Accounts Payable Audit Program

The accounts payable department of your company and a home workshop may
not, at first glance, have many things in common. But a piece of advice often
employed in the latter—i.e., “Measure twice, cut once”—can be just as useful in
the former, with a few modifications.

Accounts payable is one of the most important components in the financial

machinery of a business, and the concept of measuring twice isn’t so much about
double-checking one’s work before a payment’s made as it is verifying that
payment was made, recorded, and reconciled properly. The second
“measurement,” as it were, comes after the check is, er, cut.

No matter the size of your organization or your industry, establishing a thorough

and effective accounts payable audit program can help minimize risk and
maximize compliance while trimming fraudulent activity and ensuring your

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general ledger is accurate.

Why Establish an Accounts Payable Audit

Program?
Without effective internal controls and auditing standards for every stage of the
procure-to-payment process, your company is exposed to excessive risk. What
kind of risk? For payables, it’s the risk of fraudulent behavior—both inadvertent
and intentional—as well as the regrettable ease with which a company’s bottom
line can be boosted by overlooked and unrecorded period-end or year-end
payables.

Auditing procedures are designed to minimize the occurrence of these problems,

and quickly illuminate common, and potentially costly, errors in your year-end
financial statements, such as:

Understated accounts payable amounts (intentional or inadvertent)

Payments made to the wrong suppliers
Duplicate payments made on vendor invoices

Naturally, this task is greatly simplified if your company has already integrated
procurement software with strong support for accounts payable management and
reporting.

“While it might seem daunting, creating your own internal audit program for
accounts payable is a fairly straightforward endeavor. The audit procedure
itself can take the form of a word processing document, formatted in sequential
steps.”

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Sample AP Audit Program
While it might seem daunting, creating your own internal audit program for
accounts payable is a fairly straightforward endeavor. The audit procedure itself
can take the form of a word processing document, formatted in sequential steps.

The Basics
The header of the first page of the document should include the title, the names of
the members of the audit committee or team along with their respective roles,
and any internal coding required to link the audit into your procurement software
or ERP package.

Establishing not only the audit work to be done, but the individuals who will be
doing it, strengthens the audit trail in general and makes it easier to break down
roles and responsibilities in the working areas of the document.
An example header might look like this:

AP AUDIT DOCUMENT XX-XX

Code: XXXXXXX
Period: XXXX
Balance Sheet Date: XX/XX/XXXX

COMPANY NAME
Accounts Payable Audit Program

Audit Committee:
T. Smith (Role)
J. Brown (Role)
S. Templeton (Role)
C. Rodriguez (Role)

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Audit Procedures
This section of the AP audit report outlines the practices to be followed while
conducting the audit. It may be as detailed as your individual organization
requires, but in general will look something like this:

AUDIT PROCEDURES
● The audit committee will refer to existing internal audit planning
documentation to inform their actions and ensure they have a complete
understanding of COMPANY NAME’S financial reporting system and the
evaluation methodology to be applied to accounts payable.
● All audit work should be recorded in the relevant working papers
(attached as necessary), and recorded on this document in the columns
indicated.
● If modification to existing auditing procedures is necessary to
complete audit objectives, document all changes and include working
papers as necessary.

Audit Objectives and Financial Assertions

Beneath the header, list the goals of the audit, also called the audit objectives.
These are paired with assertions, or statements believed to be absolutely true
based on context and content, as they relate to the audit and the company’s
financial reporting.

Sample objectives and assertions might include:

AUDIT OBJECTIVES FINANCIAL ASSERTIONS

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Obtain complete documentation of
actual obligations held by
COMPANY NAME, including ● Existence/Occurrence
current liabilities and unprocessed ● Rights and Obligations
invoices for products and services ● Completeness of Information
received but not billed as of period
end.
Confirm entry amounts provided by
accounts payable match paired
invoices, purchase orders, and
● Existence/Occurrence
other supporting documentation. All
● Rights and Obligations
transactions are correctly recorded
● Allocation and Valuation
with regard to account, amount,
and period.

Ensure accounts payable are

correctly classified as current
liabilities.
Verify that debit balances above
established threshold are moved
● Presentation
and processed as other assets.
● Disclosure
Establish sufficient disclosures for
payables with specific payment
terms, assets used as collateral via
accounts payable, and related-party
transactions in accounts payable.

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 Identify internal controls in need of
improved risk management and ● Compliance
suggest modifications as necessary.

Audit Procedures
Think of this section of the audit as a checklist, walking your team through the
process. Assigning roles properly and creating support documentation are critical
to the success of the audit. Every company is different, but a basic set of
procedures you can use as a starting point might include:

WORK
COMPLETED
PROCEDURE PAPER
BY
REFERENCE
1. Obtain (or prepare) a balance sheet from
accounts payable for the indicated date.
a. Verify the accuracy of the amounts in the
listing and reconcile it with the general
ledger.
b. Review the balance sheet to identify large
debit balances. Confirm these balances with
vendors and reclassify to other assets as
relevant.
c. Identify and transfer from trade accounts to
accounts payable in prepared financial
statements any related-party transactions as
determined by their amounts.

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 d. Isolate and discuss past due and/or
disputed balances with the accounts payable
team and determine what assets, if any, have
been promised to ensure payment of these
outstanding balances.
2. Determine whether confirmation of the
accounts payable balance sheet, as of the date
listed, is required. If so:
a. Create a list of the major suppliers from
whom confirmation is required and to whom
requests should be sent. Discuss any
objections made to contact the companies on
this vendor list and, if necessary, perform
alternative confirmation procedures as
required.
b. Create and send the confirmation requests
to the companies on the vendor list.

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 c. Collect confirmation replies and use the
information provided to create a summary
worksheet that includes:
• Date of receipt
• Vendor name
• Outstanding balance to vendor per balance
sheet
• Outstanding balance per vendor
confirmation
• Difference (if any)
• Analysis and explanation, e.g. payment in
transit or unrecorded liability
d. If a vendor confirmation is not returned,
use alternative confirmation methods, such as:
• Reviewing unpaid vendor invoices and
paired purchase orders and receiving
documentation
• Confirming payment of the outstanding
liability was made after the date listed on the
sheet.
3.Search for unrecorded liabilities falling
between the balance-sheet date and the
execution of the AP audit:

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a. Search the cash disbursements journal for
all payments exceeding a pre-defined amount
and review accompanying documentation
(e.g., purchase order, vendor invoice).
• For products or services received before
the date on the balance sheet, ensure the
liability is recorded correctly by that date.
• For those received after the date on the
balance sheet, confirm that the amount listed
has been excluded from accounts payable by
the date on the sheet.
b. Collect all unprocessed invoices and vendor
statements as of the audit date. For amounts
exceeding a predetermined value, confirm the
amount on each invoice is correctly included
or excluded from accounts payable as of the
date on the balance sheet.
c. Collect all receiving reports that have not
been cross-matched with vendor invoices.
Confirm if the goods and services listed were
received as of the date on the balance sheet.
• For received goods and services, confirm the
liability has been recorded.
• If an invoice has not been received from a
vendor, consult the related purchase order,
prior invoices for the same goods and
services, or contact the vendor directly.

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 d. Consult the accounts payable team
regarding their knowledge of any unrecorded
liabilities.
e. Compare the trade accounts payable listing
from the end of the current period to the one
from the period before. If any monetarily
significant items were included in the
previous period but don’t appear in the
current listing, determine whether they have
been overlooked and should in fact be
recorded in accounts payable by the date on
the balance sheet.
4. Identify and confirm any amounts in trade
accounts payable with specified payment
terms. Reclassify these liabilities to notes
payable as appropriate and, if they do not
bear interest, discuss with your team whether
these items should be listed at their current
(likely lower) values for the purposes of
financial reporting.
5. Consult the accounts payable team
regarding any assets currently utilized as
collateral on accounts payable and ensure
they are adequately disclosed on financial
statements.
6. Ensure vendor credit memos received after
the date on the balance sheet are recorded for
the correct period.

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7. Analyze the records provided by accounts
payable and thoroughly investigate any
significant deviations from expected values.
a. Compare current balances with the
previous year’s for:
• Gross payables
• Discounts
b. Calculate these ratios and compare them to
the previous year’s values:
• Accounts payable turnover rate
• Accounts payable days outstanding
• Value of current accounts payable as
compared to current liabilities
• Purchases as compared to purchase returns
and allowances
8. If fraudulent behavior is a concern,
consider performing the following additional
audit procedures:
a. Contact all the suppliers on the vendor list
and request full information regarding any
outstanding invoices as well as payment
history, terms, etc.
Be sure to include old and new vendors, as
well as supplier accounts with small or no
outstanding balances.
b. Confirm supplier contact information as
pertains to invoices invoices using this master
vendor list.

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 c. Track down any strange or unusually large
year-end transactions or adjustments that
didn’t (for example) go through normal
approval processes or are lacking in support
documentation.
d. Carefully examine all vendor files for non-
standard or modified documentation,
including:
• Hand-written forms (especially in an
automated environment)
• Multiple, incomplete, or inaccurate
addresses for a single vendor.
• Disbursements issued for transactions
without any associated goods.
• Suspicious or thin documentation for
payments made in amounts just under those
requiring approval.

A NOTE ON WORK PAPERS:

During the auditing process, you’ll be creating and referencing a range of
supporting documentation to provide additional clarity and context. These
documents, called work papers, provide more comprehensive information about
varying aspects of the audit, including:

The role of internal controls as applies to accounts payable and expenses

AP risk assessment at the assertion level of the audit
Identification and documentation of potential improvements to be made to

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 internal controls for accounts payable
Documentation of any fraudulent behavior as related to control
deficiencies
Documentation of any search for, and identification of, unrecorded
liabilities
A comparison of budgets to actual expense reports, any significant
differences between the two, and an accompanying analysis seeking to
explain the discrepancy
Documentation of the audit program itself

Reduce Risk and Strengthen Spend

Management
Measure twice, cut once. It’s good advice, whether you’re crafting a masterpiece
or building a better bottom line. By taking the time to create and implement an
internal audit program for accounts payable, you’ll be able to establish stronger
internal controls, ensure accurate financial reporting, and shield your company
from unnecessary risk, today and in the future.

Get Total Control of Your

Procurement Function—and Audit
Trail

Find Out How

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