Audit Procedures and Assertions for Accounts Payable

Managing finances effectively is one of the most important parts of running a successful business. Accounts payable, often a large portion of outgoing cash flow, plays a critical role in this process. 

Studies show that 84% of companies that fully automate their accounts payable systems see improvements in cash flow and cost savings, highlighting the value of proper financial management.

But without strong oversight, issues like errors, missed payments, or even fraud can creep in, putting the financial health of a business at risk. That’s where accounts payable audits come in. These audits help ensure every transaction is accurate and legitimate while protecting businesses from costly mistakes, regulatory penalties, and reputational damage.

In this guide, we’ll break down how accounts payable audits work and how they can strengthen your financial processes, helping you avoid potential risks and improve efficiency.

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What is Accounts Payable Audit?

Auditing accounts payable is a vital process for ensuring financial accuracy, identifying fraud risks, and complying with legal and organizational requirements. 

At its core, an accounts payable audit involves reviewing all payable transactions, confirming their legitimacy, and verifying that they are correctly recorded in financial statements. This process plays a critical role in maintaining financial transparency and integrity.

Notably, it is different from accounts receivable. Here’s how:

The necessity of such audits becomes evident when considering the potential consequences of errors. For instance, Misstated accounts payable can lead to inaccurate financial reporting, penalties, and even legal issues. 

Regular audits help businesses address these challenges by verifying data, uncovering discrepancies, and strengthening internal controls. Let’s explore why else should you audit accounts payables.

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Why Is Auditing Accounts Payable Regularly Important?

Regular audits of accounts payable are essential for several reasons. Here are the most impactful ones:

• Financial Accuracy

Ensuring accurate records of accounts payable is critical to presenting reliable financial statements. For example, an invoice recorded with an incorrect amount might overstate expenses, reducing net income and skewing profitability metrics. 

Conversely, missing invoices can underreport liabilities, making the organisation appear more financially stable than it is. An audit identifies and corrects such discrepancies, ensuring that financial statements reflect true business performance.

Related Read: Understanding e-Invoicing: How it would work in the United Arab Emirates (UAE)

• Fraud Prevention

Accounts payable is a common target for fraudulent activities, including duplicate payments, inflated invoices, or payments to fictitious vendors. For instance, an employee might create a fake vendor and process payments to a personal account. 

Regular audits involve scrutinising vendor details, payment approvals, and transaction patterns to uncover irregularities. 

• Operational Efficiency

Audits often reveal inefficiencies in the accounts payable process. For instance, delayed invoice approvals could lead to late payment penalties, while manual invoice matching might slow down the payment cycle. 

During an audit, these bottlenecks are identified, allowing businesses to refine workflows. For example, using a spend management system like Alaan to track all transactions or implementing an AI-powered tool for expense verification could significantly reduce processing time and improve accuracy.

• Compliance

In the UAE, businesses must adhere to financial regulations and governance standards, such as the UAE VAT regulations and the UAE Commercial Companies Law. Regular accounts payable audits ensure compliance with these legal frameworks, helping avoid penalties, legal disputes, or reputational damage.

Non-compliance can result in penalties, legal actions, or loss of investor confidence. For example, companies listed on stock exchanges must ensure that their financial reports are free of material misstatements, making audits essential for meeting these requirements.

Streamline your accounts payable process with Alaan. Take the demo today!

Businesses with regular accounts payable audits experience reduction in financial reporting errors. This underscores the value of a consistent audit strategy for enhancing financial health.

Now that we’ve highlighted why regular accounts payable audits are critical, let’s explore the key audit assertions auditors use to ensure the accuracy and reliability of financial records.

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Primary Audit Assertions for Accounts Payable

Auditors rely on specific assertions to assess the accuracy and integrity of accounts payable:

1. Completeness: Ensures that all payable transactions have been recorded. Auditors examine whether liabilities such as invoices received but not yet recorded are properly documented. Missing records can lead to understated liabilities, affecting financial accuracy. You can also categorise them to ensure a streamlined process.
2. Existence: Confirms that the balances recorded in accounts payable reflect actual liabilities. For example, if a balance shows a payment due to Vendor X, auditors check if Vendor X has indeed supplied the goods or services and that these were approved according to company policies.
3. Valuation: Verifies that payables are recorded at their correct economic value. This includes checking for applicable discounts, taxes, or currency conversions in international transactions. Errors here can lead to overstatement or understatement of liabilities.
4. Rights and Obligations: Ensures that the company genuinely owes the liabilities recorded in accounts payable. For instance, liabilities must stem from valid purchase agreements or contracts, not unauthorised transactions.
5. Presentation and Disclosure: Confirms that payables are properly classified and disclosed in financial statements according to IFRS and UAE VAT regulations. Proper disclosure ensures stakeholders can make informed decisions and demonstrates compliance with local regulatory requirements.

With that covered, the next step is to assess the risks associated with accounts payable processes and how they can impact financial accuracy and operational integrity.

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Risk Assessment in Accounts Payable

Identifying risks within accounts payable is the cornerstone of an effective audit. These risks, if unaddressed, can lead to financial misstatements, regulatory non-compliance, and even fraud. Here’s a closer look at the key types of risks and how they manifest:

1. Inherent Risk

This type of risk stems from the nature of accounts payable transactions themselves. For example, companies dealing with high transaction volumes, such as retail businesses or manufacturing firms, face a higher likelihood of manual errors or missed entries.

Complexity also amplifies inherent risk. Consider a multinational organisation dealing with currency exchange rates and varying tax regulations across regions. A simple oversight in currency conversion or VAT application can result in significant inaccuracies.

2. Control Risk

Control risk arises from weaknesses in a company’s internal processes. For instance, if there is no segregation of duties, one employee might have the authority to create purchase orders, approve invoices, and process payments. This lack of oversight makes it easier for fraudulent transactions to occur.

Also Read: Steps to Automate Expense Management and Approvals

Another example is poorly defined approval workflows. If invoices can be approved without validation of purchase orders or delivery receipts, the company’s exposure to overpayments or fake invoices increases significantly.

3. Impact on Material Misstatement

Risks like unrecorded liabilities or duplicate payments can directly affect the accuracy of financial statements. For instance, failing to record liabilities for goods received before year-end can understate expenses and inflate profits.

Conversely, processing duplicate invoices can overstate liabilities and distort cash flow reports. This can mislead stakeholders and damage the organisation’s credibility.

By systematically addressing these risks during audits, businesses can prioritise areas that need immediate attention and develop strategies to mitigate potential issues.

Related Read: Solving 5 Petty Cash Problems With Alaan

Once risks within accounts payable are identified, the next step is implementing structured audit procedures to address these vulnerabilities, ensure accuracy, and strengthen financial oversight.

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Audit Procedures for Accounts Payable

A thorough accounts payable audit ensures the integrity of financial processes and reduces the risks of errors or fraud. Below is a detailed breakdown of the key steps involved:

1. Planning the Audit

Before diving into the details, define the objectives, scope, and methodology. Are you reviewing all invoices including e-invoices above a specific threshold? Or focusing on high-risk vendors identified in earlier risk assessments?

Gather the necessary documents, including:

• Accounts payable ledgers
• General ledger entries
• Purchase orders
• Vendor invoices

It’s also a good idea to have key personnel, like accounts payable staff, available for interviews. Their input can offer valuable context and help clarify any anomalies during the audit.

Bonus Read: E-Invoicing Implementation: B2B and B2C Details, Requirements, and Limit

2. Evaluating Internal Controls

One of the first tasks is reviewing internal controls. Ensure there’s proper segregation of duties. For example, the person approving payments shouldn’t also handle payment processing. A lack of segregation can open the door to fraud.

Check if approval workflows are functioning as intended. Are payments properly authorised? Examine the vendor onboarding process to rule out any unauthorised or fictitious vendors.

Lastly, confirm that three-way matching is in place—cross-verifying invoices, purchase orders, and receiving reports helps prevent discrepancies.

3. Analysing the Accounts Payable Ledger

Once controls are reviewed, shift focus to the accounts payable ledger. Compare balances in the ledger to the general ledger. Any mismatches here might signal recording errors or potential fraud.

Don’t forget to look at month-end reconciliations. Pay attention to large or unusual entries—they may indicate deeper issues that require investigation.

Make the account payables audit easier with Alaan’s spend management solution!

4. Vendor and Invoice Testing

Testing vendor accounts and invoices provides a closer look at the accuracy of transactions. Select a representative sample of vendors and their invoices. Match invoices with purchase orders and receiving reports to verify payments reflect goods or services received.

Check for:

• Duplicate payments
• Incorrect invoice amounts
• Inaccurate payment terms or due dates

Using vendor confirmations can also help. Reach out directly to vendors to validate outstanding balances and investigate any discrepancies.

5. Search for Unrecorded Liabilities

To ensure liabilities are properly accounted for, review subsequent payments made after the audit period. For example, if goods were received in December but paid for in January, these should be recorded in the prior year’s accounts.

Look at open purchase orders, too. Any goods or services received but not yet invoiced should still be reflected in liabilities.

6. Analytical Procedures

Analyse trends in accounts payable data to identify anomalies, such as sudden increases in payments to a particular vendor or unusual payment patterns.

Compare current-period expenses to prior periods to detect inconsistencies that may signal errors or irregularities.

7. Fraud Detection

Look for red flags, such as duplicate invoices, unusual payment amounts, or payments to unknown vendors. Fraud detection tools can be used to identify patterns indicative of fraudulent activity.

Verify the legitimacy of high-value transactions and investigate any vendor accounts showing irregular activity.

8. Reporting Findings

Compile a comprehensive report summarising audit findings, including identified risks, discrepancies, and control weaknesses. Provide actionable recommendations to address any issues.

Share the report with key stakeholders, such as management and auditors, and schedule follow-up reviews to ensure corrective actions are implemented.

By following these detailed procedures, auditors can provide assurance that the accounts payable process is robust, accurate, and aligned with organisational goals.

After completing the foundational steps of an accounts payable audit, the focus shifts to uncovering unrecorded liabilities—an essential process to ensure comprehensive and accurate financial reporting.

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Search for Unrecorded Liabilities

One of the most critical components of accounts payable auditing is identifying unrecorded liabilities. Two common methods include:

1. Review of Subsequent Payments: Auditors examine payments made after the reporting period to ensure all liabilities were recorded. For example, if a payment in January relates to goods received in December, the liability should appear in the prior year’s records.
2. Examination of Open Purchase Orders: Open purchase orders are reviewed to verify whether associated goods or services were received and should have been recorded as liabilities. This step ensures completeness and prevents underreporting of expenses.

Once unrecorded liabilities have been identified and addressed, the next step to do is test the overall completeness of accounts payable to ensure that every liability is accurately captured and reconciled with supporting records.

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Testing the Completeness of Accounts Payable

Ensuring the completeness of accounts payable is critical to maintaining accurate financial records and identifying potential oversights. The process requires careful reconciliation and review to ensure all liabilities are fully captured. Here's how this can be done:

1. Reconciliation of Payables

The first step involves reconciling accounts payable balances with the general ledger. This means verifying that every recorded liability in the accounts payable system matches what is reflected in the general ledger. Even minor discrepancies can signal larger issues, such as unrecorded liabilities, duplicate entries, or errors in data entry.

For example, if a payment is recorded in the accounts payable system but not reflected in the general ledger, it may indicate incomplete or incorrect recordkeeping. Investigating these differences promptly ensures all financial obligations are accounted for accurately and reduces the risk of underreporting.

2. Supplier Statement Reconciliation

Supplier statement reconciliation is another vital step in testing completeness. This process involves cross-checking the balances reported by suppliers with internal records. 

For instance, if a supplier's statement shows an outstanding balance that isn’t reflected internally, it might indicate a missed invoice or an unrecorded liability.

To address this, auditors compare balances on supplier statements with the organisation’s accounts payable ledger.

Any discrepancies—such as missing invoices, incorrect amounts, or mismatched dates—should be flagged for resolution. This ensures all liabilities owed to suppliers are properly recorded, preventing future disputes or errors in financial reporting.

Helpful Read: Understanding the Importance of Business Spend Management and Its Tools

After ensuring all accounts payable transactions are accurately recorded and reconciled, the next focus is identifying vulnerabilities within the system to prevent fraud and strengthen internal controls.

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Evaluating Fraud Risks and Internal Controls

Fraud prevention is a key objective in accounts payable audits, as even small loopholes can lead to significant financial losses. Evaluating fraud risks and internal controls involves focusing on specific vulnerabilities within the system.

Detecting Duplicate Payments

Duplicate payments are a common issue that can occur due to clerical errors or fraudulent activities. Auditors need to check for duplicate invoices or payments by reviewing invoice numbers, amounts, and payment dates. For instance, two payments made for the same invoice number or identical amounts sent to the same vendor on different dates could indicate an error—or worse, deliberate manipulation.

These checks help identify and resolve overpayments quickly, ensuring vendors are paid correctly and preventing unnecessary financial losses.

Reviewing Internal Controls

Strong internal controls are essential for preventing unauthorised transactions and maintaining an efficient accounts payable system. Auditors assess controls such as:

• Approval workflows: Are payments approved by the appropriate personnel before being processed?
• Access restrictions: Are only authorised staff able to modify accounts payable records or process payments?

For example, if a single employee can both approve and process payments, the risk of fraud increases. Ensuring proper segregation of duties minimises such risks and improves accountability.

Flagging Unusual Transactions

Unusual payment patterns or irregular transactions can be red flags for potential fraud. Examples include:

• Large one-time payments that don’t align with historical trends
• Payments to unverified vendors or vendors with no clear business relationship

Auditors investigate these anomalies through observation, inquiries, and detailed reviews of the transaction history. Fraud detection tools can also assist in identifying suspicious activities based on predefined criteria.

Once fraud risks and internal controls have been evaluated, start preparing thoroughly to ensure the audit process runs smoothly and uncovers actionable insights.

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How to Prepare for an Audit?

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A smooth and effective audit process starts with thorough preparation. Here are practical steps to ensure readiness:

Organising Documentation

Begin by gathering and organising all necessary documents, such as:

• Invoices
• Purchase orders
• Receipts

Having these records readily available not only speeds up the audit process but also ensures auditors can review transactions efficiently without delays. A well-structured filing system—whether digital or physical—can make a significant difference.

Reviewing Internal Controls

Before the audit begins, evaluate the organisation’s internal controls to ensure they meet requirements. For instance:

• Are approval workflows consistently followed?
• Is three-way matching (invoices, purchase orders, receiving reports) used to verify payment accuracy?

Addressing gaps in these areas ahead of time minimises potential issues during the audit and demonstrates a commitment to financial transparency.

Conducting Pre-Audit Reconciliation

Reconciling accounts payable balances with the general ledger before the audit can help identify and address discrepancies proactively. For example, if a liability recorded in accounts payable is missing from the ledger, correcting this early prevents auditors from raising concerns during their review.

This step also allows the organisation to resolve minor issues internally without escalating them to a formal audit finding.

While thorough preparation is key to a successful audit, leveraging automation can take your accounts payable process to the next level, making audits more efficient, accurate, and reliable.

Related Read: Complete Guide to Corporate Card Reconciliation

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Why Choose Accounts Payable Automation?

Automation transforms the way organisations handle accounts payable, making audits more efficient and reliable. By reducing manual intervention, automation minimises errors and enhances accuracy. Here’s how automation can simplify your audit process:

• Automated Receipt Matching: Alaan’s AI matches receipts to transactions in real time, ensuring no record is missing or mismatched. This level of accuracy is essential for businesses looking to streamline operations. With process automation, businesses can achieve significant reduction in operational costs, saving both time and money.

You might also like: The future of AI in Finance: How is AI reshaping the financial landscape?

• Custom Approval Workflows: Set up hierarchical approvals that align with company policies, improving transparency and accountability.
• Seamless Integration: Alaan integrates effortlessly with leading accounting platforms like Xero and QuickBooks, providing real-time data syncing and eliminating the errors common in manual bookkeeping. This integration allows accounts payable teams to handle a greater volume of work efficiently. For instance:

In fully automated systems, an accounts payable professional (FTE) can process 23,333 invoices annually, compared to 10,853 invoices in partially automated setups and just 6,082 invoices in manual processes, according to the APQC.

• Fraud Prevention: Alaan’s AI-powered tools detect duplicate payments and flag suspicious activities, safeguarding businesses from financial loss. With 80% of accounts payable teams already leveraging some level of automation, Alaan’s advanced features take automation to the next level, offering robust fraud detection and streamlined workflows.

Embracing accounts payable automation isn’t just about convenience—it’s a proven strategy for improving efficiency, reducing costs, and scaling operations. 

Ready to experience the difference? Discover how Alaan can transform your accounts payable process today!

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Conclusion

Regular audits of accounts payable are crucial for maintaining financial accuracy, preventing fraud, and ensuring compliance. By implementing comprehensive audit procedures and leveraging automation tools like Alaan, businesses can streamline their audit processes, mitigate risks, and enhance financial transparency.

Proactively managing accounts payable audits not only safeguards company assets but also builds trust with stakeholders, ensuring long-term financial stability. Whether through detailed reconciliation or advanced AI-powered tools, an effective audit strategy is an indispensable part of sound financial management.

See how our automation tools can simplify your accounts payable audits and strengthen your financial processes!

Schedule a demo with Alaan today!