Accounts payable recovery audits are critical examinations of the company’s financial statements and records. The audit aims to identify and rectify errors in payment processes by scrutinizing invoices, transaction records, and procedures. And here’s the big deal: Do you know they can also help you recoup some of your losses?
That’s right! By identifying and rectifying these financial discrepancies, companies can often recover funds that were otherwise lost or misallocated. So, if you’re curious about the potential benefits of an accounts payable audit then read on and learn the type of recovery you can expect to receive.
Accounts payable recovery audits are considered to be a best practice because they promise considerable recoveries, as well as insight into process breakdowns in the procure-to-pay process. On average, you can expect recoveries between 0.05% and 0.1% of accounts payable spend. While this is a very small percentage, an organization with $1 billion in annual spend would expect recoveries of $500,000 to $1 million. Even for small to medium-sized organizations with lower revenues, every dollar recouped can have a major influence on operations and growth.
The major goal of an accounts payable recovery audit is to recover cash lost due to overpayments and unrecognized vendor credits, but they provide other benefits as well. Audits detect and allow you to correct inefficiencies in processes, ultimately contributing to greater efficiency and production, risk reduction, and cash flow maximization.
You can expect different types of recoveries from an accounts payable audit. However, the recoveries depend on various factors such as the thoroughness of the audit. The more detailed the audit is, the greater the chance that you will be able to recover significant funds. Another factor is the accuracy of the records. If the records are complete and accurate, it facilitates the discovery of overpayments, duplicate payments, or unauthorized expenses. Efficiency of internal controls also plays a major role in determining the extent of recovery through accounts payable recovery audits. The audit may include:
Accounts payable recovery audits frequently identify missed discounts and rebates. The auditor thoroughly examines vendor agreements and purchase records to ensure that the available discounts and rebates are utilized by the company. The audit partner also makes sure that the discounts for early payments or bulk purchases have been calculated and applied accurately. The company can identify discrepancies through the audit and can work to recover missed discounts and rebates.
Another benefit of the accounts payable recovery audit is the identification and recovery of returned products. The audit reconciles inventory records with purchase and sales data. This helps to identify instances where products have been returned to vendors but refunds have not been processed. The audit ensures that the company is not bearing the cost of returned stock without receiving due compensation. It not only helps the company to recover funds but also improves the inventory management process.
In addition, the accounts payable recovery audit helps the organization to identify and rectify incorrect pricing. The auditor compares contracted pricing terms with actual invoiced amounts to identify any differences. This mitigates financial losses and adds to the overall value of the audit.
The audit team works to identify and recover overpayments during an accounts payable recovery audit. The recovery involves identifying the instances where payments exceed the amount owed to vendors. The audit helps to take action to reclaim those excess funds. The process requires the auditor to check the overpayments thoroughly. Once the overpayments are confirmed with the vendor, the audit team provides full audit trail for the situations to the client. The recovery process involves refunds, credits, or adjustments to future payments. However, the process should be backed by regular audit cycles to ensure accurate resolution and in order to prevent future errors.
There are instances where the invoices are paid more than once in error. Recovery of duplicate payments refers to getting those extra payments back. The process involves identifying the duplicate payments and communicating them to the vendors in order to rectify the error. The audit ensures that the overpaid amount is credited or refunded back to the company’s account. Reviewing the root causes of the identified duplicate payments helps to avoid such errors in future.
Vendor credits are typically due to the company as a result of overpayments, returned merchandise, or discounts which are not properly applied to invoices. Vendor credits can also arise from rebates, refunds, or adjustments for damaged or defective goods.
For instance, if a company returns a defective product to a vendor, the vendor may issue a credit to the company’s account. The value of the credit is the same as the value of the returned stock. Similarly, if a vendor offers a discount that was not applied correctly to an invoice, the vendor may issue a credit to rectify the error.
Vendor credits should be recorded correctly to ensure accurate accounting and financial reporting. The auditor should also monitor the company’s vendor accounts to identify and ensure that they are properly utilized. This will help to reduce expenses, improve cash flows, and strengthen company-vendor relationships.
By regularly reviewing AP processes and addressing identified issues, companies can improve their operations and adapt to ever-changing business environments.