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AP Auditing 101: A Guide for Beginners

Efficient nonprofit organizations pay their vendors, suppliers, utility companies, contractors, and others who provide services or goods in a timely manner. Not giving proper attention to the accounts payable process can really tie a knot in organizational plans, resulting in tense vendor relationships and audit-related headaches.

As an accountant, you need to advocate for reliable and efficient accounts payable process at any organization you support.

But how can you make sure that happens? By performing regular accounts payable (AP) audits.

Why do we need AP audits?

The accounts payable process at most organizations includes certain risks that, if not mitigated, can put the organization’s success in jeopardy. Fraud, including invoice tampering, has traditionally been one of the biggest such risks. The Association of Certified Fraud Examiners reports that businesses, on average, lose about 5 percent of their annual revenue to fraud.

An excess of accounting errors is another AP risk. When an organization repeatedly makes duplicate payments or fails to record liabilities, the health of the nonprofit will surely suffer.

How can you prevent these issues from occurring in the first place? By performing an accounts payable audit. In addition to identifying individual accounting issues, an AP audit can pinpoint inefficiencies in organization processes and provide a plan for fixing them.

What does an AP audit look like?

There are several steps to an AP audit, none of which should be skipped.

1. Planning

The first step to a successful AP audit is to plan a strategy. Management should meet to discuss the outcomes they hope to realize. Some questions to ask might include:

  • What are your current AP processes?
  • Who is involved in each stage of the AP process (budgeting, purchasing, paying, recording)?
  • Does the organization hope to create efficiencies in processes?
  • Are there particular issues of fraud that need to be addressed?
  • Can software be used to simplify the audit?

All the necessary documents for carrying out the audit should also be prepared at this time.

2. Fieldwork

Once a plan is in place, the necessary fieldwork can begin. At this stage of the audit, a number of activities take place, including:

  • Comparing purchase orders, invoices, bank records, and other documentation against the actual payables
  • Analyzing the AP ledger to make sure vendor invoices and outstanding balances match what’s recorded in the ledger
  • Looking for unrecorded liabilities and checking for potentially fraudulent activity that bears investigating
  • Verifying financial statements and checking to make sure that payables are being properly recorded
  • Comparing current year (or quarter) payables to previous year (or quarter) payables and noting any inconsistencies that require further review
  • Studying the AP functions and, if they don’t already exist, creating standard operating procedures that formalize the process
  • Investigating any duplication of duties that might create opportunities for errors to be made

 “Leave no stone unturned” is an appropriate rule of thumb for fieldwork.

3. Reporting

With the fieldwork completed, the next step is to write a report discussing the relevant findings, including whether or not any fraud was detected, providing any deficiencies noted in the processes, and outlining what steps the organization can take to remedy the issues. Suggestions for ensuring a clear separation of duties between accounting personnel may also be included. The report should verify that AP processes are in compliance with generally accepted accounting principles (GAAP).

4. Follow-up

AP audits should be conducted periodically, usually in yearly intervals, to determine if progress has been made in making AP processes more efficient and that fraud continues to be prevented.

How can I streamline my audit process?

In addition to following the above steps, one surefire way to streamline your AP audit process is to encourage any organization you support to use AP automation software and electronic invoicing. Automating these tasks will make the AP audit process faster and more efficient.

AP automation is also a service you can offer to any organization that you support. Many are better off outsourcing their AP to an accounting firm rather than managing the process themselves; and firms benefit by offering a greater level of service and value to clients.

An intelligent, cloud-based payments platform, such as the one offered by Bill.com, can create a number of specific efficiencies in your AP process. Bill.com makes the process of receiving, paying, and recording invoices a snap. Bills can be reviewed and approved from any device, with a click or a tap.

Once a payment is made, it’s automatically synced over to the organization’s accounting software. Your team saves time on duplicate data entry, reduces the chance of manual entry errors, and always has up-to-date books. Bill.com also offers custom user roles (Administrator, Accountant, Clerk, Approver, Payer) to ensure a clear separation of duties and to maximize the efficiency of staff.

For more information from a JMT consultant on how you can automate and control the AP process, contact us here.

This article was originally published on the Bill.com blog and has been edited for relevancy.

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