What is Accounts Payable? How Do I Prepare Myself for an AP Audit?

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Every business that buys goods and services from its suppliers on credit has to record its accounts payable, or the money that it owes to its suppliers. It is not enough to just record your bills and pay them off—it is important to audit accounts payable regularly to ensure that everything is in order. Not auditing accounts payable can lead to unfavorable consequences for your business, like duplicate or missed vendor payments and unrecorded liabilities. In this guide, we will see what accounts payable is, what auditing accounts payable means, and how to prepare your business for an accounts payable audit.

So what is accounts payable?

Accounts payable is simply the sum of money a business owes its suppliers. Accounts payable is a liability account that shows up in accrual-based accounting when a business buys goods or services from its suppliers on credit and has yet to pay for them. Accounts payable is crucial because it is the record of what a business owes its vendors or creditors. As an example, let’s suppose that you purchase a desktop computer worth $2,500 for your business from a dealer on credit. This increases your assets account because you have bought a computer, and increases your liability account by $2,500 because you have purchased on credit. This liability is recorded as accounts payable to the dealer and will be listed under the current liabilities section of your balance sheet.

What does auditing accounts payable mean?

In simple terms, auditing means inspection. An accounts payable audit is just a formal, well-organized, and thorough inspection of a business’ accounts payable records. Auditing can be done by either internal or third-party auditors. Auditing is required in all countries, but the rules for when the audit is required change from country to country. Governments usually require that businesses get audited as soon as they cross a certain revenue threshold.

Auditing is important because it reveals whether your business’ payables are recorded correctly, and whether your records provide an accurate picture of your business’ liabilities.  It also shows that you are playing by the rules, and that your company’s resources are being used for legitimate purposes. Auditing your accounts payable regularly ensures that bills are getting paid on time and helps you prevent duplicate payments, unrecorded liabilities, and defaults on vendor payments.

What auditors look for before the audit

Auditors do not necessarily follow any set patterns while auditing. Their auditing methods vary according to the size of the business, the number of business transactions done over the audited period, and the level of accuracy needed. Generally, the bigger the business, the higher the accuracy required.

How does auditing work?

There are four stages in a typical accounts payable auditing process: planning, fieldwork, audit reporting, and follow-up review.

Planning

The first stage in the auditing process is planning. Auditors discuss the scope of the auditing process, and also the possible outcomes of the audit. While planning, you can also discuss any concerns you have regarding financial statements, potential fraud, or the need for improvement with your auditors. After this discussion, auditors can come up with a plan of action for the subsequent steps in the auditing process, beginning with fieldwork.

Fieldwork

This is when the auditing actually starts and the role of an auditor is put into action. Auditors begin to review how your business functions. They examine your business transactions and documents, including purchase orders, vendor invoices, bank records, and journal entries to ensure that the information in them is correct, payments have been made correctly, and the terms and conditions have been adhered to. Fieldwork can take a few days to several weeks, depending on how big your business is and how many transactions it has made.

Audit reporting

When the fieldwork is complete, auditors put their findings into a report. This report contains all the information the auditors have discovered about your business’ accounts payable and how accurate they are. The report also specifies areas where your business is doing well, and areas where it might need improvement.

Follow-up review

The audit is not over at the reporting stage. Auditors do a follow-up review after a year, to check whether the suggested changes were implemented and the desired outcomes have been achieved.

Getting your business audit-ready

So how do you get your business audit-ready? Here are a few steps that help ease the work for your auditors.

  • Get an accounting system that helps record your bills, expenses, and other purchase transactions
  • Categorize your expenses neatly into expense accounts
  • Keep track of vendor credits and use them the next time you have to pay your vendors
  • Reconcile your bank accounts before the audit

Audits don’t have to be a headache

Getting your accounts payable audited helps you catch costly errors and prevent payment-related fraud. Auditing is not a simple task, though, and going over documents by hand is a complex process that actually increases the risk of fraud. On the other hand, an accounting app that uses automation can help keep your accounts payable in order. Besides prepping you for the audit, it’ll reduce the scope for errors and fraud, giving you less to worry about when audit season comes around.

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