The Fundamentals of AP Auditing
In general, audits in the American corporate world relate to either unplanned audits conducted by the Internal Revenue Service or scheduled audits conducted by internal or external auditors.
Let’s start with some of the fundamentals of accounts payable audits.
How Does It Work?
Audits can range in scope, severity, and duration, from a basic check to see if employee check withholdings are correct to more significant investigations to see if broadscale, long-term fraud is occurring.
taking place within a corporation Internal and external auditors, on the other hand, often apply General Accounting Principles and follow a four-stage procedure that includes:
Planning, in which the auditing firm meets with the company it will be auditing ahead of time to discuss the audit and acquire essential documentation;
Internal controls, in which auditors obtain access to the records they require and gain a better understanding of the inherent, detection, and control risks they may face, resulting in a more accurate audit;
Testing, in which auditors look over records and whatever else is required to perform their investigation;
The auditors communicate their findings to the corporation via reporting.
Following that, another crucial stage should occur: the sometimes unsaid follow-up stage, in which auditors contact the company after the audit is completed. As we’ll see in a moment, this is an important step that if skipped can lead to more issues.
What is examined?
In an accounts payable audit, anything and everything financial is fair game. Auditors might begin with the general ledger, which “holds all the financial information necessary to construct the income statement and balance sheet reports, and serves several major objectives in According to Small Business Chronicle, “the financial operation of the business.”
Auditors can look over the ledger to check if anything is amiss. Auditors may seek to see associated purchase orders, invoices, and receipt reports to establish the authenticity of each transaction, therefore the ledger can be a gateway to deeper research. As a result, having all of this information readily available is critical.
Companies that rely heavily on paper records, therefore, may face longer and more expensive audits. And audits are already expensive, with Strategic Finance noting in late 2019 that audit fees for 83 public corporations averaged $9.8 million and $139,000 for private organisations.
How Often Do AP Audits Take Place?
Audits are fairly frequent, according to the ACFE, with 83 percent of corporations having their financial statements externally audited, 74 percent having internal audit teams, and 62 percent having independent audit committees.
The Sarbanes-Oxley Act of 2002 requires public corporations to undertake yearly compliance audits and internal controls reports to assure the accuracy of their financial statements. After the highly publicised financial disasters at Enron and WorldCom, the act was established, and its tough rules are still in place for public companies nearly 20 years later.
Audits in private enterprises are far more infrequent. Some companies conduct them on a regular, annual basis. Surprise audits appear to be less common, according to the ACFE, which found that only 38% of employers in its research conducted them. Internal fraudsters can hide their traces if they know an audit is coming, so organisations should conduct surprise audits on a regular basis – and be able to do so at any time.
The Benefits and Drawbacks of AP Auditing
It’s safe to argue that audits can uncover a plethora of data and that they provide a variety of advantages to companies who execute them. However, audits aren’t failsafe, and companies conducting them should keep a few things in mind before getting started.
Here are some of the advantages of audits, as well as one cautionary tale to remember.
Risk Management and Fraud Prevention
Asset misappropriation, such as cash theft and billing scams, occurred in 86 percent of the instances studied by the ACFE in 2020, with businesses losing $100,000 on average. The COVID-19 epidemic has also raised the stakes, with 70 percent of respondents telling ACFE that they’ve noticed an increase in fraud.
The good news is that by conducting audits on a regular basis, businesses can receive substantial protection against risk and fraud. Audits, whether conducted by internal departments or external specialists, can provide results, with internal audits discovering fraud 15% of the time and external audits detecting fraud 4% of the time, according to the ACFE study.
Companies tended to profit from proactive auditing, with the ACFE finding that firms using internal auditors had a median fraud duration of half that of firms using external auditors – 12 months instead of 24 months – and median damages of $100,000 instead of $150,000.
Verification of What Is Wrong – and What Is Correct
“Sunshine makes everything in government better,” a state legislator who was aiming to expand audit power for the public told USA Today Network in December 2020, referring to the New Jersey Transit Corporation. The only people who are frequently unhappy are the elected officials or bureaucrats involved.”
Accounts payable audits are the same way. Sunshine in the form of an honest, thorough audit can reveal internal flaws or outright fraud that has gone unnoticed for decades. It’s a fantastic opportunity for a corporation to get rid of undesirable actors and fix harmful habits. “A corporate audit is a lot like going to the dentist,” as one CFO website puts it. It may be unpleasant—even painful—but it is required for healthy (organisational) health.
Audits are also a fantastic way for companies to see what they’re doing properly and to reassure their employees, customers, and investors or shareholders that their records are accurate and everything is in order.
Where Audits Might Fail
The troubles with the New Jersey Transit Corporation and a private contractor it contracted to run some of its routes allegedly began in 2006.
Missed routes, a lack of responsibility in invoice keeping, and inadequate record keeping were revealed during NJ Transit’s internal audits. According to USA Today Network, NJ Transit did not make these findings public, and the errors continued for years, costing the agency $15 million in missed trips and prompting the New Jersey Attorney General to open a criminal inquiry.
While a company is not required to self-report its audit findings to the wider public, it is critical that it do so and act quickly on whatever is discovered. Otherwise, it’s just squandered funds and uncontrolled liabilities.
Using Automation Software to Prepare for AP Audits
Preparing for AP audits may be difficult for businesses, since it often necessitates hunting down invoices, receipts, and other records that may or may not exist if they’re only kept on paper. Audits are costly, and sloppy preparation, whether deliberate or the result of faulty documents, is equivalent to wasting money.
The audit preparation process is made easier if a firm uses accounts payable automation software, which may help businesses not only pay their bills faster, but also prepare them for even the most unexpected audits.
Clean Bills and a Simple History
Companies don’t have to pray that they’ll be able to discover all the documentation they need before an audit begins using Stampli’s all-in-one AP automation platform. Purchase orders, invoices, and receipts are stored in the system and can be retrieved at any moment during the bill payment process.
Companies also don’t have to worry about not being able to answer a question from an auditor regarding a specific transaction. Stampli’s software prioritises communication by including conversation windows at the top of invoices for any authorised user to review.
Audits for less
From the minute they arrive at a company, auditors aren’t cheap, with Strategic Finance putting their hourly charge for private company work at $191. ” According to the magazine, “several financial executives described massive increases in paperwork needs as explanations for the extra time and expense required to conduct the audit.”
However, costs should be reduced using AP automation software, which, as previously said, maintains a lot of this material. This can be reflected both in terms of the time saved by employees searching for documentation and the fact that organisations using AP automation software are audit-ready at any time. They won’t have to wait for paperwork from an auditor.
Billy the Bot, Stampli’s artificial intelligence assistant, is one differentiator. Billy the Bot not only assists firm controllers and CFOs by analysing innumerable transactions and highlighting suspected symptoms of fraud, but it can also provide this information to auditors.
Billy the Bot can accomplish this virtually ahead of time, giving vital legwork, just like an auditor will likely want to glance at a general ledger before they start their work and use it as a cue for more research.