Last updated by
March 1, 2021
A financial audit is typically required if a company is public or holds debt from a 3rd party lender, and it helps form a high level of assurance the numbers can be trusted.
Financial information forms the foundation of trust for owners, banks, shareholders, lenders, and employees. A financial audit helps form a high level of assurance that the numbers can be trusted.
A financial audit is typically required if a company is public or holds debt from a 3rd party lender. If you handle accounting records in your business understanding how the audit process of works for accounts payable is important.
The accounts payable component of a balance sheet may not pose the most risk in an audit, but it does require attention.
Accounts payable relate to the liabilities of a company. They are the amounts owed to vendors for goods or services. Balances may be incorrect because of human error, unethical behavior and even fraud so it is important to have the independent verification of an audit.
Accounts payable directly affect cash flow. The biggest risk to an investor or creditor is payable amounts have been omitted from the accounts payable balance. Let’s review the steps of an accounts payable audit.
Table of contents
To audit accounts payable several reports will be needed to test the validity and accuracy. The most common reports used are:
These are common financial reports that should be maintained by a company. If your accounting system is automated these reports will be easy to directly print from the software. Without an automated system you will need to manually prepare the reports. For smaller businesses, excel is a great alternative.
The audit will verify balances by looking at controls, reviewing detailed transactions, analytics, and review of contractual agreements.
The first 2 steps really are just establishing the foundation that the details match the balance sheet. Once established then the audit can begin to verify and test the following assertions:
The third step is a list of procedures that may be applied by an auditor to validate and confirm the 7 assertions mentioned above.
One final consideration in regards to auditing accounts payable is audit exceptions. Audit exceptions are not uncommon. If an audit exception is found, it will be extrapolated to the entire population of accounts payable to come up with an adjustment.
Auditors have to make assumptions because not every invoice will be reviewed. So, if x amount of error is found in the sample, then that x percentage error exists in the entire accounts payable balance. Auditors typically have a materiality level. If an error falls below the materiality level it becomes a moot point as it would not materially affect anybody’s decision making process.
Audit procedures are valuable steps to take even though they seem cumbersome. It is for the good of the company and all invested parties because it ensures:
Fraud detection is one of the main purposes for an audit. It is estimated on average companies lose 5% of annual revenue due to fraud.
The easiest form of fraud is invoice tampering like duplication of invoices, manipulation of invoices, creating fake invoices or establishing fake vendors. Additionally, because fraudsters know not every invoice will be checked this allows for manipulation of information or creating transactions under materiality threshold levels.
Whatever the fraud approach, it is difficult to catch everything. The best approach is to be thorough in your audit procedures. Internal controls are a valuable deterrent to potential breakdowns in segregation of duties or authorization approvals.
Automated systems can help prevent fraud by creating an instant audit trail making it easier to search for common fraud indicators. Strong accounts payable departments help ensure the prevention of fraud.
Lastly be observant, if it looks odd, acts odd, or doesn’t seem right – it probably isn’t.
Ultimately, audits are a valuable resource in not only preventing fraud but improving the flow of information through a company. Rather than push off an auditor as a nuisance, embrace the audit as a way to improve your company's financial reporting. Beyond the necessary audit component, auditors often provide valuable insight into continuous improvement.