How to Audit Payables: Steps for Accurate Accounts Payable Reviews
Learn how to review accounts payable with a focus on accuracy, compliance, and process efficiency through structured audit steps.
Learn how to review accounts payable with a focus on accuracy, compliance, and process efficiency through structured audit steps.
Auditing accounts payable is fundamental to maintaining financial accuracy and preventing errors or fraud within a business. Whether conducted internally or by external auditors, a careful review of payables helps avoid costly mistakes and enhances financial transparency.
This process demands attention to detail and consistency. Even minor oversights can create discrepancies affecting cash flow and relationships with vendors. A methodical approach ensures all significant aspects are covered.
An accounts payable audit begins with systematically collecting the necessary financial records and supporting documents. This step involves assembling files that substantiate the company’s payable transactions for the period under review, creating a comprehensive dataset for examination.
Key documents typically include:
Gathering these items provides the necessary inputs for subsequent review stages. According to the American Institute of Certified Public Accountants (AICPA), Statement on Auditing Standards No. 142 emphasizes evaluating the relevance and reliability of information used as audit evidence.1AICPA. Statement on Auditing Standards No. 142, Audit Evidence
Ensuring all relevant files for the entire audit period are collected is important at this stage. Missing documents can create gaps in the audit trail, hindering the review. This collection might involve accessing records from various sources, including physical files, accounting software, and document management systems.
Organizing these files logically, perhaps by vendor or date, facilitates easier access during later audit phases. Maintaining well-organized and securely stored documentation is a best practice for audit preparation and forms the basis for the remaining procedures.
Once documents are organized, the focus shifts to scrutinizing accounts payable ledger entries for accuracy. This involves comparing the information in the accounts payable subledger against the supporting source documents like invoices and purchase orders. The goal is to confirm that each recorded transaction correctly reflects the vendor, amount owed, and transaction date.
This verification addresses the accuracy assertion in financial auditing.2ACCA Global. The Audit of Assertions Auditors check that amounts and other data related to recorded transactions are appropriate, which includes verifying the mathematical correctness of invoices and ensuring ledger amounts match source documents precisely.
Accuracy checks also involve confirming transactions are recorded in the correct accounting period, relating to the cutoff assertion. Generally Accepted Accounting Principles (GAAP) require expenses to be recognized when incurred (the accrual basis). Liabilities for goods or services received before the period’s end must be recorded in that period, even if invoiced later. Examining receiving report dates against invoice and ledger entry dates helps ensure compliance, preventing misstatement of expenses and liabilities between periods.
Common errors sought during this review include data entry mistakes like transposed numbers, duplicate invoice entries, misclassifying expenses, or failing to record vendor credits. While accounting software can help prevent some errors like duplicate invoice numbers, manual review remains necessary to catch subtle mistakes or misclassifications.
After verifying ledger accuracy, the audit examines whether payments were properly authorized according to company policy before disbursement. This step assesses the internal controls designed to prevent unauthorized expenditures and potential misuse of funds.
Effective internal controls, such as those outlined in frameworks like the one from the Committee of Sponsoring Organizations of the Treadway Commission (COSO), emphasize authorizations and approvals. A common control is segregation of duties, meaning different individuals should handle different parts of a transaction.3New Jersey Society of CPAs. Why Segregation of Duties is Essential for Internal Control For payables, the person approving an invoice should ideally be different from the person processing the payment, making fraud more difficult.
Auditors test payment authorizations by selecting a sample of paid transactions and examining supporting documentation for evidence of proper approval, such as a signature or an electronic record. They verify that the authorization aligns with company policy, checking if the approver had the correct authority level for the transaction amount.
The examination also confirms that authorization occurred before payment was made by comparing approval dates to payment dates. Consistent adherence to these protocols provides assurance that expenditures are valid. Weaknesses found, like missing or unauthorized approvals, signal risks and may require further testing or recommendations for improving controls.
The audit process then involves reconciling supplier statements by comparing the company’s accounts payable records for specific vendors against statements received from those vendors. These statements show the transactions from the supplier’s perspective, including invoices, payments, and credits. The primary goal is to identify discrepancies between the company’s records and the supplier’s view of the outstanding balance.
Obtaining these statements, sometimes directly from the supplier to enhance reliability, is the first step. Each line item on the supplier statement is then compared to the company’s accounts payable ledger for that vendor. This matching process helps pinpoint differences, such as unrecorded invoices on the company’s books or payments made but not yet reflected by the supplier due to timing.
Identifying discrepancies requires investigation to determine the cause. An unrecorded invoice might represent a genuine liability that needs to be accrued. Alternatively, the difference could stem from a supplier error. All findings and investigation steps must be documented in the audit workpapers, as required by standards like AU-C Section 230, providing evidence for the auditor’s conclusions.4AICPA. AU-C Section 230, Audit Documentation Regularly performing these reconciliations strengthens internal controls.
When audits uncover discrepancies or errors, they must be addressed through adjustments and corrections. This requires ensuring changes are accurate, properly documented, and correctly reflected in the financial statements according to accounting principles like those in ASC 250.
Adjusting journal entries are typically used to correct the accounting records. These entries might record previously omitted liabilities, correct invoice amounts, or reverse incorrect entries like duplicates.
Each adjusting entry needs thorough documentation explaining the reason for the change and providing supporting evidence, such as vendor correspondence or calculations. Clear descriptions within the journal entry are also necessary.5UCSF Controller’s Office. Supporting Documentation Guidelines for Journal Entries
Proper authorization adds a layer of control over adjustments. Manual journal entries, especially corrections, carry risks. Internal control frameworks usually require review and approval by personnel independent of the original transaction processing. Auditors often examine these controls over journal entries.
The significance of identified errors determines how they are reported. Auditing standards, like AU-C Section 450, guide the assessment of misstatements.6AICPA. AU-C Section 450, Evaluation of Misstatements Identified During the Audit Materiality is a key consideration; errors are material if they could influence the decisions of financial statement users. The Financial Accounting Standards Board (FASB) provides guidance on materiality, defining it based on whether information has a substantial likelihood of altering the ‘total mix’ of information for a reasonable user.7Texas Society of CPAs. Materiality: More Than Just a Numbers Game
Immaterial errors might be tracked but not require immediate adjustment. Material errors affecting prior periods necessitate a restatement of those financial statements. Errors material only to the current period may be corrected within the current statements. Auditors are required to communicate significant adjustments and uncorrected misstatements to those charged with governance, such as the board or audit committee, ensuring transparency about the audit findings.