Auditing is the examination and evaluation of an organization’s financial records and is usually done by a third party. It ensures financial records are accurate. The process follows stipulated standards that vary from one country to another. Auditing provides information to shareholders, creditors, customers, suppliers, partners, and government entities. The statements must include all financial activities with attention to accounts payable and accounts receivable.
Accounts Receivable Audits (AR)
Accounts receivable include the money your customer owes you for credited goods and services. It’s recorded as an asset since it’s converted to money which you use to run the business. Auditing involves a thorough examination of the accounts to ensure there’s no fraud.
The process of auditing receivable accounts may vary, but it must include:
- Inspecting customers’ orders- The auditor compares sent invoices with orders made by customers to ascertain the amounts are the same.
- Comparing receivable reports with grand total- This compares amounts in accounts receivable in the general ledger with the total receivables in the accounts receivables aging report to ensure they match.
- Matching invoices to shipping logs- The auditor checks whether shipments dates correspond to items in the shipping log.
- Confirming receivables- The auditor can contact customers to confirm unpaid accounts receivables.
- Reviewing receipts- The auditor may use receipts to confirm accounts receivable.
Accounts Payable Audits (AP)
Accounts payable refers to money your business owes the suppliers and is recorded as a liability. Accounts payable audit is a financial assessment of your company’s account payable records. It involves the AP department to ensure all end-of-term payables are recorded.
The process involves matching general ledger transactions to the numbers in your ledger. A standard AP audit procedure is as follows:
- Scheduling the audit- The auditor notifies your business of the audit and holds a meeting to discuss the standard operating procedures.
- Doing the fieldwork- The auditors check financial reports for discrepancies in recording and time periods.
- Final audit report- The auditor summarizes the findings of an audit report.
- Follow-up review- This happens one year later to ensure that recommendations are implemented.
Auditing accounts payable and accounts receivable is essential in identifying fraud or theft in a company. It helps keep straight records for partners, shareholders, and government entities. Although the procedures may vary, the aim is to improve financial accountability. It’s important to have a third party as the auditor to avoid conflict of interest.
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