Question

Discuss audit tests of notes payable and related accounts and transactions. How does this apply to your chosen organization? Coca-Cola

Answer 1

In an AP audit, the goals are to review financial records for accuracy and completeness, while also identifying potential areas of improvement for internal controls and reducing risk exposure caused by fraud. Audit procedures will vary from company to company, but audits that hit the target for transparency, compliance, legitimacy, and completeness share certain common features and follow the same basic outline.

In general, an accounts payable audit is conducted in four distinct steps:

1. Planning
2. Fieldwork
3. Audit Reporting
4. Follow-up/Audit Review

Note: If you’ve implemented a comprehensive procurement software solution that includes AP automation, all phases of your accounts payable audit will be much easier.

1. Planning

The first step in an AP audit is to schedule a meeting with management and other stakeholders to discuss the scope of, and desired outcomes for, the audit. This discussion, along with any expressed concerns (e.g., potential fraud, the need for process improvement, etc.), provides an outline for the audit and a supplemental checklist during the fieldwork, reporting, and follow-up stages.

Prepare on Paper

Essential work documents for a thorough AP audit include:

• A review of existing internal controls for accounts payable.
• A detailed period-end accounts payable ledger
• A comparison and comprehensive analysis of budgets as compared to expense reports, with clarifying information on any unexpected deviations.
• Complete documentation of any unrecorded liabilities
• A detailed risk assessment of AP and expenses
• A summary of potential weak points in accounts payable controls.
• Overview of planned audit procedures for accounts payable
• Documentation related to any fraud investigation required by weak or absent controls

Consider Your Goals

Some of the considerations that factor into a well-planned AP audit include:

• Is there a software solution in place to simplify the audit?
  • If so, does the system support three-way (PO, receiving document/packing list, and invoice) matching?
  • Is the software used in conjunction with a purchasing policy that follows GAAP?
• What is the company’s annual expense budget, if any?
• Who receives budget and expense reports?
• Is there a policy in place to ensure all payables are recorded in the proper period?
• With regard to purchase orders:
  • Are purchase orders digital, physical, or both?
  • What is the numbering system used for POs?
  • Who authorises purchase orders?
  • Are purchase orders made by any methods other than PO? If so, what other methods are used in the payment process?
• Are credit card purchases recorded and tracked by the system to avoid invisible spend? If not, who controls approval for credit card purchases, and what considerations are in place to limit or eliminate maverick spend?
• What methods (e.g., Automated Clearing House (ACH), wire transfers, etc.) are used to make electronic payments?
• Does the accounts payable department have clear separation of responsibilities for approving, paying, and recording payables, as well as reconciling bank statements?
• Regarding vendors:
  • How are new vendors evaluated and added to the approved vendor file?
  • Who is authorised to add new vendors to payables?
  • Are purchases limited to approved vendors?

Keeping these considerations in mind will ensure that both financial accuracy and process improvement are properly explored during the audit.

1. Fieldwork

Armed with a plan, auditors can devote their attention to the audit process. During this step, your auditors will likely:

• Review (or create, if necessary) standard operating procedures (SOPs) for accounts payable functions and verify their implementation. Any potentially weak internal controls increasing the risk of fraud or inaccuracy are identified, then strengthened or replaced.
• Compare budgets to expenses and/or spend balances from prior years. Significant exceptions are noted and tagged for investigation.
• Review original documents—including purchase orders, vendor invoices, journal entries for both AP and inventory, and bank records—at random to ensure all information is correct, payment has been properly made, and terms and conditions have been satisfied.
• Conduct vendor verifications by requesting outstanding balances and comparing the answers to the amounts recorded in the AP ledger. Exceptions are noted and tagged for follow-up.
• Verify the accuracy of financial statements. Policies and accounting procedures for close processes (month, quarterly, annual, etc.) are evaluated to ensure items are recorded in period in which the expense was actually incurred. Policies and procedures for related-party transactions and cash payments are also scrutinised, along with the transactions themselves, to develop a complete record of all financial information for the audit period.
• Search for unrecorded liabilities and evaluate suspicious activity to detect fraud.

1. Audit Reporting

When the audit is complete, the findings are collected and put into a full report—which includes information on both the financial accuracy of accounts payable and how well it conforms to GAAP, as well as potential areas of control improvement—submitted to management and other stakeholders for review.

1. Follow-up/Audit Review

No audit is truly complete until a year later, when a special follow-up review is performed to confirm how well the suggested changes (if any) were implemented.