Accounts Payable Review

Accounts Payable Review
<Insert Date>
Table of Contents
Objectives, Scope & Procedures Performed
Executive Summary
Detailed Issues & Observations
Appendices
Appendix A: General Background
20
Appendix B: Internal Control Scorecard
22
Appendix C: Best Practices Scorecard
23
Appendix D: Best Practices Details
24
Appendix E: Testing Summary
29
Appendix F: Performance Measures
32
Appendix G: Process Flowcharts
33
This report provides management with information about the condition of risks and internal controls at a specific point in
time. Future changes in environmental factors and actions by personnel will impact these risks and internal controls in ways
that this report cannot anticipate.
2
Source: www.knowledgeleader.com
Sample Internal Audit Report

Objectives
Determine if key financial and business controls exist and are operating effectively.
Assess the operating efficiency of the process.
Compare Companys practices to Best Practices, including performance measures.
Review performance measures used to monitor and improve the process.
Assess compliance with applicable corporate policies and procedures.
Identify opportunities for internal control and process improvements.
Scope
The scope of this audit includes a review of Accounts Payable processes, focusing on the following areas:
Invoice receipt.
Invoice approval process.
Matching of invoice to purchase order and to receiving information.
Prioritization of payments.
Use of early payment discounts.
Payment processing.
Record retention.
Reconciliations between general ledger, AP sub-ledger, and bank accounts.
Summary of Procedures Performed
Interviewed key management and personnel regarding the accounts payable processes.
Reviewed existing documentation of relevant policies and procedures.

Summary of Procedures Performed
Obtained an understanding of procedures and internal controls.
Discussed existing management plans to improve operations or internal controls.
Performed analysis on accounts payable transactions for the period (Month) XXXX through (Month) XXXX.
Documented the accounts payable process through high-level process maps.
Evaluated the effectiveness and efficiency of business processes against Best Practices.
Summarized observations and management action plans.
Executive Summary
Internal audit reviewed the Accounts Payable function in (Month , Year). The objectives of this review were to
obtain an understanding of the key administrative, operational and financial processes relating to these functions,
evaluate the adequacy and effectiveness of the associated internal controls and to identify opportunities for
process improvements.
Overall, the control environment was in need of improvement. At the time of our review, Management had identified
weaknesses in controls and had begun to implement plans to improve the control environment as well as the
efficiency and business effectiveness of the process. These plans are summarized on page 6. We noted some
additional areas where controls could be enhanced or added - these are summarized below.
See the Detailed Issues & Observations section of this report (pages 7 - 20) for a detailed discussion of all issues
identified in this review and the management implementation plan to address each issue.
Observations/Issues
See Page
Timing
Q1,
XXXX
1.
Purchase requisition approval process is not consistently followed (X of XX approvals examined

were completed by personnel not authorized in the Approval List).
2.
Review of purchasing card transactions should be strengthened (we noted numerous

exceptions in our testing).
3.
Invoices should be recorded and processed on a timely basis (we noted numerous exceptions
in our testing).
4.
Not all receipts to support reimbursement of T&E expenses were submitted as required by
corporate policy (X reports out of XX tested did not contain all documentation).
10
Q2,
XXXX
5.
Password security for check printing applications does not conform to the Computer Security,
Audit and Control Policy.
11
Q4,
XXXX
6.
Unit As petty cash ($X,XXX) balance is larger than necessary (management subsequently
decided to eliminate the fund)
12
Q4,
XXXX
Priority:
5
Priority
Low
Medium
Q2,
XXXX
Q1,
XXXX
High
Executive Summary (Contd.)

Observations/Issues
Priority
See Page
Timing
EXISTING MANAGEMENT PLANS

7.
Policies and procedures for key AP processes (e.g.. Wire transfers, signature approvals, check
signing, p-cards) should be formally documented and updated.
13
8.
Invoice processing efficiency is not optimal due to a high volume of low-dollar invoices (XX% of
payments are under $XXX and account for less than X% of dollar value). Increased use of pcards, summary invoicing and invoiceless processing should be considered.
14
9.
Excessive numbers of open purchase orders need to be closed (of XX,XXX open POs,
approximately X% are current)
15
Q2,
XXXX
10.
Duplicate vendors exist in the vendor master file (due to access issues, which have now been
resolved).
16
Q2,
XXXX
11.
Outstanding checks and reconciling items should be resolved in a timely manner (there is an
unreconciled difference of $XX,XXX and outstanding checks totaling $XX,XXX from XXXX and
XXXX)
17
Q1,
XXXX
12.
Purchasing card limits should be followed or revised if they are not appropriate.
18
Q1,
XXXX
13.
Credit memos (for returns, etc.) need to be properly communicated to appropriate AP personnel
and should be resolved in a timely manner (there are items dated to XXXX).
19
Q1,
XXXX
14.
Performance measures are not utilized to monitor the AP process
20
Q1,
XXXX
Priority:
6
Low
Medium
Q1,
XXXX
Q1,
XXXX
High
Detailed Observations and Issues
Observations/Issues
Management Action Plan
1. Purchase requisition approval process is not

consistently followed.
Purchasing approval thresholds are authorized by
management and documented in the Approval Signature
List. These thresholds are set up in the System by local
systems personnel. Appropriate level of approval must be
obtained in the system to generate a purchase order (PO). At
the processing payment stage, AP personnel perform
matching and rely on the front end controls that approvals
have been obtained for the purchases.
Of the XX purchase requisitions we tested we noted the
following variances from policy:
<Insert number> (X%) of the purchase requisitions were
authorized by personnel whose authorization limits were not
contained in the Approval Signature List.
<Insert number> (X%) of the purchase requisitions were
approved by personnel whose approval limit was below the
invoice amount. The limits contained in the System were not
consistent with documented and approved thresholds as
contained in the Approval Signature List.
Business Impact: Invoices might be processed and paid
without proper authorization. Checks might be issued without
proper/accurate approval.
A. Management should formalize Signature Authority

policy and the Approval Signature List to clearly
define approvals required for different types of
purchases. (See Observation 7).
B. Management should ensure local systems
personnel are granting systems approval limits
according to those formally authorized.
C. Management should perform a systems audit to
reconcile approval thresholds between the
Approval Signature List and limits set up in the
System.
Owner/Timing
(Owner Name)
Q1, XXXX
Observations/Issues
2. Review of purchasing card transactions should be

strengthened.
Approximately XX company employees use purchasing
cards (p-card) for the acquisition of lower cost goods and
services. The process to review p-card expenditures
currently resides with local office managers .
The Purchasing Manager of US Contracts and Agreements
sends p-card transaction reports to local managers for
review monthly. Managers are not required to sign and
return reports evidencing review and approval. Negative
confirmation serves as approval.
Although cardholders are responsible for sending reconciled
monthly p-card activity logs to supervisors for review and
signature, our testing of XX logs indicated the following:
Two activity logs were not submitted for approval.
One supervisor approval was verbal and not
documented.
One approval was typed in by employee without actual
approval from supervisor.
Three had missing receipts.
One had a transaction over the $X,XXX per transaction
limit.
Also see Observation 12 regarding non-compliance with pcard procedures and disbursement policy.
Business Impact: Increased risk of inaccurate and
unauthorized processing of P-card expenditures.
A. Management should require managers to sign and

return p-card transaction reports evidencing
review and approval.
B. Management should review all transactions and
receipts and then sign activity logs to document
review for accuracy, completeness and
appropriateness of expenditures.
Owner/Timing
(Owner Name)
Q2, XXXX

Observations/Issues
3. Invoices should be recorded and processed on a timely
basis.
Invoices are received at local sites for matching and
vouching for disbursement.
During our testing of five vendor statements, we noted that
in one vendor statement, XX of the XX outstanding invoices
(dated <Insert Date>, XXXX through <Insert Date>, XXXX)
were not recorded in the AP system as of <Insert Date>,
XXXX. Discussions with AP personnel indicated invoices
have been received but not processed.
Also, analysis of timeliness of payments (see page 5)
indicated approximately X% of payments generated between
<Insert Months> XXXX were paid after XX days of invoice
date. Discussions indicated these invoices related to
inventory purchases where buyers have been working with
vendors to resolve disputes.
Business Impact: Risk of recorded liability being
understated. Risk of forgone opportunity for early payment
discounts.

A. AP personnel should ensure all invoices and
payments are processed timely.
Owner/Timing
(Owner Name)
Q1, XXXX

Observations/Issues
4.
Not all of the receipts to support T&E

reimbursement of expenses were submitted as
required by corporate policy.
Travel and Entertainment (T&E) Expenses
Travel Policy (Finance Policy XX) states the companys
requirements for the submission of supporting
documentation and receipts. It also requires employees
to file T&E expense reports no later than XX days after
completion of each trip.
In our testing of XX expense reports, we noted three
expense reports that did not contain all required receipts.
Owner/Timing
A. The Expense Report Processor should review

expense reports for all required receipts.
B. Management should determine appropriate
procedures for reviewing petty cash items
submitted via expense reports. New procedures
should be documented in the formal policy.
(Owner Name)
Q2, XXXX
Petty Cash Expenses

As of September XXXX, only XX plants have petty cash.
Personnel at sites with no petty cash are requesting
reimbursements via expense reports. The current
practice for expense reports is to review for receipts if
report total (excluding airfare and mileage) exceeds
$XX. Management should revise the current policy and
procedures to ensure receipts are submitted, proper
approvals are obtained, and adequate review is
performed for petty cash items submitted via expense
reports.
Business Impact: Unauthorized expense
reimbursements. Potential for reimbursement of nonbusiness expenses. Potential tax-related issues due to
lack of documentation.
10
11
Observations/Issues
Owner/Timing
5. Password security for check printing applications does

not conform to the Computer Security, Audit and Control
Policy.
The current Computer Security, Audit and Control Policy
requires unique user IDs and passwords. Passwords are to
be a minimum of six characters and must be a combination
of alpha and numeric characters. Passwords are to be
changed at least every XX days.
The AP department uses (3rd Party Software) for printing AP
checks. Two users of the AP group share a user ID and
password. The password is not required to be changed on a
regular basis.
The Expense Report Processor uses (3rd Party Software) for
printing expense checks. The password is not required to be
changed on a regular basis.
Business Impact: Lack of individual accountability. Risk for
unauthorized access to (3rd Party Software). Potential
financial losses due to AP check frauds.
A. Administrators for the applications should

determine if the software has the capability of
required password changes.
B. Management should ensure compliance with
corporate policy or otherwise document and obtain
approval for exceptions.
(Owner Name)
Q4, XXXX
12
Observations/Issues
Owner/Timing
6. Unit As petty cash balance appears to be larger than

necessary.
As of <Insert Month> XXXX, only five units have petty cash.
All locations have between $XXX and $X,XXX in their petty
cash fund with the exception Unit A. Discussions with the
Accounting Assistant indicated Unit A has $XX,XXX in petty
cash. This amount appears to be excessive when compared
to other locations. Additionally, the Accounting Assistant
indicated that $XXX to $XX,XXX would be sufficient for
monthly petty cash needs.
Business Impact: Increased exposure of cash theft
A. After managements assessment of the need for a

petty cash fund in Unit A, a decision was made to
eliminate the petty cash fund by (Month, XXXX)
(Owner Name)
Q4, XXXX
13
Observations/Issues
Existing Management Plan
Owner/Timing
7. Policies and procedures for key AP processes should be

formally documented and updated.
There is no formal AP policy. Certain policies and
procedures used by the AP department exist but are not
formally documented. These include the following:
Draft policy
Disbursement (Wires).
Disbursement (Checks and Other).
Signature Authority.
Informal procedures Purchasing Cards
Informal policy Approval Signature List
The Corporate Travel policy contains outdated information
(e.g. mileage reimbursement amount). Also, it does not
specify the dollar threshold ($XX per IRS) for submitting
receipts other than meal expenses.
In our testing, we noted five (XX%) purchase requisitions
were not properly authorized. These were signed by local
employees whose authorities are not documented in the
Approval Signature List. (see also issue number 1)
Business Impact: Lack of clearly defined roles and
responsibilities. Loss of knowledge in the event of employee
illness or turnover. Difficulty in training new personnel.
Difficulty in assessing accountability. Inconsistent
understanding and application of policies and procedures.
A. The Financial Systems Manager is aware of the

issue. Senior management is in the process of
drafting and issuing these policies as part of the
Corporate Policy Initiative. Senior management
has plans to complete this initiative by the end of
Q2, XXXX.
B. Management should communicate the formal
policies to all related personnel.
C. The Financial Systems Manager plans to update
the Corporate Travel policy and instructions in the
standard expense reporting Excel worksheet.
D. Management should post relevant policies and
procedures on the intranet for accessibility by all
personnel.
E. Management should implement a periodic review
process to ensure policies and procedures are
being consistently followed by AP personnel.
(Owner Name)
Q1, XXXX
14
Existing Management Observations/Issues
Owner/Timing
8. Invoice processing efficiency is not optimal due to a

high volume of low-dollar invoices.
In the period of July through <Insert Month> XXXX, XX% of
all payments processed were less than $X,XXX, but
accounted for less than X% of the total dollar value of
invoices. See appendix A for the results of the data
analysis.
Approximately XXX employees use purchasing cards (pcards). The use of p-cards is a proven best practice that has
been successfully used to reduce costs and cycle times for
low dollar transactions. Opportunities exist to increase the
efficiency of the procurement function by expanding the
utilization of p-cards and/or requesting summary invoicing
from vendors with whom a large volume of transactions
occur at low dollar amounts.
Business Impact: Inefficient processing. Increased
processing costs related to issuing, reviewing and clearing
checks.
A. Management is aware of the issue and plans to

increase the use of p-cards to decrease volume of
low-dollar invoices.
B. Consider benchmarking performance by
quantifying the percentage of items or dollars
expensed to p-cards and volume/value of invoices
processed.
C. Consider increasing the use of summary invoicing
with key vendors on a larger scale in order to
combine numerous invoices for efficient payment
purposes.
D. Consider implementing invoiceless processing
with key vendors. Payment will be based upon
receipt of goods and merchandise at agreed-upon
prices rather than receipt of an invoice.
Invoiceless processing requires extensive
employee training, upfront system edits, accurate
purchase order and receiving processes and clear
exemption reporting. The benefits could be lower
payable transaction costs, simplified material
controls, fewer AP personnel per XX million of
disbursements and improved control over AP.
(Owner Name)
Q1, XXXX
15
Owner/Timing
9. Excessive numbers of open purchase orders need to be

closed.
Review of open commitments report indicate excessive
purchase orders are currently open. Some of these date
back to XXXX.
Discussions with the Financial Systems Manager indicated
he is aware of the issue and there appears to be XX,XXX
open POs, of which only approximately X% are current.
Business Impact: Risk of potential liability from purchase
order commitments. Complications for management in
deleting duplicate vendors (see Observation 10).
A. Financial Systems Manager indicated he is aware

of the issue and that research will be performed to
close the open POs.
(Owner Name)
Q2, XXXX
16
Owner/Timing
10. Duplicate vendors exist in the vendor master file.

Prior to April XXXX, Local plant personnel had access to the
vendor master file to add, change, and delete vendors. This
open access led to duplicate vendors being set up.
Discussions with the Financial Systems Manager indicated
management is aware of duplicate vendors in the system.
As of April XXXX, access to the vendor master database had
been restricted to four personnel. All new vendor requests
must be approved by the Financial Systems Manager and
added by AP personnel.
Business Impact: Inefficiency in processing payments.
Difficulty in analyzing vendor-specific AP data. Potential for
inconsistent contract terms with same vendor.
A. Upon closing of the non-current open POs (see

Observation 9), the AP department will go through
the vendor master file and delete duplicate
vendors.
(Owner Name)
Q2, XXXX

11. Outstanding checks and reconciling items should be
resolved in a timely manner.
AP accounts, disbursements, and bank accounts are
reconciled by the accountant on a monthly basis.
In the August XXXX bank reconciliation, $XX,XXX (X% of
bank balance) was identified as prior unknown variances that
require further research. Also, there were outstanding
checks of $XX,XXX (X% of AP bank balance) from XXXX
and XXXX.
Business Impact: Potential for inaccurate cash balances.
Risk for undetected AP check fraud.
17
Owner/Timing
A. Management is aware of the issue. The Legal

department is performing research to determine
the legality of voiding outstanding checks that are
over six months old.
B. B. The Accountant is performing research on the
unreconciled balance.
(Owner Name)
Q1, XXXX

12. Purchasing card limits should be followed or revised if
they are not appropriate.
The draft policy on Disbursements (Checks and Other)
states spending limits on purchasing cards (p-cards) are
$X,XXX per transaction and $XX,XXX per month. The PCard procedures also states the $X,XXX per transaction
limit.
Per review of the American Express billing summary, we
noted numerous employees have spending limits over the
policy amounts. During our testing of ten activity logs, we
noted one log that had a transaction over the $X,XXX per
transaction limit.
Discussions with the Purchasing Manager of US Contracts
and Agreements indicated the limits are determined by
employees supervisors based on actual needs in relation to
job positions.
Business Impact: Increased risk of unauthorized spending.
18
Owner/Timing
A. The Purchasing Manager of US Contracts and

Agreements indicated the p-card procedure and
each employees limits are scheduled to be
reviewed in November. The procedure will be
changed to reflect "exceptions" and limits will be
adjusted based on actual use.
(Owner Name)
Q1, XXXX

13. A process should be established to communicate Credit
memos to AP personnel.
Discussions indicated that returns are not always
communicated to AP and there is no individual formally
designated the responsibility to follow up with vendors to
ensure returns and credits are properly and timely
processed. Hence, credits may not be applied appropriately.

A. Continue to work with local management and
vendors to resolve credit balances.
Owner/Timing
(Business Owner)
Q1, XXXX
For credit memos that have been applied, the Financial

Systems Manager sends a summary of aged credit balances
to local management requesting follow up. As of <Insert
Date>, XXXX, there is a net debit balance of $XXX,XXX (X%
of total AP balance) for invoices outstanding and credit
balances over XX days. A number of these items date to
XXXX.
It has been communicated and recommended that for
vendors where the credit memo is aged and that the
company has not done business within the past XX months,
a request should be sent to vendor for payment. It has also
been noted that certain credit balances are with vendors who
have gone bankrupt; hence, reserves should be booked
against those amounts.
Business Impact: Risk of inaccurate AP balance. Cash
balance is not maximized.
19
20
Owner/Timing
14. Performance measures are not utilized to monitor the AP

process.
The AP department has not identified a clear set of key
performance measures to monitor AP activities and to
facilitate process improvements.
Periodically, AP aging reports, check registers, and account
reconciliations are reviewed by management. The Financial
Systems Manager is also developing tools to analyze the
timeliness of invoice processing. Discussions indicated
plans to work with the Treasury department to estimate
outgoing cash flows related to disbursements to facilitate
proper cash management.
See Appendix F for a list of key performance measures.
Business Impact: Lack of accountability. Difficulty in
identifying root causes of issues. Lack of relevant
information to improve performance. Opportunity cost for
improved cash management.
A. Management is working with Treasury with a focus

on outgoing cash flow aging.
B. Management should develop performance
measures and standardized reports to monitor
and improve the AP process.
C. Management should communicate performance
measure goals to all employees and include them
as part of the annual employee goal setting / and
review process.
D. Management should review actual performance
against goals on a regular basis and make
adjustments or changes to goals as needed.
(Owner Name)
Q1, XXXX
Appendices
Appendix A: General Background

AP transactions for the period from July to September XXXX were analyzed for top vendors, processing timeliness, and
dollar amounts per check. Data was obtained from company accounting system.
Processing Timeliness
Amount Per Payment
22
The chart above shows the average processing time of

received invoices. Timeliness is based on the lag
between invoice and check dates.
The chart above shows the average processing time of

received invoices. Timeliness is based on the lag
between invoice and check dates.
The AP department processes and pays more than XX%

of received vendor invoices in 10 days or less.
The AP department processes and pays more than XX%

of received vendor invoices in XX days or less.
Approximately XX% of invoices are processed and paid

within XX days. Approximately X% of invoices are paid
after XX days (See Observation #3).
Approximately XX% of invoices are processed and paid

within XX days. Approximately XX% of invoices are paid
after XX days (See Observation #3).
Appendix A: General Background (Contd.)

Top 10 Vendors
Note: P-card expenses are included in

the analysis. The total P-card
payments made during this period
amounts to US$XX,XXX.
AP Aging As of <Insert Date>
23
Appendix B: Internal Control Scorecard

The following matrix lists process controls present within the Accounts Payable process. An evaluation of the companys
process is noted in each instance. Controls were evaluated as follows:
Adequate
Improvement Recommended
Not Adequate
Where possible improvements can be made, a reference has been made to the Issues and Observations section, where
managements change implementation plan is described, along with the responsible party and estimated implementation
timing
Internal Control Practice
Rating
1.
Policies and procedures are documented and followed
2.
Duties are adequately segregated
3.
AP and cash disbursements are properly matched to underlying documents and authorized
4.
Transactions (liabilities) are recorded on a timely basis
5.
Recorded AP balances are substantiated and evaluated
6.
AP records and cash disbursements are safeguarded and numerically controlled
7.
AP and cash disbursement transactions are reliably processed and reported
8.
General ledger accounts, AP accounts, disbursements and bank accounts are reconciled on a timely basis,
and reconciling differences resolved timely
Issue Ref.
3, 4, 5, 7,
12
NA
1, 2, 4
24
9.
Costs are reduced as much as possible.
3, 4, 13
9, 12, 13,
14
5, 6, 10
1, 2, 4, 9,
10
11
6, 8, 9, 10
Appendix C: Best Practices Scorecard

As part of this review, the companys practices were benchmarked against the Best Practices. An evaluation of the
Accounts Payable process is noted in each instance. Best Practices were evaluated as follows
Good - Best Practice currently
in use.
Moderate Use - Improvement possible

in order to achieve Best Practice status
Limited/Some Use - Improvement

recommended to improve process
efficiency/effectiveness
If improvement can be made, a reference has been made to the Issues & Observations section, where managements change
implementation plan is described.
Best Practice
1.
Strengthen cash flow by explicitly managing payment dates and terms.
2.
Manage communication with suppliers to establish mutually agreeable practices.
3.
Analyze money, quality and time in the current AP process
4.
Implement rigorous, pervasive policies to protect against disbursement fraud and overpayments
5.
Establish controls appropriate to the risk and value of corresponding transactions
6.
Reduce the volume of AP transactions
Rating
Issue Ref.
14
13
14
5,7
1
8,9
25
7.
Reduce processing costs and cycle times for smaller, recurring invoices as well as T&E report processing
8.
Integrate AP with related operations
9.
Process invoices and checks electronically
6
6
8,10
1
8
Appendix D: Best Practices Detail

Best Practice
1. Strengthen cash flow by explicitly managing
payment dates and terms
Negotiate lenient credit terms with supplier.
Reduce late fees and interest charges with ontime payments.
Pay early to take advantage of prompt-payment
discounts.
Define cash flow objectives and set specific
targets e.g. average days in accounts payable or
accounts payable turnover.
Benefits include:
Provides more flexibility to the company.
Maximize cash flows resulting from lower interest
costs and liquidity improvements.
The company has negotiated standard payment terms

and discounts with major vendors.
As of <Insert Month> XXXX, the AP department has
implemented new system functions to enable printing
of checks that have been processed and are eligible
for early payment discounts.
The company does not calculate monthly cost or
savings resulting from AP functions. The AP group
does not use specific performance measures, such as
average days in AP and AP-turnover, to improve the
process.
2. Manage communication with suppliers to

establish mutually agreeable practices.
Evaluate cash flow circumstances and agree to
realistic payment terms.
Renegotiate the terms if previous ones cannot be
met.
Solicit suppliers advice on AP improvements and
provide them with feedback on their role in the
payment process.
Benefits include:
Enables quick and straightforward work of
processing payment.
The reciprocal arrangement works well for all
parties
Purchasing determines payment terms up front when

contracting with a vendor. In most cases, standard
terms are negotiated to be net xx days.
Returns and potential credit memos are not always
communicated to AP. Credit memos have not been
resolved in a timely manner.
Rating:
26
Company Practice
Good
Moderate Use
Evaluation/Reference
14
13
Limited/Some Use
Appendix D: Best Practices Detail (Contd.)

Best Practice
Company Practice
3. Analyze money, quality and time in the current

AP process
Map the AP process and transaction volumes.
Measure the companys invoice-processing
capacities, pinpoint bottlenecks in the workflow to
create plan for process improvement.
Benefits include:
Provides information on bottlenecks and repetitive
errors that would allow for process efficiency
improvement.
The AP department understands on a high level how

many invoices and checks are processed under the
existing operational procedures.
However, there are no performance measures to allow
for process efficiency improvements.
4. Implement rigorous, pervasive policies to

protect against disbursement fraud and
overpayments.
Adopt a code of ethics throughout organization.
Secure sensitive financial property.
Segregate duties in purchasing, receiving, and
finance.
Carefully test and monitor computer system
changes and passwords.
Benefits include:
Reduces possibility of financial fraud
Code of ethics are signed and renewed annually.

Purchasing, receiving and finance duties are
segregated. The AP department also keeps duties
such as disbursing funds and reconciling bank
accounts segregated. Physical limits to sensitive
financial properties such as check stock and check
printing facility are in place. The AP department works
in partnership with the IT group to implement changes
to AP systems.
However, password changes for check printing
applications do not conform to corporate policy. Also,
there is no formal AP policy.
Rating:
27
Good
Moderate Use
14
5, 7
Limited/Some Use

Best Practices
5. Establish controls appropriate to the risk and
value of corresponding transactions
Set appropriately high threshold for accounts
payable proofreading, that is, checking the
arithmetic on invoices.
Set appropriately high thresholds for supervisory
approvals.
Some companies eliminate invoices relying on
invoice approval and match purchase orders with
receiving information to create of vouchers.
Benefits include:
Reduction of non-value added activities in the
process e.g. error correction.
Builds in quality and customer satisfaction.
The company has set purchase requisition approval

thresholds according to nature of purchase and
personnel position. However, thresholds need to be
updated and correspond to limits set up in system.
Also, Matching criteria are set up in system when
generating a purchase order.
Check registers are reviewed by AP personnel and
Financial Systems Manager periodically.
6. Reduce the volume of accounts payable

transactions
Implement purchasing card programs.
Reduce number of invoices per supplier by
using summary invoicing.
Benefits include:
Reduces volumes of transactions and
paperwork
The company has implemented a purchasing card

program. However, per review of payment details, we
noted approximately XX% of payments generated in
three months were for invoices below $X,XXX
Rating:
28
Company Practice
Good
Moderate Use
8, 9
Limited/Some Use

Best Practices
7. Reduce processing costs and cycle times for
smaller, recurring invoices as well as T&E report
processing
Reduce number of active vendors.
Consolidate small invoices and process as bulks.
Utilize electronic banking system for recurring
costs.
Streamline invoice processing procedures.
Benefits include:
Reduction of AP processing costs.
Allow more time for value adding activities.
The company has set purchase requisition approval

thresholds according to nature of purchase and
personnel position. However, thresholds need to be
updated and correspond to limits set up in system.
Also, Matching criteria are set up in system when
generating a purchase order.
Check registers are reviewed by AP personnel and
Financial Systems Manager periodically.
8. Integrate accounts payable with related

operations
Centralize accounts payable operations.
Integrate the accounts payable function with
purchasing, receiving, and treasury by using
integrated software programs and shared data
files.
Benefits include:
Process that operates with fewer people while
handling a large volume of transactions in all
related areas.
Eliminates duplication of functions.
The companys AP function is decentralized. There

are local AP personnel at plants to process invoices.
The AP department is the central location to generate
disbursement checks.
Purchasing and receiving functions are in the
accounting system. Two/three way matches are also
performed in the System
Rating:
29
Company Practice
Good
Moderate Use
6
8, 10
Limited/Some Use

Best Practices
Company Practice
9. Process accounts payable electronically.

AP and purchasing periodically review vendor lists
and banks for EDI candidates.
All AP personnel receive comprehensive training
to utilize EDI effectively.
Feedback mechanisms are in place with EDI
partners to review goals/objectives and generate
improvement ideas.
Benefits include:
Reduces non-value added steps in the process
creating a more efficient process.
Electronic data transfers reduce the cost of
generating checks and protecting them from
fraud.
Eliminates the cost to store data in the files and
improves the efficiency of search.
Many aspects of the AP function are still manually

driven. The company pays most of its suppliers with
paper checks instead of using an electronic system.
There is also no integrated procurement system linked
to their vendors (EDI).
10. Use performance measures to achieve overall

Accounts Payable efficiency improvements
Measure AP process efficiency and
effectiveness by using appropriate performance
measures.
Reward employees demonstrating efficiency
improvements.
Set up incentives for quality and efficiency
improvements.
Benefits include:
Improved efficiency in AP process.
Heightened employee morale.
The AP department has not established a set of key

performance measures to monitor the AP activities.
Rating:
30
Good
Moderate Use
6
8
6
14
Limited/Some Use
Appendix E: Testing Summary

The matrix below outlines testing performed and related results. Samples were randomly selected from July through
September XXXX data.
Testing Performed
31
Purpose
Observations
1. Monthly vendor statements

Sampled X vendor statements to
verify all invoices/ liabilities are
recorded accurately and timely
The tests were performed to evaluate the

following:
Accuracy of recorded liabilities
Completeness of recorded liabilities
Timeliness of recording transactions
2. Expense reports
Sampled XX expense reports to review
for the following:
Supporting documentation
Proper approval
Lag time between completion of trip,
submission of expense reports, and
processing of reimbursements
Existence of documentation
Existence of approval
Timeliness of submitting expense reports
and processing of reimbursements
3. Petty cash
Sampled XX petty cash
reimbursement requests to review for
the following:
Supporting documentation.
Proper approval.
Existence of documentation.
Existence of approval.
We noted in one (XX%) vendor statement, XX

(XX%) of the XX outstanding invoices listed
were not recorded in the AP system
See Observation 3
We noted the following exceptions:

<Insert Number> (XX%) expense reports
had missing receipts.
<Insert Number> (X%) was not processed
timely. This time report was for a
terminated employee and was approved by
corporate after being rejected by AP
See Observation 4
No exception noted
Appendix E: Testing Summary (Contd.)

Testing Performed
4. Reconciliations
Reviewed the latest AP reconciliation
for AP system postings vs. actual GL
postings.
Reviewed the latest AP account bank
reconciliations and determine if the
balances tied to the GL.
Purpose
following:
Accuracy of data.
Existence, timeliness and completeness of
reconciliation.
Existence of management review
Observations
5. Invoices
Sampled XX invoices to review for the
following:
Purchase requisition approval.
Invoice approval.
Two/three way matching.
Payment of applicable taxes.
Existence of approval for purchase.

Existence of approval for payment.
Accuracy of receipt and payment.
Existence of supporting documents.
Existence of taxes paid
32
In our review of the August XXXX AP bank

reconciliation, we noted the following:
Unreconciled items of $XX,XXX (XX% of
AP bank balance) are identified as
requiring further research.
Outstanding checks of $XX,XXX (X% of
AP bank balance) from XXXX and XXXX
See Observation 11
We noted the following:

<Insert Number> (XX%) were not properly
authorized.
<Insert Number> (XX%) were approved by
personnel whose approval limit was below
the invoice amount.
<Insert Number> (XX%) were not provided
for testing.
See Observation 1.
Appendix E: Testing Summary (Contd.)

Testing Performed
6. Purchasing card expenditures
Sampled XX purchasing card activity
logs to review for the following:
Proper approval.
Payment of applicable sales taxes
7. Potential duplicate payments

Sampled XX transactions to review for
the following:
Duplicate payments
33
Purpose
following:
Existence of documentation.
Existence of approval.
Existence of taxes paid.
Validity of payments of same amounts.
Observations
We noted the following:

<Insert Number> (XX%) activity logs have
not been submitted for approval.
<Insert Number> (XX%) supervisor
approval was verbal and not documented.
<Insert Number> (XX%) approval was
typed in by employee without actual
approval from supervisor.
<Insert Number> (XX%) had missing
receipts.
<Insert Number> (XX%) had a transaction
over the $X,XXX per transaction limit.
<Insert Number> (XX%) were not provided
for testing.
See Observations 2 and 10
No exception noted
Appendix F: Performance Measures

The following matrix shows key objectives for the AP process, the outcome measures associated with each objective and
the activity measures that drive each outcome measure. The list provides a starting point from which the company may
select performance measures to improve the process.
Key Objectives
Strong cash flow
Accurate invoice
payments
Cost to finance accounts

payable
Number of accounts payable

transactions with errors
34
Late fees and interest charges.

Amount of lost prompt-payment discounts
Average number of errors on invoice vouchers.

Number of duplicate payments and overpayments.
Percentage of checks processed manually.
The percentage of invoices that the company processes via EDI or an
electronic banking system.
Average days in accounts

payable
Average number of days to edit, review, and approve an invoice.

Percentage of invoices edited.
Percentage of invoices reviewed by a supervisor or managers
Capacity for processing

invoices
and payments
Supplier satisfaction as
reported on surveys
Percentage of invoices paid on time.

Number of supplier inquiries.
Average number of days to resolve supplier requests and inquiries
Efficient systems with

adequate capacity
Effective supplier
relationships
Activity Measures
Outcome Measures
Number of suppliers that use invoiceless processing.

Number of suppliers that use summary invoicing.
Percentage of purchases on purchasing cards.
Percentage of payments that the company makes with electronic banking
Appendix G: Process Flowchart Invoice Processing

Input Invoice into
System
Generate PO
Employees generate a purchase requisition

in the system. (See Observation 10)
Employees reference the Authorization Level
Policy to determine the authorized party for
the amount and type of expenditure, and
enter it into the indicated field.
Requisitions are routed to the indicated party
for approval.
The System requires approval from
personnel with the proper authorization level
for the dollar amount and type of purchase.
(See Observation 1)
When approved, requisitions are
automatically routed to the buyer.
The buyer generates the PO, indicating the
supplier, delivery terms, and whether the
purchase is for stock or non-stock items.
(See Observation 9)
The PO is electronically numbered by the
system.
A 2-way matching is designated for
professional services; a 3-way matching is
designated for raw materials.
AP maintains a master vendor/supplier list,
and each facility has its own vendor list.
(See Observation 10)
Buyers fax the POs to vendor. The buyers
are responsible for ensuring on-time delivery
for the materials that they order.
Approved invoices are verified for an

authorized signature before being entered
into the System.
Invoices are bundled for entering into the
System. Invoices processed are manually
added up and stapled to a tape with the
total amount. (See Observations 3 and 8)
Local AP personnel enters quantity
received and billed data into the System.
AP also enters the batch total for
reconciliation.
The matching procedure is performed
automatically in the System once invoice
and receiving data are entered.
The System reconciles the batch total to
the tape total.
As invoices are vouched and matched in
the System, they are electronically routed
to AP for disbursement.
Petty cash receipts are required for all
expenses and reviewed by local
supervisor. A summary is sent to AP for
periodic reimbursement. (See Observation
6)
P-card logs are reconciled and reviewed
by managers. Monthly, Purchasing
Manager, US Contract and Agreement
uploads data to GL for payment and
reconciles GL and source. (See
Observations 2 and 12)
Generating Payments
Checks are run every Monday.

The Select-to-Pay function
automatically selects all invoices
eligible for payment based on the
payment due date, discount due date,
and completed matching.
Select-to-Pay also lists overdue
invoices and credits. (See
Observation 13)
Check stock, the signature card, and
software specific diskette are kept in
the AP room that is locked.
The processor prints checks on (3rd
Party Software) Payment Solution.
Two processors are allowed to print
checks under one user name. The
password is not changed. (See
Observation 5)
The first and last check in the batch is
verified against the information on the
System.
Physical checks are sent to vendors
via mail. Back up documentation is
scanned and stored.
Control Points In Place:
Internal control point (manual)

Internal control point (system based)
Control Weaknesses:
35
Internal control weakness

Process Inefficiency
Appendix G: Process Flowchart Expenses Reporting

Expense Report
Approval
Employees enter their travel and

expense report in a standard Excel
worksheet.
Manager approval is required
through e-mail or a written signature
for a total expense amount over
$1,000, excluding mileage and
airfare.
T&E reports are e-mailed weekly to
Expense Report Processor (ERP).
The Corporate Travel policy states
requirements for meal receipts, but
not for other expenses. (See
Observation 7)
Expense Report
Processing
Expense Report
Posting
AP saves each received T&E report

by employee number in a AP Expense
Report file, and prints out a hard copy
of the report to store in a drawer until
it is matched with the receipts.
ERP manually reviews T&E for input

errors.
Receipts that are received in the mail

are date stamped and filed
alphabetically in a drawer. Each
employees T&E report is manually
matched against the receipts and
stapled together. (See Observation 4)
Every Tuesday, AP batches the

reports in groups of 15 to enter into
the expense system.
ERP sets up a reconciliation in Excel

to match against the number of items
and total dollar amount to the
Balancing Control Register. This is
printed out and attached to the batch.
AP uploads the batch every Tuesday

to be transmitted. If there are any
errors, an error report is generated.
The T&E file is uploaded to the GL

and reconciled to Proof by Pay
Report.
Every Thursday the T&E file is

downloaded and moved into the
check printing software. ERP
enters a password and prints the
checks to be mailed out on Friday.
(See Observation 5)
AP makes a copy of all debit slips

and checks, then stamps and files
them.
Control Points In Place:
Internal control point (manual)

Internal control point (system based)
Control Weaknesses:
36
Internal control weakness

Process Inefficiency

Accounts Payable Review

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Detailed Issues & Observations

Appendix B: Internal Control Scorecard

Appendix C: Best Practices Scorecard

Appendix D: Best Practices Details

Appendix E: Testing Summary

Appendix F: Performance Measures

Appendix G: Process Flowcharts

Sample Internal Audit Report

Objectives, Scope & Procedures Performed

Assess the operating efficiency of the process.

Compare Companys practices to Best Practices, including performance measures.

Review performance measures used to monitor and improve the process.

Assess compliance with applicable corporate policies and procedures.

Identify opportunities for internal control and process improvements.

Invoice approval process.

Matching of invoice to purchase order and to receiving information.

Use of early payment discounts.

Reconciliations between general ledger, AP sub-ledger, and bank accounts.

Summary of Procedures Performed

Reviewed existing documentation of relevant policies and procedures.

Sample Internal Audit Report

Objectives, Scope & Procedures Performed

Obtained an understanding of procedures and internal controls.

Discussed existing management plans to improve operations or internal controls.

Documented the accounts payable process through high-level process maps.

Summarized observations and management action plans.

Sample Internal Audit Report

Purchase requisition approval process is not consistently followed (X of XX approvals examined

Review of purchasing card transactions should be strengthened (we noted numerous

Executive Summary (Contd.)

EXISTING MANAGEMENT PLANS

Performance measures are not utilized to monitor the AP process

Detailed Observations and Issues

Management Action Plan

1. Purchase requisition approval process is not

A. Management should formalize Signature Authority

Sample Internal Audit Report

Detailed Observations and Issues

Management Action Plan

2. Review of purchasing card transactions should be

A. Management should require managers to sign and

Sample Internal Audit Report

Detailed Observations and Issues

Management Action Plan

Sample Internal Audit Report

Detailed Observations and Issues

Not all of the receipts to support T&E

Management Action Plan

A. The Expense Report Processor should review

Petty Cash Expenses

Sample Internal Audit Report

Detailed Observations and Issues

Management Action Plan

5. Password security for check printing applications does

A. Administrators for the applications should

Sample Internal Audit Report

Detailed Observations and Issues

Management Action Plan

6. Unit As petty cash balance appears to be larger than

A. After managements assessment of the need for a

Sample Internal Audit Report

Detailed Observations and Issues

Existing Management Plan