Internal auditors and Certified Public Accountants are usually interested in auditing the accounts payable processes of nonprofits. Sometimes grantors, such as as the federal government, also audit a nonprofit's payables to be sure that its expenses were spent according to grant contracts. Audits of nonprofits include risk assessments and other procedures to verify that the numbers shown in grant reports and financial statements are reasonable and compliant with grant stipulations.
Assessing risk is a major task of auditors, who may review internal controls, test them in the accounts payable area and determine the need for substantive work, in which actual bills and checks are reviewed. Auditors look for proper authorizations on invoices, and they may also verify that only original bills were paid -- a common control to prevent payment duplication. The authorization sign-off could be performed by a program manager or executive director, or it may involve a grant manager. Other items auditors may look for include packing slips to accompany certain bills to be sure that the items paid were actually received.
One available audit step to catch errors and verify accounts payable balances is to scan vendor reports looking for unusual transactions, such as a debit balance on a vendor account, which may be an indication of overpayment. An auditor can request an aging payable report by vendor to see if the nonprofit is late in paying its bills, which is a sign of possible financial problems. Another use of a vendor report is to verify that payments for goods and services went to vendors not connected with individuals on the nonprofit's board of directors, who are supposed to be financially independent of the organization.
Unrecorded liabilities are payables that haven't been recognized in the books, usually because bills were not received and entered in the system by the end of the period. Auditors generally look for these items by reviewing checks paid in the following months and verifying which period these expenses belong to. If it's determined that a transaction actually happened in the last period, then auditors will require a journal entry to increase an expense and a liability account in the last period. The search for unrecorded liabilities is a common audit procedure that is part of the period cut-off activities, in whic transactions are allocated between periods depending on when they occurred, not when payments were made.
Analyzing accounts payable and expenses is a commonly-used audit procedure. If balances on accounts payable for last year are twice what they were in the prior year, it will catch the attention of auditors, who may want to find the reason for the increase and possibly test more items within this area. Auditors may also want to analyze how grants and expenses are flowing, and whether a nonprofit used restricted funds for unrestricted payables. Nonprofits can borrow from restricted funds, but at the year end all reconciliations and paybacks must have been completed.