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.
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 in these purchase forms 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.