How to audit accounts payable and receivable (step-by-step)

Whether you're preparing for an external audit or running an internal review, accounts payable and accounts receivable deserve careful attention.

Errors in accounts payable (AP) can lead to duplicate payments, fraud, or unrecorded liabilities — while errors in accounts receivable (AR) can overstate revenue or mask collection problems.

For companies managing international payments, the process gets even more complex. Currency conversions, cross-border transactions, and fragmented banking records all add layers of reconciliation work.

In this guide, we’ll cover the core objectives of AP and AR audits, a step-by-step process for auditing each, and how modern payment infrastructure can make audit prep far less painful.

What is an accounts payable or accounts receivable audit?

An accounts payable audit is a systematic review of your AP records to verify that all payments made and liabilities owed to suppliers are accurate, valid and properly documented.

An accounts receivable audit does the same for amounts owed to your company — confirming that customer invoices are real, properly recorded and collectable.

While external auditors conduct these reviews as part of year-end financial statement work, smart finance teams run their own internal audits on a regular basis. The goals of any AP or AR audit should be visibility and compliance — not just one or the other. You're catching errors before they compound, identifying fraud risks early and making sure your financial records reflect reality.

For international businesses, internal audits also need to verify the accuracy of currency conversions and confirm that cross-border payments are properly tracked and reconciled. Without this, you're working from numbers you can't fully trust.

Key audit objectives for AP and AR

When you run an internal AP or AR audit, you're essentially stress-testing the claims your financial statements make about these balances. There are three core areas to focus on.

Completeness and accuracy

In this context, completeness means every liability (AP) and receivable (AR) is recorded in the correct accounting period — nothing is left off the books. And accuracy means the amounts recorded match your supporting documentation: invoice totals, payment amounts and account balances should all tie out.

To test completeness, review transactions around period-end cutoffs and look for unrecorded items. Common issues include invoices received but not yet entered, payments made but not recorded, or transactions booked to the wrong period. These gaps often surface during month-end close as well. If your close process is messy, your audit will be too.

For accuracy, pull a sample of transactions and trace them back to bank statements and original documentation. Discrepancies usually point to data entry errors or timing mismatches.

Validity and authorisation

Validity confirms that recorded transactions actually occurred. For AP, that means verifying invoices against real goods or services received. For AR, it means confirming invoices tie back to actual sales.

Authorisation confirms that payments and adjustments were approved according to your internal policies. Look for proper segregation of duties. For example, the person who creates a payment shouldn't be the same person who approves it for payments over a certain amount. When these controls break down, you're exposed to fraudulent transactions and errors that slip through unnoticed.

A few red flags to watch for here:

• Payments to unfamiliar vendors
• Missing approval signatures
• Invoices without matching purchase orders
• Unusual transactions that don't fit normal patterns

If you're managing international payments, also be sure you’re actively safeguarding your cross-border payments with proper fraud prevention protocols in place. The complexity that comes from multi-currency operations can potentially mask AP fraud or obscure real issues.

Compliance with relevant accounting standards

Compliance means transactions are recorded according to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on your jurisdiction.

For most mid-market companies, this is less about regulatory box-ticking and more about maintaining clean financial reporting practices that hold up under scrutiny — whether that's from investors, lenders, or your own board. Consistent application of correct accounting procedures now avoids painful corrections later.

How to audit accounts payable: a step-by-step process

A solid AP audit follows a logical sequence: Start with big-picture reconciliation, drill into transaction-level testing, then hunt for items that might be missing from your books entirely.

Step 1: Review the AP ledger against the general ledger

Pull your AP subsidiary ledger (the detailed vendor-by-vendor breakdown) and compare the total to what's recorded in the general ledger. Any discrepancy between these two signals a recording error, timing difference or misclassification that needs investigation.

Also, review journal entries affecting AP to ensure they're supported by proper documentation.

For multi-currency operations, verify that foreign currency payables are translated at appropriate exchange rates. This is where errors compound quickly, especially if you're managing payments across multiple entities or running intercompany accounting workflows.

Step 2: Test invoices, vendors, and payment records

Select a sample of AP transactions and trace each one end-to-end — from invoice to purchase order to goods receipt to payment. This is where you catch mismatches between what was ordered, what arrived, and what you paid for.

Verify that vendors are legitimate by confirming business details and checking for duplicate vendor records in your master file. It may sound simple, but duplicate entries are one of the most common sources of duplicate payments in your books. Look for the same invoice number paid twice, identical amounts to the same vendor in close succession, or payments that don't match invoices on file.

For cross-border payments, confirm that the payment amount in your accounts payable system matches what actually left your bank account after currency conversion.

Step 3: Search for unrecorded liabilities

The first two steps verify what's in your books. This one looks for what's missing.

Start by reviewing invoices that arrived after your period-end cutoff. If you're using accrual accounting, any invoices for goods or services delivered before the cutoff should have been recorded as liabilities — even if the invoice hadn't arrived yet. For cash-basis accounting, the timing rules differ, but you're still checking that transactions are recorded consistently with whichever method you follow.

Next, review payments made early in the following period and trace them back. Are there liabilities that should have appeared in last period's books but didn't? Missing items here mean your reported liabilities were understated.

Finally, scan for recurring expenses that span accounting periods — utilities, rent, professional fees and subscriptions — and confirm they're handled consistently with your accounting method. These are easy to miss and tend to accumulate quietly.

A simple AP audit checklist

Here's a quick reference version of the AP audit process:

• Reconcile your AP subsidiary ledger to the general ledger
• Verify a sample of invoices against purchase orders and goods receipts (three-way match)
• Check your vendor master file for duplicates or suspicious entries
• Test payment authorisations against your approval policies
• Scan for duplicate payments — same invoice number, amount, and multiple payments made within a short period to the same vendor can help to narrow these down
• Review subsequent payments to identify unrecorded liabilities
• Confirm foreign currency payables are translated at the correct rates
• Document all discrepancies and resolutions for your audit trail

How to audit accounts receivable: a step-by-step process

AR audits focus on confirming that the amounts your company expects to collect are real, properly valued, and recorded in the right period. The process mirrors AP in structure but with different pressure points.

Step 1: Reconcile the AR aging report to the general ledger

Pull your AR aging report — the breakdown of receivables by how long they've been outstanding — and compare the total to your general ledger balance. Discrepancies often indicate timing differences, unapplied payments or misclassified entries.

While you're in the aging report, review the distribution across buckets. Heavy concentration in the 60+ or 90+ day columns might signal collection problems that haven't surfaced in your cash flow yet.

Similar to an AP audit, verify that foreign currency amounts for international receivables are translated consistently. If you're invoicing in multiple currencies, reconciliation gets harder without a clear view of your FX payments activity.

Step 2: Confirm receivables directly with customers

For higher-value or higher-risk accounts, consider reaching out to customers directly to verify the balance they believe they owe. This is one of the strongest ways to validate your accounts receivable — you're getting independent confirmation rather than relying solely on your own records.

You can do this formally (sending a statement and asking customers to confirm or dispute the amount) or informally by reviewing recent correspondence and payment history. Either way, investigate any differences between what your records show and what customers confirm.

This step often surfaces invoices that customers dispute, payments they've made that you haven't applied, or simple miscommunications about what's actually outstanding.

Step 3: Review cash receipts and credit notes

Examine cash received around period-end to verify it was recorded in the correct accounting period according to your accounting method. Either way, you're checking for consistency. Then review credit notes and write-offs:

• Were they properly authorised?
• Is there a valid reason documented for each one?
• Are they concentrated with specific customers, products or sales reps?
• Do the amounts align with your write-off approval thresholds?

Look for patterns that might indicate problems, like unusual credit notes issued just before period-end, or a spike in write-offs that hasn't been explained.

If you're receiving international wire transfers, pay extra attention to timing as well. Depending on the cross-border payment provider you're working with, international payments can take multiple business days to settle, which creates cutoff ambiguity if you're not tracking when funds actually cleared versus when they were initiated.

Step 4: Evaluate the allowance for doubtful accounts

The allowance for doubtful accounts (sometimes called a bad debt reserve) represents your estimate of receivables that won't be collected. It directly affects both your balance sheet and net income.

Review the methodology you're using to calculate this allowance:

• Is it based on historical collection rates?
• Does it factor in aging analysis?
• Are there specific assessments for at-risk customers?

Whatever the approach, test whether it's reasonable given your actual write-off experience and current conditions.

An allowance that's too low overstates your assets and income, while one that's too high understates them. Compare your current reserve percentage to prior periods as well and look for unexplained swings in either direction.

A simple AR audit checklist

Here's a quick reference version of the AR audit process:

• Reconcile your AR aging report to the general ledger
• Send confirmation requests to a sample of customers (especially high-value accounts)
• Review cash receipts around period-end for proper cutoff
• Examine credit notes and write-offs for authorisation and patterns
• Evaluate your allowance for doubtful accounts against historical experience
• Check aging bucket accuracy and identify overdue concentrations
• Verify foreign currency receivables are translated consistently
• Document all confirmation responses and discrepancy resolutions

Simplify your next audit with iBanFirst

Most AP and AR audit pain comes from fragmented records. Think about chasing down documentation across multiple bank portals, reconciling currency conversions manually, and piecing together incomplete payment trails.

That's where iBanFirst comes in. iBanFirst is a payment institution built for businesses managing international payments. The platform centralises your cross-border payment operations, giving you the visibility and documentation trail that makes audits straightforward rather than painful.

With iBanFirst, you can:

• Track most cross-border payments in real time with shareable proof-of-payment documentation and tracking links
• Hold, send, and receive funds in 25+ currencies from a multi-currency account
• Integrate directly with your ERP for automated reconciliation

When your payment infrastructure creates audit-ready records from day one, you spend less time scrambling and more time running your business. Open an account to see how it works for yourself.