Accounts Payable Internal Control for Maximum Security

Every accounting and bookkeeping system needs good internal controls to minimize the risk of fraud, error, and loss. Of course, this doesn’t exclude periodic audits as best-practice companies always audit their invoice processing to ensure such control is still in place and being used. However, on this page, we’ll talk about accounting internal control.

Types of Accounting Internal Controls

When it comes to internal control, one or several of the following criteria should be satisfied, within the accounting system.

1. Validity
2. Accuracy
3. Authorization
4. Identify errors
5. Completeness
6. Segregation of duties
7. Existence
8. Presentation

The main purpose of the internal controls is to ensure that both vendor and supplier invoices are recorded and paid by the business properly. Let’s take a look at the most commonly encountered techniques when it comes to accounting internals controls, below on this page.

Internal Control Checklist

Policy

To ensure all employees understand the accounts payable process, a business should have well-documented policies and procedures on payable internal controls.

Separation of Duties

Also referred to as segregation of duties, this is one of the most important accounts payable internal controls. The separation of duties ensures that the person dealing with physical assets is not the same person responsible for the recording and bookkeeping. In its most common sense, it means that at least two individuals are responsible for a financial process in order to prevent potential error or fraud.

Ideally, a third party should be responsible for an overall review of the transaction as a form of an audit.

Receive Documentation

Usually, the transactions should have 3 documents: the purchase order, the vendor invoice, and the receiving report (also referred to as GRN – Goods Received Note). The process is as follows:

• Setting authorization
  levels for invoice approval.
• All invoices should be
  received centrally in the accounts department.
• Matching the invoice
  price, quantity, and terms to the purchase orders and also matching the invoice
  quantity to GRN. This is also referred to as the three-way approach.
• Checking the accuracy of
  calculations.
• Checking for duplicate
  invoices/orders.
• Verifying if the vendor
  exists when receiving an invoice from a new individual.
• Checking the vendor
  invoice address.
• Date-stamping invoices
  and entering them in a register of unapproved invoices. This is required in
  order to avoid losing invoices when approved outside the accounting department.
  Those invoices should also be crossed off the register when they return.

Post the Purchases Journal

• Posting the purchases day
  book from the vendor invoice as soon as a new transaction occurs. The purchases
  day book (also referred to as purchases journal) is a chronological list of all
  the purchase invoices.
• Using the purchase day
  book to post the accounts payable control account in the general ledger (the
  main accounting ledger containing a record of all transactions).

Post the Accounts Payable Ledger

• Posting the accounts
  payable ledger (it shows record amounts owed to suppliers for account
  purchases) from the vendor invoice when a new transaction occurs.
• Filing unpaid invoices,
  sorting them by date in order to ensure they are paid late, and also avoid
  missing early payment discounts.
• Reconciling vendor
  statements to balances and the unpaid invoice file.
• Carrying out random spot
  checks on vendor activity and checking for signs of unusual activities.
• Reviewing debit balances
  on accounts payable accounts.
• Producing an aged
  accounts payable report and reviewing the balances.
• Reviewing all journal
  entries to the payable ledger accounts.
• Regularly reviewing debit
  balances in the accounts payable ledger.
• Reconciling the accounts
  payable ledger with the accounts payable control account (an account used to
  record summary transactions).

Payment Preparation

• Setting up authorization
  levels.
• Making payments only to
  the invoices supported by the original, and not copies, in order to avoid
  duplicate payments.
• Making a payment
  agreement with the approved vendor invoice.
• Stamping invoices as paid
  when payment has been made.
• Checking for duplicate
  payments.

Please, keep in mind that this may vary depending on each business’ specifics. This is a given example for the accounts payable internal controls checklist for educational purposes. As a business owner, you and your team should develop your own policies and procedures that suit your objectives.

Following the checklist, you should be able to minimize the risk of fraud and error when it comes to accounting and bookkeeping.