The procurement audit is a step in the procurement management cycle and
an essential part of the purchasing process. When a business procures the
resources it needs to complete its work and run smoothly, managing
spending until the end is mandatory to prevent overspending and build
trustworthy relationships with suppliers for future projects.
Procurement management covers various processes, one of which is the
audit. The others include:
Purchase orders and requisitions
Solicitation from suppliers
Contract negotiations
Supplier management
Order and invoice approvals
Record keeping
The audit specifically reviews your procurement contracts and suppliers to
analyze the accuracy, efficiency, and legitimacy of the
overall procurement effort. The records produced will help shape future
procurement processes as well.
Spending can occur in any form. Direct costs such as staff salaries and
insurance, as well as production costs associated with the raw materials in
manufacturing. Indirect costs, like professional services and travel costs,
are also a consideration. How do you enable proper visibility into your
spending activities and audit them to achieve market competitiveness?
Why You Need To Focus on Audit Procedures
The purchasing department has a lot on its hands when it comes to
managing and enforcing procurement practices. The audit process will help
with multiple aspects of the job.
Spending performance: Auditing allows you to step back and look
at where your money is going. Finding new ways to cut down on
barriers, negotiate stronger supplier contracts, find higher quality
suppliers, and optimize spending in general, all contribute to better
profitability.
Streamlining workflow: When you have a chance to review
purchasing processes, you can easily identify redundant or obsolete
business practices that slow down your purchasing cycle. For
instance, you might be ordering similar products from multiple
vendors or suppliers when you could compile them together in a bulk
order.
Supply chain visibility: For direct procurement procedures, a
structured review of spending formally evaluates your supply chain
ecosystem and prevents administrative errors. Suppliers themselves
will be more motivated to evaluate their own practices when they see
that you value policy compliance.
Legitimacy: An audit detects and protects against fraudulent
invoices. With so many purchases made every day, it can be easy for
rogue spending to seep through the cracks. Billing schemes are, for
instance, the most common form of fraud for small businesses.
Risk management: On a similar note, rogue spending often leads to
fraud and compliance infractions. Formal audits point you in the right
direction when it comes to making corrective action against breaches
of industry standards and legal policies.
Audit trails: Running your own internal audits is certainly a step in
the right direction, but you occasionally need an external audit as
well, either from another business or government agency. In both
cases, you will already have an audit trail in place.
Don’t expect all the benefits of an audit to come overnight. Audit records
help you make incremental improvements as you trim down unnecessary
costs and streamline contracts without impacting the quality of your work.
Optimizing AP Processes
with Streamlined Purchasing
Learn how to overcome AP issues by optimizing your purchasing process
for today’s business reality.
Read more
The Process For Implementing Procurement Audits
Identify problem areas in your procurement practices, and your findings will
drive more robust internal controls and help you identify the resources
needed for internal operations. The following are some basic steps towards
an impactful procurement audit.
Talk With Higher Management
If you work in purchasing, procurement, or even project management,
getting supervisors on board with your plans should be a first priority. Pick
up any input from the managers so that you can make preparations and
know where to focus your efforts.
This is an opportunity to highlight any areas of concern. Are certain
suppliers not giving you the results you need? Then you may want to start
there first. Likewise, any particular process or policies that require
acknowledgement should be brought up with the upper management.
Get the Stakeholders Involved Too
On top of the administration, the stakeholders in the organization are the
ones giving approvals and making the purchases. These people often aren’t
willing to give up control over their resources, so it’s important to let them
understand your intentions as well. Show that the audits contribute to
better integrity in the procurement process.
Leverage the feedback you receive from them as well. Certain stakeholders
in the procurement management process might bring up pain points or
specific changes they want to enact. Perhaps adopting different contracts
are in order, or a particular process or policy require consideration.
Look Through Your Purchase Forms
A purchase order is the document your company submits to the supplier for
a new purchase. Look through your purchase orders first and make sure
they are filled out completely and accurately. Specific fields to examine are:
PO numbers of ordered items
Supplier information
Accuracy of product descriptions and pricing
Authorized signatures
Remember that whatever final invoices or receipts you have need to reflect
in the original purchase order. AP should be able to do some cross-checking
so that everything is accounted for.
A structured review of purchase orders is also an opportunity to compare
your inventory’s expenditures against other analogous departments in your
industry. Use local or national averages to see how you stack up with other
companies and competitors.
Finally, keep in mind that when procurement management formally
evaluates purchase orders, the sheer volume of transactions made can
make the process difficult. If you’re working manually, take random
samples from each supplier’s list of orders to double check.
Go Through Each Supplier on Your List
Vendor or Supplier selection is another major responsibility of the
procurement department. In addition to finding ways to make bulk orders
across multiple departments, check with each contract to see whether it fits
into the standards of your business. Set aside any organizations you
purchase from if they don’t meet your expectations.
Variables to account for include the following:
Bulk discounts, rebates, and other ways to save money
Credit programs
Delivery practices
Accuracy and clear language in the contract
Quality of the services provided
Reputation of the supplier in the market
Comparisons with other organizations offering similar goods and
services
Who knows? A procurement audit might uncover hidden discounts and ways
to save that the project management might have missed at first glance.
Review Company Policies
Work as an auditor doesn’t end with the vendors. It will also determine the
procedures within the organization regarding procurement, such as signing
documents or approving contracts. Every step that employees perform must
be looked at and recorded to make sure everything is completed to the
specifications of procurement management.
Get feedback from your staff too. Are the new protocols brought on by
procurement audits too burdensome to do? Should they be changed to
better fit in with the overall workflow of the company?
Create a Final Report
Review your findings by compiling a final report and discuss it with project
management. If any data suggests inefficient contracts, potential fraud, or
lack of compliance, make a record of it and discuss ways to fix the
problems.
The report must contain actionable insights to encourage corrective action,
empowered by the procurement data collected during the process. A better
procurement process catalyzes a business’s ability to streamline
procurement operations, receive resources more consistently, and review
contract performance.
The Procurement Audit Checklist
There are many processes, documents, feedback, and procurement
contracts to keep track of throughout project management. To help you
stay on top of everything and measure your progress, the following
checklist covers most of the responsibilities of procurement audits.
Preparation: Indirect spending is especially difficult for project
management to deal with, as it’s not exactly set in stone where new
purchases are made. Start by organizing all your purchases, including
those with vague contract terms, missed discounts, price
discrepancies, and other potential issues.
Purchase orders: For example, does your organization use three-
way matching? Are there protections against fraud? And are proper
authorizations enabled during the approval process? You should be
aware of what’s going on throughout the process, from making the
order to receiving it.
Supplier selection: Analyze the performance of each contract and
how it compares to the rest of your portfolio. Is each one up to par
with your standards and compliant with your policies? What’s the
process for onboarding a new vendor when it’s needed?
Payments: Invoice processing must be accurate, complete, and
timely. Keep an eye out for fraudulent transactions like always.
Three-way matching might play a role here too.
Reporting your findings: Determine the corrective actions needed
to fix the issues brought up by the procurement audit. What can we
do to reduce risk, increase efficiency, and ensure compliance for a
project management process in the future?
Create your own checklist according to your own needs and circumstances.
Every business is different when it comes to procuring its goods and
services, so why not make your solution custom-made?
Procurement Audit Best Practices
Want some extra tips and tactics before you get started on this task that
will transform the way you acquire everything your business needs?
Hire a dedicated internal auditor to handle this task: Getting
the purchasing department to audit itself is both ineffective and a
potential conflict of interest. You wouldn’t want employees writing
their own performance reviews after all, so hand the work to an
internal auditing team to create a complete, accurate, and structured
review. Such a team needs to understand the current policies and
needs of the project and the organization as a whole.
Remember to create a paper trail for future auditing: Once
you’ve already collected all the sales data, inventory records,
payable accounts, and other documentation related to the auditing
process, you already know exactly how to do it again the next time
an audit is in order. Work on the paper trail the first time to make
future cycles much faster.
Plan to implement custom procedures in response to your
findings: One of the least useful things procurement auditing can do
is to offer generic advice in response to found inefficiencies. Aim to
create tailor-made solutions that apply specifically to the kind of
organizations you work for.
Start using a procurement tool: Automation has helped us with
large parts of our lives already, and project management will be
pleased to know that modern solutions now exist to make
procurement auditing faster and easier.
Keeping yourself competitive in an ever-growing market is all about
adopting the latest tools for the job. Let’s talk more about software tools
related to internal auditing in the next section.
Tools, Software, and Automation
If it seems to you that audits are a challenge to execute, know that tackling
the task is much easier when you have an automated system to help you
out. Online services exist now that are designed to handle tasks like:
Centralized records management
Cloud-based collaboration
Visibility into the workflow to protect against fraud or noncompliance
Quick comparisons of best suppliers
Real-time price analytics for comparing deals
A procurement tool can also accelerate auditing in general by sending the
right documents to the right people automatically, ensuring that no
stakeholder is left uninformed. You also greatly reduce the possibility of
human error in data entry and analytics. It’s clear that the future of auditing
and the procurement process in general will rely on software automation
and the efficiency benefits it inevitably provides.