Procurement is an important function in any organization as it directly affects the efficiency, cost-effectiveness, and quality of goods and services acquired. It can be challenging to effectively manage procurement activities, particularly with complex supplier relationships, multiple contracts, and changing market conditions. Procurement auditing is a step toward addressing this issue. Learn about procurement audit by joining the Procurement and bid management course for the project offered at the British Academy for Training and Development.
Procurement auditing is the reviewing of the procurement activities of an organization and scrutinizes if the procurement process has followed standards with transparency, efficiency, and within budget, and further makes sure that it does not violate any rules or laws. Procurement auditing determines whether the procurement activities in an organization are consistent with the objectives of that organization, follow standard procedures and guidelines, and uphold ethical principles.
Procurement audits cover the entire lifecycle of the procurement process from planning to sourcing, purchasing, and delivery. They also evaluate vendor relationships, contract management, and the overall effectiveness of the procurement function in attaining organizational goals. Conducting procurement audits allows companies to determine inefficiencies, risks, or opportunities for improvement in their procurement strategies.
Procurement auditing offers a wide scope of benefits for ensuring the success and sustainability of an organization. Among its benefits of checking purchases via procurement auditing include:
Procurement audits identify unnecessary or inflated expenses. Auditors can look through purchasing records and, thereby, find instances where overpriced products or services bought are recorded, or cases in which some discount or favorable terms might have been underutilized. This yields very important savings on cost and improves finance management.
In brief, procured processes are the reason for effective and improved efficiency; audits reveal them as organizations will be potent enough to make their procurement system smoother and free from all types of duplication, ultimately avoiding all kinds of inefficient resources.
Procurement audits ensure that all procurement activities comply with internal policies, industry regulations, and legal requirements. This is essential to avoid penalties, fines, and legal risks associated with non-compliance. Regular auditing ensures that the organizations are in line with procurement standards, reducing the risk of fraud, corruption, or other unethical practices.
This will then expose the risks in the procurement process that may include dependency on one supplier or a weak contract. The potential risks could be addressed with proactive measures to protect a supply chain, prevent loss of money, and also safeguard the company's reputation.
The procurement audit procedure will ensure transparency and accountability in the procurement process. The process will make it visible where purchasing decisions, vendor relationships, and financial transactions take place, which reduces the risk of fraud or misutilization of resources. Therefore, the transparent procurement process increases the confidence of the stakeholders in the employees, suppliers, and customers.
Another performance that procurement audits facilitate in the organization is an assessment of suppliers. This means that they are able to determine the performance of their suppliers with respect to reliability, whether their products or services will arrive on time, or offer good customer service.
Audits provide feedback, which proves useful to organizations to enhance their procurement processes. Typically, results from procurement audits trigger some recommendations that call for improving the process, staff development, or even systems upgrades. This ensures that a culture of continuous improvement characterizes the procurement function.
The whole process of procurement auditing typically involves several steps. Here is a general outline of how procurement auditing is conducted:
The scope of the audit and setting clear objectives constitute the first step in conducting a procurement audit. It would entail the identification by the auditors of procurement activities, contracts, or departments that should be subjected to review. They would also include specific areas of concern like supplier relationships, contract compliance, or the costs of procurement. The auditors must also obtain relevant documents, including purchase orders, contracts, invoices, and records of payments.
This step, namely collection and analysis of data pertinent to the procurement activities, is collected and analyzed by auditors. This includes reviewing financial records, examination of purchase histories, and analysis of compliance with procurement policies. The auditors would also interview key personnel connected with procurement, such as the procurement managers, buyers, and contract managers, to find more information.
The auditors test the procurement procedures and practices against the organizational policies and regulations, making sure they are compliant. They may appraise the following:
The procedure for sourcing and identifying the suppliers
Contracting that covers the terms
Payment processing including invoice
Work-flows applied to create purchase orders and get them approved
Practices related to managing stock
Identify the problems and risks: While reviewing procurement activities, the auditor identifies any mismatch, risk, inefficiency, or non-compliance areas. Some of these may include overpricing, lack of transparency, delays in delivery, or failure to meet the terms of a contract. The auditor documents his findings and determines how these problems affect the performance of the organization as a whole.
After going through all the data, the auditor will collect the findings and place them in a report. The report should carry out an assessment of the activities carried out in procurements, a summary of all issues that were identified, and finally, recommendations for corrective actions that may be taken on identified risks and some suggestions for risk mitigation.
Once an audit report is presented, the organizational management will go through the outcomes and implement corrective measures on its procurement policies, contact renegotiation, or on suppliers' performance. A follow-up review by auditors may be done as a means of checking how changes have been implemented satisfactorily and whether procurement activities have improved.
A procurement audit checklist is a guide used to ensure that all aspects connected to the procurement process are considered. Here is a sample of what an auditor could consider using when evaluating procurements:
Have procurement goals and objectives been defined?
Is a procurement strategy documented?
Do procurement decisions align with the organizational budget and priorities?
Are suppliers selected from an open and competitive process?
Are supplier qualifications and capabilities thoroughly evaluated?
Are supplier relationships properly documented and managed?
Are contracts reviewed by legal and procurement teams before signing?
Are contract terms clear, fair, and aligned with the organization's interests?
Are there mechanisms in place to monitor contract performance?
Are purchase orders created and approved according to organizational procedures?
Are there any discrepancies between purchase orders and invoices?
Proper controls against duplicate orders or unauthorized purchases?
Is there effective tracking of inventory with its regular updates?
Procedures in place for the excess inventory or stockout situation?
Are there inefficient ways of handling and storage of inventory?
Reviews and approvals of invoices before payment?
On-time payment and terms?
Do purchase orders, goods received and invoices have discrepancies?
Are suppliers regularly checked on quality, delivery, and customer service?
Are supplier performance reviews documented and acted on?
Is there a recurrent issue with specific suppliers?
Is the procurement under laws, regulations, and industrial practices?
Is the record of procurement available and easy to access?
Are procurements audited regularly?
Depending upon the objective of the audit, procurement audits can have varied forms. However, there are a few common types of procurement audits that exist such as:
The objective of a compliance audit is to ensure that all procurement activities are conducted under the relevant laws, rules, and policies prevailing at the internal level. In general, this audit would encompass legal requirements, ethical considerations, and procurement regulations.
A financial audit focuses on the spending, budgeting, expense control, and invoicing aspects of the procurement. It helps find all ways through which cost-saving may be obtained and never lets the organization spend excessively on purchases.
A performance audit is an assessment of the efficiency and effectiveness of procurement processes. It checks whether procurement activities are achieving what is desired, such as cost reduction, quality improvement, and timely delivery. This audit may also center on vendor performance and its impact on the overall performance of the organization.
A contract audit is an audit that mainly focuses on reviewing the procurement contracts' terms, conditions, and performance. That is, the agreed term is being complied with upon the execution of the respective contracts, and both are performing their obligations. A contract audit may reveal risks in procurement contracts, which may imply unfavorable terms in the procurement contracts, missed deadlines, and underperformance by suppliers, among other risks.
The reliability and performance of the suppliers is assessed in a supplier audit. The process also encompasses reviewing supplier qualifications and delivery schedules, product quality, and contractual terms being followed. A supplier audit helps organizations keep their relationships with suppliers healthy and enhances their supplier base.
Procurement auditing is very vital for the organization because, through it, an organization can make sure that its procurement activities become cost-effective, efficient, compliant, and aligned with the strategic goals. Organizations can identify areas where improvement can be made while mitigating risks and enhancing procurement processes through checking purchases. Learn about audits by joining the Strategic Procurement Course and help organizations make good decisions while maintaining transparency to build robust supplier relationships. The procurement audit checklist guides auditors on all aspects of procurement from planning to payment.