Preparing for your annual accounts payable (AP) audit can be a stressful ordeal. Whether the auditor is an internal employee or from a third-party, they’ll be closely looking at all of the details of your business’ financial transactions and your company will be responsible for providing them with information as they request it. When handled well, audits can provide valuable information that can help you review your operations and find room for improvement. If handled poorly, audits can introduce significant risks. Fortunately, learning about audits can help you prepare for your next one with technology like AP Automation.
What Are Accounts Payable Audits?
Accounts payable audits are detailed assessments of a company’s accounts payable processes and payments. Auditors can be internal employees or hired from third-parties. If your audit is for compliance purposes, you may need to work with an auditor that possesses specific credentials.
The auditing process begins with the auditor learning about your finance department and its processes. Especially if the auditor is a third-party operator, they will spend days gaining a clear picture of your business structures. Once the auditor understands your business structure, they’ll start diving into your company’s processes and records.
In the detailed audit, the auditor works closely with your financial team to pull records and files and ask questions for clarification. For most AP audits, your financial team will need to provide records including invoices, contracts, purchase orders and other transaction and budget information. The auditor may request some items with advance notice, but they will make most requests as needed.
Auditors work by focusing onfour key areas of accounts payable, listed and explained in more detail below:
Standard operating procedures: Standard operating procedures (SOPs) are the basis of AP department functions. Some companies don’t have formal SOPs while others don’t follow their existing ones. Auditors will check that the AP department has SOPs as well as check transactions to determine if employees follow them. If any discrepancies arise, the auditing process usually stops until the department creates or updates SOPs.
Analysis of paper trails: Auditors track random transactions from inception to completion in a process called “vouching.” This involves reviewing purchase orders, invoices, journal entries, bank records and other associated documents. Auditors check that the transaction was completed properly and make sure the company complied with invoice terms and that they received all discounts for which they were eligible.
Confirmations: Auditors will often confirm that the company’s record of what they owe a vendor matches the vendor’s records. They will do this by sending confirmation requests to the vendor. If a discrepancy arises, the audit team will pursue further inquiries into the reason for the discrepancy. Depending on the size and nature of the discrepancy, the unresolved issue may result in a poor audit score.
Verification of financial statements: Auditors analyze the financial statements of the company with the AP department’s records. This includes ensuring that items are posted with the correct amount and in the correct period. Auditors will also look for any cash payments, unrecorded liabilities and other potential problems.
Auditors will review each area to ensure that there is sufficient recordkeeping and that the company is in compliance with best practices and regulatory entities. They will also look for any signs of duplicated, incorrect or invalid payments or fraudulent activity on the part of the company or its vendors.
Once the audit is complete, the auditor then provides a comprehensive report on their audit. This report includes information identifying any fraudulent spending, erroneous financial records or process problems, as well as data to support opportunities for process improvement. Your company will need to review this information between your audit committee, executive director and senior financial staff to determine what problems to address and which recommendations to implement. Your committee will also need to review the audit itself to determine if there are any changes needed for next year.
Audits typically take anywhere from a week to a month to complete depending on the scope and process of the investigation. While it takes time for audits to finish, your company can take steps to reduce it. By preparing for an audit proactively, you can cut down the time to completion and reduce the amount of stress placed on your AP department.
Find out How Accounts Payable and Notes Payable Are Different
AP Auditing — Why Staying in the Know Matters
One of the best ways to prepare for an accounts payable internal audit is to learn more about the process and what your company is responsible for providing. Your level of responsibility changes based on the size of your department and what, if any, regulatory agencies you need to report to. For example, while a basic AP audit usually only covers transactional information, Sarbanes Oxley audits for publicly traded companies also look into your AP methods and security controls.
While you may think it easier to wait until the audit to gather your information, this choice can negatively affect the auditing process and results. Lack of preparation can result in the following issues:
Reduced productivity: While audits are naturally going to take your employees’ attention away from their daily duties, their productivity will plummet even further if you’re not prepared for your audit. Instead of having the information readily accessible, employees will need to scramble to find the requested information, taking time and energy away from their normal tasks.
Increased mistakes: Lack of preparation may mean that your company is missing critical pieces of information for the audit. Missing or erroneous paperwork may cause auditors to mark mistakes when there are none or overlook critical errors because of a lack of documentation. This negatively affects your audit and its usefulness for your company.
Additional costs: The less prepared your company is, the longer your audit will take. The longer your audit takes, the more money you are spending paying the auditor and your supporting employees.
All of these problems can pose threats to your company and your audit score. Fortunately, avoiding these problems is relatively simple.
To prepare for an audit, check in with your auditor beforehand. Your auditor will often have an accounts payable internal control checklist for you to work with or a summary of their accounts payable audit checklist. They can also provide information pertaining to any regulations your company needs to follow. These resources will help you understand what the auditor is looking for so that your departments can prepare appropriately.
The Cons of Paper-Based Processes
One of the biggest roadblocks in an accounts payable internal audit is paper-based processes. Approximately 36% of accounts payable departments use paper invoicing, which poses significant issues for the auditing process. Some of these issues are listed below:
Inefficient storage and retrieval: Manual recordkeeping requires a huge amount of space and detailed organization. Unfortunately, that organization system may be optimized for your daily operations, but not for an audit. As a result, staff may need to rifle through multiple cabinets just to find the process steps for a single transaction.
Poor visibility: Manual processes reduce transactions to individual pieces of paper, which are often dispersed throughout multiple systems, processes and storage systems. While each piece of information plays a role in the big picture, it is nearly impossible to see because of the way it is handled.
Missing information: Filing systems also leave room for human error. If one piece of paper is misfiled, it can be nearly impossible to find depending on the size and scope of your company’s records. Unfortunately, that one piece of information may be essential to your next audit.
Data entry errors: Data entry errors are some of the most significant issues for manual accounts payable department processes. Paper records may be misread or transcribed inaccurately, while manually updated spreadsheets may include input errors. In fact, one study found that 88% of the Excel spreadsheets used by businesses contain errors. These errors impact your company’s transactional data as well as your audit scores.
Processing times: Processing times are significantly slower with manual processes as compared to digital ones. Longer processing times, unfortunately, increase the chances of late payments, which can negatively impact audit scores.
Any of these issues can significantly slow down the auditing process and introduce accounts payable audit risks. Fortunately, these issues can be circumvented by switching to digital and automated AP processes. Digital storage eliminates inefficient storage and retrieval processes, while automation removes human error from the equation.
5 Reasons AP Automation Reduces Audit Risks
One of the most useful tools to help improve accounts payable audit procedures is AP automation. This software digitizes your accounts payable system and automates most recordkeeping and transcription processes, streamlining your procedures and improving documentation as a whole. When implemented before an audit, AP automation simplifies the auditing process and reduces audit risks and complications.
Some ways that AP automation reduces audit risks are listed below:
Accurate transcription: AP automation eliminates manual data input and transcription, minimizing errors in recordkeeping. This means that auditors are less likely to find discrepancies in your records and calculations.
Detailed tracking: AP automation software stores transactional data at every step of the process. This includes copies of invoices, processing data and payment information. This event tracking gives your company and your auditors quick, real-time access to transactional history. This means that your department and your auditors spend less time searching for information and speed up the auditing process.
Immediate access: AP automation stores invoices and transactional data in an easily searchable and highly accessible format, making it quick and simple to find information. It also reduces the chances that information will be lost. Both of these factors help increase the accuracy and speed of audits.
Standardized systems: AP automation standardizes your company’s system, eliminating shortcuts, circumvention and other issues that conflict with your standard operating processes. AP automation, therefore, gives you greater control over adherence to your SOPs, positively affecting your audit scores.
Improved compliance: By standardizing your system, you can also improve adherence to compliance standards. AP automation follows protocols to the letter, ensuring that you have everything you need for compliance audits.
In total, AP automation helps improve the result of your accounts payable risk assessment by improving control, access and visualization in your company. However, the advantages of AP automation on accounts payable audits don’t stop there.
The Positive Impact of Audits With AP
AP automation reduces audit risks and enhances the benefits of accounts payable audit procedures. Some examples are listed below: Automation
Documentation: Audits track your documentation from purchase to invoice to payment. AP automation keeps detailed records of this information, making it easier for auditors to access this information and find any gaps or inconsistencies.
Fraud: Audits specifically look for any indication of fraudulent activity. AP automation helps improve the quality of this search with detailed recordkeeping and minimizes the potential for fraud by controlling and tracking access to sensitive information.
Duplicate payments: Audits look for inaccurate information and erroneous payments, including duplications. AP automation reduces the instances of these mistakes by cross-referencing internal information and closing out transactions after they’ve been completed. By eliminating gross mistakes, auditors can find more detailed errors.
Validity of purchases: Auditors cross-reference your purchasing information to ensure that your charges are accurate. AP automation helps maximize accuracy by automatically running calculations, transcribing information and tracking incoming data. This way, auditors have all the information they need to detect vendor discrepancies and other problems.
In total, these benefits make for more accurate audits that provide more detailed and valuable takeaways and process improvement suggestions. AP automation also enables auditors to run audits more quickly, saving your business time and money so you can get back to your normal daily processes and get more valuable takeaways from the auditing process.
Choose MHC Systems for AP Automation
No matter how far out your company is from your next audit, it’s never too early to prepare. Audits are more than a compliance requirement — they’re a tool your company can leverage to help improve your processes, reduce errors and eliminate fraud. By implementing AP automation, you can enhance these auditing benefits even further. If you’re interested in an AP automation tool for your company, MHC can help.
MHC provides quality accounts payable software systems designed to streamline your AP processes by eliminating manual approval processes, data entry and filing, making it easier to access and update your data. With our system, your employees no longer need to handle the most tedious work of accounts payable — instead, they can focus on customer-facing services and audits.
On top of our quality accounts payable software, MHC ensures the safety of our clients by focusing heavily on security. All our software solutions are built with high-level security features so you can rest easy knowing that your company data is secured.
Get in touch with us and learn more about our AP Automation solutions and how they can help your company streamline the accounts payable audit process.
Accounts payable automation software saves your business time and money and allows your employees to focus more of their time and energy on relevant tasks. At MHC, our focus is on eliminating inefficient processes from the business world. To find out more about our AP automation software and to see how it can help improve your company’s process, schedule a free demo.