Mastering the Art of Accounts Payable Audit: A Guide for CFOs

Accounts payable audits are more than just number crunching—they’re a strategic shield, safeguarding your business from hidden risks that can quietly erode its financial stability. These audits dig into how your payables are managed, ensuring every transaction is recorded accurately and transparently. 

For many businesses, accounts payable is a high-risk area. Unrecorded payables or end-of-term liabilities can distort net income, creating opportunities for fraud. It’s no wonder the AICPA’s fraud risk assessment standards are a cornerstone of AP audit strategies, helping businesses stay vigilant and compliant. 

And the need for vigilance has never been clearer. The AFP Payments Fraud and Control Survey 2023 found that 65% of companies faced payment fraud attempts, with losses averaging 5% of annual revenue. For businesses of all sizes, regular AP audits are a key to staying ahead—turning risks into actionable insights and securing long-term financial health. 

In this guide, we’ll break down the practical steps, common challenges, and key strategies that can help you master the art of accounts payable audits—turning them into a tool for smarter, stronger financial management. Let’s get started. 

3 Reasons Why Accounts Payable Audits Matter for CFOs 

Preventing Accounts Payable Fraud 

Fraud and phishing attempts are a growing concern for finance leaders, and AP departments often find themselves in the spotlight. With so many transactions flowing through AP, the risk of fraud is high.  

That’s why accounts payable internal controls are non-negotiable—they help catch mistakes, stop fraud, and prevent improper payments. Without them, AP processes can quickly become vulnerable. Regular audits step in here, acting as a safeguard to spot and fix any red flags before they escalate. 

Avoiding Duplicate Payments 

Duplicate payments are a frustrating yet common issue in AP operations. These errors usually happen when there’s a lack of clarity in the AP audit workflow, leading to unnecessary financial losses. Audits are your safety check—they help catch these errors early, saving money and keeping your financial operations clean and efficient. 

Boosting Trust in Your Business 

A smooth, reliable AP process is about more than just payments; it’s a reflection of a business’s credibility. When you show that you’ve implemented solid controls to reduce fraud and errors, you build trust with stakeholders and prove the reliability of your financial statements. This trust isn’t just good for business—it’s essential for attracting investments and maintaining a strong reputation in the market. 

What Do You Audit in Accounts Payable?  

The focus of an AP audit can vary based on a company’s size, industry, location, and what the audit aims to achieve. Auditors look for unusual transactions, check for signs of fraud (many are certified fraud examiners), and ensure everything is in order. Typically, they focus on four main areas: 

1) Completeness 

Auditors check that all payable balances match the general ledger and tie back to journal entries, purchase orders, and invoices. They want to see a clear trail connecting recorded payables to actual payments, whether electronic or otherwise. Any unmatched or open records are flagged for further review, and cutoff tests are often used to ensure transactions are recorded in the correct period. 

2) Compliance 

This step is about ensuring the company’s AP process aligns with GAAP standards. Auditors dig into financial records like balance sheets, income statements, and cash flow reports, tracing transactions back to their origin to confirm proper accounting methods are used and all regulatory requirements are met. 

3) Validity 

Here, auditors focus on confirming that transactions are legitimate. They may contact suppliers or vendors directly to verify specific payments. They typically prioritize key third parties, selecting them based on assessed risk levels or the significance of the transactions involved. 

4) Accuracy 

Accuracy checks ensure the numbers in the company’s financial records are correct. Auditors review procedures, double-check supplier invoices, and verify payment calculations to spot and correct any discrepancies. 

Discover the 7 essential accounts payable KPIs every CFO should track to boost efficiency. 

How to Audit Accounts Payable: A 4-Step Guide 

No matter the size of your business, mismatched journal entries and bank records can quickly lead to problems. To create a reliable internal control system, an audit trail typically follows these four steps: 

1) Scheduling the Audit 

It all starts with planning. Your business will get a heads-up about the audit, followed by a meeting to go over standard operating procedures (SOPs). This is the time to define the scope, set goals, and map out the process for the upcoming assessment. 

2) Conducting the Audit 

Next comes the hands-on part. Auditors dig into financial records to ensure everything checks out. They’ll often use tools like “cut-off tests” to confirm that transactions are recorded in the right time frame. During this phase, they’ll review documents such as: 

• Balance sheets 
• Check registers 
• Purchase orders 
• Vendor invoices 
• General ledgers 

3) Wrapping It Up with Accounts Payable Audit Report 

Once the review is done, the auditor pulls everything together into a final report. This includes a summary of their findings, any areas of concern, and recommendations for improvement. 

4) Following Up 

The work doesn’t stop with the report. A follow-up review, usually about a year later, ensures that the recommended changes have been implemented and are delivering results. 

Key Procedures to Auditing Accounts Payable 

The accounts payable (AP) function in most companies handles a high volume of transactions, making the AP ledger susceptible to errors and even fraudulent entries. To ensure accuracy and compliance with U.S. GAAP, auditors focus on four key areas to identify and resolve any major discrepancies: 

1) Reviewing Standard Operating Procedures (SOPs) 

SOPs are essential for keeping AP operations running smoothly, but not all companies have them, and some don’t follow them consistently. 

If SOPs are in place, auditors review them carefully and test a selection of transactions to ensure the AP team sticks to the rules. If the department lacks formal SOPs or has outdated ones, auditors pause the audit until proper procedures are created or updated. This ensures the audit is built on solid, reliable processes. 

2) Examining the Paper Trail 

Auditors trace transactions from start to finish, checking key documents like: 

• Purchase orders 
• Vendor invoices 
• Journal entries 
• Bank records 

They select transactions randomly or based on their size and frequency. The goal is to confirm that payments align with invoice terms, discounts are applied correctly, and all records are accurate. 

3) Verifying Vendor Balances 

To confirm outstanding balances, auditors may reach out to vendors directly. These confirmations can either: 

• Show the amount owed based on the company’s records, or 
• Leave the balance blank for the vendor to fill in. 

If the vendor’s response doesn’t match the company’s records, auditors investigate further to resolve the issue. Unexplained differences could lead to additional testing or impact the audit opinion. 

4) Cross-Checking Financial Statements 

Auditors compare the company’s financial statements with AP records to ensure everything matches. They review the month-end closing process to confirm expenses are recorded in the right period. They also check for related-party transactions, cash payments, and unrecorded liabilities. 

This step helps identify errors or fraud, which can be costly—research shows financial statement fraud costs companies an average of $1 million. 

Issues Uncovered by an Audit  

Accounts payable audits often uncover issues that can disrupt workflows and strain finances if left unchecked. These challenges may seem routine but can have far-reaching consequences for an organization’s efficiency and credibility. Let’s take a closer look at some of the common hurdles CFOs encounter during an AP audit and how to tackle them. 

1) Missing or Incomplete Documentation 

Imagine trying to verify a transaction only to find the supporting invoice or purchase order missing. Incomplete records create gaps in the audit trail, making it difficult to confirm whether payments are legitimate or accurate. 

• Why It Happens: Poor record-keeping, manual processes, or miscommunication between teams can lead to missing documents. 
• How It Impacts: Delays in audits, compliance risks, and missed opportunities to spot fraud or errors. 
• What to Do: Adopt a centralized, digital document system to ensure all AP records are organized, accessible, and complete. 

2) Duplicate or Overpayments 

Duplicate payments or overpaying invoices are costly mistakes that audits often catch—but only after they’ve already drained resources. 

• Why It Happens: A lack of visibility in AP workflows or errors during manual data entry often leads to paying the same invoice twice or overpaying. 
• How It Impacts: Lost money, strained vendor relationships, and additional time spent resolving discrepancies. 
• What to Do: Use automation tools to flag duplicate invoices and set up regular reconciliation practices to catch overpayments early. 

3) Vendor-Related Discrepancies 

Discrepancies between what vendors say is owed and what’s recorded in your books are a common sticking point. 

• Why It Happens: Mismatched records can result from misaligned payment terms, unrecorded credit memos, or simple human error. 
• How It Impacts: Payment delays, frustrated vendors, and inaccurate financial reporting. 
• What to Do: Foster open communication with vendors to resolve differences quickly and use automation to reconcile accounts more efficiently. 

4) Weak Internal Controls 

Without strong internal controls, AP processes can become a free-for-all, leaving room for unauthorized payments, fraud, and mistakes. 

• Why It Happens: A lack of oversight, outdated policies, or insufficient segregation of duties can create vulnerabilities. 
• How It Impacts: Increased risk of fraud, unapproved transactions, and inefficiencies in payment processing. 
• What to Do: Tighten controls by clearly defining roles within the AP team, implementing approval workflows, and using fraud detection tools to catch irregularities early. 

Learn how QX streamlined accounts payable for a global beverage giant, empowering their finance team to focus on strategic growth. 

What’s the Bottom Line? 

Accounts payable audits do more than check off compliance boxes—they help businesses uncover inefficiencies, prevent fraud, and build stronger financial systems. For CFOs, these audits offer a real opportunity to strengthen processes, improve accuracy, and create a foundation for smarter decision-making. 

The key is to stay ahead of the curve. By adopting tools like automation and data analytics and best practices for accounts payable audits, you can simplify audits and turn them into a source of valuable insights. As businesses continue to evolve, the role of audits will become even more important.  

They’re not just a safeguard but a way to build trust, streamline operations, and prepare for the future. The question isn’t whether to do audits—it’s how to make them work smarter for your business. 

Originally published Nov 25, 2024 11:11:13, updated Nov 29 2024

Topics: Accounts Payable Optimisation, Accounts Payable Process