts Payable to play a much more strategic role in enterprise success. Regardless of your organization’s size, learn more about how accounts payable automation from Corcentric can unleash more value by eliminating the inefficiency of paper invoices and manual processing. Get started today — Contact Us. How do you test the completeness of accounts payable?The primary test to confirm the completeness assertion for accounts payable and other liabilities is to perform a “search for unrecorded liabilities”. Basically, the audit team obtains a listing of all cash disbursements made for a period of time after year-end.
What do auditors look for in accounts payable?Despite these differences, auditors will generally look for completeness, validity, and compliance of records, and see if the accounts payable balance was properly disclosed on the end-of-year statement. Together, these confirm whether the company's records actually do present an accurate view of the business.
What are some tests that the auditor can perform to ensure all notes payable are recorded in the correct period?Cut-off tests, reconciliation and audit trails are the primary ways auditors can indicate whether documents have been properly recorded and calculated. A company must show in their year-end financial statements cut-off tests for purchases and cash payments for goods and services received by the end of that year.
Why are auditors concerned with the completeness of accounts payable?The auditors are concerned about completeness of accounts payable because the company's financial strength is exaggerated by an understatement of liabilities. b. Procedures used to establish the completeness of recorded accounts payable include (only three required): Confirmation of accounts payable.
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