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, performing spend analysis and managing spending until the end is mandatory. These processes prevent overspending and build trustworthy relationships with suppliers for future projects.
A procurement audit is a recurring internal audit, with an audit report, to evaluate internal controls, supplier solicitation, negotiation, and selection, purchase order and contract management, how well contract terms with suppliers and vendors are followed, the operational efficiency of procurement processes, and how spending is analyzed and controlled.
Procurement management covers various processes, one of which is the audit. The others include:
The procurement audit specifically reviews your procurement contracts and suppliers to analyze the accuracy, efficiency, and legitimacy of the overall procurement effort, including strategic sourcing. 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 procure-to-pay spending activities for decision-making and audit them to achieve market competitiveness?
In the procurement audit process, identify problem areas in your procurement practices and procurement activities. Your audit findings will drive more robust internal controls and help you identify the resources needed for internal operations. To conduct a procurement audit, use a standardized audit program with a checklist or procurement audit template for questions. The following are some basic steps towards an impactful procurement audit.
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 relating to the procurement function. 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.
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 is in order, or a particular process or policy requires consideration.
A purchase order is the document your company’s procurement team 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 in these purchase forms are:
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.
Supplier selection or vendor 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 and adheres to legal requirements. Set aside any organizations you purchase from if they don’t meet your expectations.
Variables to account for include the following:
Who knows? A procurement audit might uncover hidden discounts and ways to achieve cost savings that the project management might have missed at first glance.
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? Are new or modified company procurement policies required?
Review your findings by compiling a final audit 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 procurement audit report must contain audit findings and 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.
Procurement automation provides audit trails, a contract repository, efficient supplier management, and procurement processes.
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.
Create your own checklist according to your own needs and circumstances, or use standardized internal audit software that contains checklists that can be customized for your business. Every business is different when it comes to procuring its goods and services, so why not make your solution custom-made?
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.
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. You may gain insights for improving company procurement strategy and making any necessary policy changes.
Want some extra tips and tactics for procurement best practices before you get started on this task that will transform the way you acquire everything your business needs?
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.
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:
Your company needs more than testing internal controls over procurement through a procurement audit. It also needs an accounts payable audit and AP internal controls that are improved with AP automation software. You can extend the accounts payable audit to include your company’s reimbursement of employee expenses.
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 with an E-procurement system. It’s clear that the future of auditing and the procurement process will rely on software automation and the efficiency benefits it inevitably provides. Explore more.
Barbara is a financial writer for Tipalti and other successful B2B businesses, including SaaS and financial companies. She is a former CFO for fast-growing tech companies with Deloitte audit experience. Barbara has an MBA from The University of Texas and an active CPA license. When she’s not writing, Barbara likes to research public companies and play Pickleball, Texas Hold ‘em poker, bridge, and Mah Jongg.