The AP audit playbook for small businesses

This accounts payable (AP) audit playbook provides a step-by-step guide to help you audit accounts payable records and procedures to streamline your AP processes, identify potential risks, and improve financial controls.

Using the strategies outlined in this playbook can help protect your company from fraud, improve cash flow management, and ensure compliance with accounting regulations and generally accepted accounting principles (GAAP).

Whether you're just starting out or looking to refine your existing accounts payable audit procedures, this playbook is a valuable resource that will help you achieve financial success.

What is auditing in accounting and why is it important?

Auditing provides an objective assessment of your company's financial statements to make sure those statements are accurate, reliable, and compliant with regulations. Auditing helps uncover any errors, irregularities, or fraudulent activities to protect your business.

It also enhances transparency and accountability, providing assurance to management, investors, lenders, and shareholders that your company's financial information is correct and can withstand tough scrutiny. 

For public companies, the Sarbanes-Oxley Act of 2002 (aka SOX or Sarbox) made accounting audits more important than ever. Under that US law, upper management is responsible for certifying a company's financial information. Internal audits help assure management that they can do so with confidence and integrity.

For small businesses that are looking for external investment, accounting audits show potential lenders and investors that your company is implementing financial best practices.

What is an accounts payable audit?

An accounts payable audit is a specific kind of accounting audit that investigates a company's accounts payable records, statements, and processes. In an AP audit, auditors follow AP transactions from beginning to end—including the purchase order or invoice, approval steps, payment, and reconciliation—making sure that everything has been recorded correctly.

AP auditors may also investigate a company's AP processes to make sure those systems follow accounting best practices, such as segregation of duties and a rigorous approval process, to help prevent mistakes or fraud in company payments.

Why are AP audits important, in particular?

Accounts payable audits are important because they dive into the procedures your AP department uses to review invoices and approve them for payment. Internal AP auditors do more than review documents, records, and financial statements. 

They look for vulnerabilities in your AP operations and accounting procedures that could lead to duplicate payments, overpayments, and other mistakes—or even fraud.

How often should you perform AP audits?

Ideally, AP audits should be performed every year. If that sounds grueling, your company probably isn't using AP automation software. Accounts payable audit procedures are much more time-consuming when auditors have to slog through stacks of paper to track down audit trails and investigate unusual transactions. But that's all the more reason to do it.

Paper-based AP systems are notoriously susceptible to honest human error as well as fraud. If the audit process feels overwhelming, chances are your company would benefit from an AP system overhaul—and especially AP automation—to help your accounts payable department work more efficiently and effectively.

What should companies look for when auditing accounts payable?

Think of your AP audit in two distinct sections: (1) auditing your AP transactions, and (2) auditing your AP processes. 

Audits of your AP transactions should look for:

• Accuracy—are your AP transactions recorded correctly
• Completeness—was every transaction recorded at every step
• Compliance—has your AP department adhered to accounting regulations
• Validity—was every transaction a legitimate business expense

Audits of your AP processes should look for strong internal controls, such as:

• Segregation of duties—separating transaction recording from transaction approval
• Strict access controls—restricting access to your AP and accounting systems
• Robust approval procedures—ensuring validity before approving payments

Accounts payable audit checklist

Before you can start your internal audit, you'll need to gather documentation of your internal processes as well as your financial documents.

What documents do you need for an AP audit?

Here are the documents you'll need to perform an AP audit. Your AP department may want to add to this list, so don't consider it exhaustive. Think of it more as a place to get started:

1. Financial records

• Payable ledger of payable transactions
• Expense reports
• Bank statements
• Vendor invoices
• Accounting records and AP journal entries

2. Unrecorded liabilities

• E.g. signed vendor contracts that haven't yet been entered into your AP records

3. Year-end financial statements

• Balance sheet
• Cash flow statement
• Income statement

4. Standard operating procedures documentation

• Internal controls
• Approval procedures
• Payment process

Preparing for your AP audit

The checklist above is enough to get started. If you'd like to take your AP audit further, use it as an opportunity to create efficiency benchmarks for your AP team, calculating and tracking AP turnover.

Calculating AP turnover

Your AP turnover is a great way to start measuring the efficiency of your AP operations. It measures how quickly you're paying your creditors and suppliers by comparing your AP payments to your average AP balance during a given time period.

It has four primary uses:

1. It makes sure you're paying your bills on time
2. It can be an early warning sign of cash flow problems
3. It indicates your company's financial health to lenders
4. It can help your company secure credit with large suppliers

Learn more about AP turnover and how to calculate it.

How to audit accounts payable

Like any other task, a payable audit process becomes easier if you break it down into different stages.

The 4 phases of an AP audit

Stage one: Planning. Review your company records and bank records to gather the documentation listed above. Be sure to include any other records that can help your internal auditors assess your company's financial health. Be prepared to give your auditors read-only access to your accounting software, bill pay software, and any other systems your payable department might use.

Stage two: Fieldwork. Whether you're conducting an internal or external audit, your audit team should provide an overview of the accounts payable audit process. Generally speaking, this involves matching up every transaction between internal and external records and ensuring that company procedures were followed every step of the way. The team should also conduct a risk assessment on those procedures to see if they can be improved.

Stage three: Final audit report. Your audit team will provide an accounts payable audit report that includes detailed documentation of their payable audit procedures as well as the audit findings. It will identify any unmatched documents discovered as well as any potential fraud identified, and it will provide recommendations regarding fraud investigation, if any. The report will also identify any vulnerabilities that were discovered in your internal AP controls.

Stage four: Follow-up review. If the audit discovered any unusual financial transactions or a risk of fraud during the payable auditing process, you'll need to strengthen your AP operations. 

Streamlining AP audits with automation

Today's AP automation software can vastly improve the efficiency of your AP processes while streamlining AP audits. 

AP automation software can:

• Control permissions and access to your AP system
• Automatically apply approval rules to each invoice
• Integrate and sync with your accounting software
• Create an instant audit trail of every transaction touchpoint
• Provide read-only access for auditors

Automate accounts payable audits using BILL

BILL can do all of that and more, helping your team spend 50% less time on your accounts payable process while streamlining your AP audits.

See what AP automation could do for your business.