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Every business that buys goods and services from its suppliers on credit has to recorditsaccounts payable, or the money that it owes toitssuppliers. It is notenoughto just recordyour bills and pay them off—it is important to audit accounts payableregularly to ensure that everything is in order.Not auditing accounts payable canlead to unfavorable consequences for your business, like duplicate or missed vendor payments and unrecorded liabilities. In this guide, we willsee what accounts payable is, what auditing accounts payable means, andhow to prepare your business for an accounts payable audit.
So what is accounts payable?
Accounts payable is simply the sum of money a business owes its suppliers. Accounts payable is a liability account thatshows up in accrual-based accounting when a business buys goods or services from its suppliers on credit and has yet to pay for them. Accounts payable is crucial because it is the record of what a business owes its vendors or creditors. As an example, let’s suppose that you purchase a desktop computer worth $2,500 for your business from a dealer on credit. This increases your assets account because you have bought a computer, and increases your liability account by $2,500 because you have purchased on credit. This liability is recorded as accounts payable to the dealer and will be listed under the current liabilities section of your balance sheet.
What does auditing accounts payable mean?
In simpleterms, auditing means inspection. Anaccounts payable audit isjust a formal, well-organized, and thorough inspectionofa business’ accounts payable records. Auditing can be done by either internal or third-party auditors.Auditing is required in all countries, but the rules for when the audit is required change from country to country.Governments usually require that businesses get audited as soon as they cross a certain revenue threshold.
Auditing is important because it reveals whether your business’ payables are recorded correctly, and whether your records provide an accurate picture of your business’ liabilities. It also shows that you are playing by the rules, and that your company’s resources are being used for legitimate purposes. Auditing your accounts payable regularly ensures that bills are getting paid on time and helps you prevent duplicate payments, unrecorded liabilities, and defaults on vendor payments.
What auditors look for before the accounts payable audit
Auditorsdo notnecessarilyfollow any set patterns while auditing.Their auditing methods vary according to thesize of the business, the number of business transactions done overthe audited period,and the level of accuracyneeded. Generally,the bigger the business, the higher the accuracy required.
Accounts payable audit procedures
There are four stages in a typical accounts payable auditing process: planning, fieldwork, audit reporting, and follow-up review.
Planning
The first stage in the auditing process is planning. Auditors discuss the scope of the auditing process, andalso the possibleoutcomes of the audit. While planning, you canalso discuss any concerns you have regarding financial statements, potential fraud, ortheneed for improvement with your auditors. Afterthisdiscussion, auditors can come up with a plan of action for the subsequent steps in the auditing process, beginning with fieldwork.
Fieldwork
This is when the auditing actually starts and the role of an auditor is put into action.Auditors beginto review how your business functions.They examine your business transactions and documents, including purchase orders, vendor invoices, bank records, and journal entries to ensure that the informationin them is correct, payments have been made correctly, andthe terms and conditions have been adhered to. Fieldwork can takea fewdaysto several weeks, depending on how big your business is andhow many transactionsithas made.
Audit reporting
When the fieldwork is complete, auditors put their findings into a report. This report contains all the informationthe auditors have discoveredabout your business’accounts payable and how accuratethey are. The reportalso specifies areas where your business is doing well, and areas where it might need improvement.
Follow-up review
The audit is not over at the reporting stage. Auditors do a follow-upreview after a year, to checkwhether the suggested changes were implemented and the desired outcomes have been achieved.
Gettingyour business audit-ready
So how do you get your business audit-ready? Here are a few steps that help ease the work for your auditors.
- Get an accounting system that helps record your bills, expenses, and other purchase transactions
- Categorize your expenses neatly into expense accounts
- Keep track of vendor credits and use them the next time you have to pay your vendors
- Reconcile your bank accounts before the audit
AP Audits don’t have to be a headache
Getting your accounts payable auditedhelps youcatch costly errors and prevent payment-related fraud.Auditing is not a simple task,though,and going over documents by handis acomplexprocess that actually increases the risk of fraud.On the other hand, an accounting app that uses automation can help keep your accounts payable in order. Besides prepping you for the audit, it’ll reduce the scope for errors and fraud, giving you less to worry about when audit season comes around.
