A small business owner’s guide to AP audits
“Audit.”
Just the mention of this word is enough to send shivers down any small business owner’s spine and keep them up at night. But an audit doesn’t have to be a sign that you’re in trouble with the IRS. An internal accounts payable (AP) audit, for example, can be a great tool to make sure your business payments are smooth and you aren’t overpaying or missing payments due to error or fraud.
In this article, we’ll cover what AP is, what an AP audit looks like, and how to use it to improve the way you do business.
What’s accounts payable?
Accounts payable or AP is an accounting term that refers to open bills or invoices for goods and services already provided to a business but not yet paid for. AP is typically due within 30-90 days, making it a type of short-term debt listed as a liability in your balance sheet.
Depending on a company’s size and structure, AP may be handled by a dedicated team, an external accountant, an in-house bookkeeper, an office manager, or even the owner. The responsibilities of whoever deals with accounts payable at a company include:
- Invoice management
- Three-way matching
- Invoice approval
- Making payments correctly and on time
- Follow-ups
What’s an AP audit?
In layman’s terms, an audit is just an inspection. It can be external, prompted by the tax authorities in the most dreaded example, or it can be internal. Internal audits are initiated by the company itself and are meant to examine its internal processes in order to improve them and ensure compliance and efficiency.
Accounts payable involves one of the most important functions of any business: money coming out. So, it’s crucial to periodically review it to ensure everything is in order. The process entails making sure that all invoices are properly recorded, handled, and paid out.
Even if you don’t work with an accountant on a regular basis, it may be a good idea to hire one to do your audit. This way, you’ll get a professional outsider’s perspective on how to handle this critical aspect of your business.
Why AP audits are important
Occasional accounts payable audits ensure your AP is recorded correctly and provide an accurate picture of your business’s liabilities that are used to calculate equity. An audit also helps show your business is run legitimately and by the book.
Major benefits include knowing your bills are paid on time, ensuring the process is smooth, and avoiding issues like:
- Duplicate payments
- Unrecorded liabilities, which result in a false bottom line
- Defaults and fines on missed payments
- Incompliance with tax and other legal regulations
Stages of an AP audit
There are four main stages to a successful accounts payable audit.
Planning
For an internal audit, the first thing you need to do is to establish its main goals and covered time frame. Then, assign auditing tasks within your team or hire external assistance and auditors, if needed.
Fieldwork
Gather all the necessary information and documents, including bills, invoices, payment records, receipts, balance sheets, purchase orders, bank statements, vendor lists, etc.
Once you have all the information, the auditor will review it to search for inconsistencies, errors, missed payments, or any other issues and inefficiencies in the way AP is handled in your company.
Due to the potential volume of data contained in these documents, the auditor will likely only review random samplings to get a representative picture of the company’s AP process.
Reporting
The auditor will create a report outlining what’s being done right and what needs to be corrected. Their suggestions may include digitizing your accounts payable process to eliminate errors and inefficiencies.
Follow-ups
Make the audit a periodic (preferably annual) habit for your business. This helps make sure recommendations and conclusions from the previous audit are implemented and all issues addressed.
Performing an audit every year also allows you to pinpoint potential problems in time before you file your annual reports.
How digital tools help simplify accounts payable audits
Using a digital payment tool like Melio makes your accounts payable process much smoother and easier to review. Here’s how:
Visibility
All your invoices are recorded in the same place for easy reference, and their payment status is always clear. This helps avoid mistakes and oversight. It also makes it easy to gather the necessary information for an audit.
Sync
With an online payment tool, you can sync your AP information with your accounting software, for more accurate bookkeeping. The status of each payment automatically appears on both platforms, saving you time and the need for manual dual input, which is prone to error.
Automation and scheduling
You can automate recurring payments and schedule payments to go out on time to ensure you never miss a payment because of inefficient processes.
Streamline your AP
Sign up for Melio today to improve your accounts payable process and make your life so much easier when it’s time for an audit.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.
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