Let’s see if we have any suppliers with open items
It is obviously normal for your suppliers to have open items.
Normal open items can include unpaid invoices, unpaid debit notes (for example in the case of a return) or advanced payments for which the invoice has not yet been received.
Unusual open items can include reversals and payments. It is unusual for these items to be open because they are usually matched to something when they are entered.
1/ Unmatched payments: unauthorized payments
If we see that there are payments that are not cleared to an invoice, then there could be an indication of weak three-way-match controls. This could give rise to opportunities for unauthorized payments and misappropriation.
2/ Fictitious down-payments
Downpayments are normal and it can be normal to have downpayments in the system that remain open.
Down payments may remain open so that we remember that we still need to receive an invoice for them.
However, if the downpayment has been open for a very long time, it could be that the supplier took the downpayment and then disappeared!
A fictitious supplier takes a down-payment and then runs for it
3/ Errors, such as duplicate payments, due to matching not done
Sometimes we see in the system that there are both positive and negative transactions that have not been matched.
This situation usually arises because the Accounts Payable department do not clear the payments to the invoices during the payment process.
In this situation we could have a risk of duplicate payments. This is because invoices still look like they need to be paid.
Clearing an invoice is a bit like giving it a “Paid stamp”
When invoices are not cleared, it is as if they are not stamped as paid. In this situation, we might accidentally pay them again. Especially if there are many of us working in Accounts Payable.
4/ Reimbursements not made
Debit notes may be raised if goods were faulty and had to be returned.
Since the Accounts Receivable department are usually focused on recovering money from sales to customers and the Accounts Payable department are usually focused on paying suppliers, sometimes monies owed by suppliers could be forgotten.
There is therefore a risk of unreclaimed funds, in the event that your open item is a debit note that did not get paid.
In another fraud scenario a debit note could be raised to support the return of goods that actually never get returned.. at least not to the supplier.
Items that get returned to the wrong address will unlikely see their debit note paid
5/ Unresolved disputes
Sometimes, suppliers deliver goods that are faulty. Sometimes payments are made on delivery or they are made quickly. If it is necessary to return goods after a payment has already been made, then a debit note will be made so that the supplier can make a reimbursement.
Unresolved debit notes can be indications of disputes
Therefore, large values or frequent debit notes for suppliers may indicate that the entity is paying too early or is not controlling the quantity of delivered goods in a timely manner and before payments are made to the supplier.
In this situation, it is possible that three-way-match controls are not very strong.
The entity may therefore run the risk of not being able to recover funds for faulty goods or services and may have inefficiencies, due to the administration of the unpaid debit notes.
6/ Unclear or unfavourable incoterms
If goods go missing during transit and your organization is responsible for those goods, then the entity might end-up having to pay for them. The entity might then try to raise a debit note to the supplier to recover costs and this debit note might be rejected by the supplier.
If incoterms are not clear, then the supplier might refuse to reimburse goods lost in transit
7/ Financial misstatements
The entity that you are auditing might want to reduce the costs on the financial statements. This could occur if they notice that they are spending too much on a particular project, for example. If the entity over-estimates the supplier invoice reversals that they enter, some suppliers could end-up with a debtor balance.
This situation could also indicate unclear accounting, or incorrect accounting entries that do not tie to real activities.
If cost is cancelled in the period, then the Profit & Loss statement will be incorrect, which could result in a fine for financial misstatements and incorrect financial records.
Incorrect reversal: more likely to be incorrect when not cleared to original transaction
8/ Lack of approval for payments
If we see in the data that there are both positive and negative transactions that are not cleared, but that have similar values, then this could indicate that payments are entered without clearing to the original invoices.
This situation may indicate that payments are being entered into the system manually, without going through the SAP payment program.
If we have manual payments in the system, then we face the following risks:
- Lack of approval: unauthorized payments: misappropriation
- Errors following invoices not netted-off and then repaid: duplicate payments
- Access to online banking? Misappropriation through unauthorized/ unrecorded/redirected disbursements
9/ Mass clearing
We might notice that we don’t have many open items in the data at the time of the audit, but that the lead-time for clearing transactions was very long.
This situation may indicate that “mass clearing” occurred just before the audit.
Mass-clearing of transactions can also be identified when we see that in the data there are hundreds of transactions that all have the same clearing date.
The following risks can be seen with mass clearing:
- Errors when processing invoices? paid or not paid already?
- Accidentally clearing debit notes that are not yet paid – loss of income
- Incorrect follow-up with suppliers: damaging to reputation
- Inefficiencies within the Accounts Payable department – loss of time and resources