Procurement Audit — What You Should Know?

A procurement audit allows companies to spot any irregularities that can potentially lead to fraud. However, how do you conduct it?

In this article, we will discuss what procurement audit is and its importance in the procurement process. Also, we are going to teach you how to conduct procurement audits. Furthermore, we are going to tell you the advantage and the checklist you need to follow whenever you conduct a procurement audit. 

After reading this article, you will have a deeper understanding of procurement audits. This understanding will help you conduct your procurement audits effectively which will make your procurement process efficient. 

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What is Procurement Audit?

A procurement audit is a process where companies conduct assessments or evaluations to know if their employees follow the rules or standards that are set for the procurement process. 

Additionally, it aims to look for opportunities that can enhance the procurement process and spot any inconsistencies that can lead to procurement fraud. 

Procurement audit answers questions such as:

• Are the employees compliant with the standards set for the procurement process?
• Can we determine all the purchases we made and are they all incurred by the company?
• What process needs to be improved?

Procurement audits should be conducted regularly to be effective. However, you must remember that you must follow the same process when conducting your audits to ensure consistency.

Typically, in procurement audits, the procurement manager checks the different contracts and processes in the company’s procurement system. The manager also looks at the transaction history with suppliers to ensure that the terms of the contracts are being followed.

Why isProcurement Audit Important?

A procurement audit has three functions that make it important in the procurement process:

1. Enhance efficiency

Procurement audits look really closely at how you procure materials or services and how it works. By checking the procurement process, you can find the parts that need improvement so you can get better results. A successful procurement audit should show any extra steps that might be making your company’s procurement process slower.

2. Checking for inconsistencies

Regular checks on how you buy materials for the company help find any strange things in how you manage your purchases.

By looking at how you’ve purchased things in the past and looking carefully at each step, you can find issues with how things are done. This will help you know and eliminate possible procurement fraud. 

3. Maintain compliance

When you agree to purchase materials from a new supplier, there are special terms in the contract that you need to follow. Through procurement audits, you can watch these contracts to ensure the suppliers are doing what they promised in the contract.

Additionally, procurement audit lets you see suppliers who aren’t doing well and you can either replace them or give them feedback on how they can improve their performance.

How to Conduct aProcurement Audit?

The following are the steps that can guide you on how you can conduct a procurement audit in your organization:

1. Involve the management

The management and the other people in the company play a big role in making the procurement audit successful. When you start auditing your procurement, the first thing to do is talk one-on-one or have a group meeting with the managers who handle purchasing and the key stakeholders in your company.

You want to hear what they think from their real job experience. They can tell you what’s going well, what’s not, and what could be better to make the procurement process smoother. This helps a lot when you’re checking for problems because now you know what to look for.

Of course, you still need to do a complete check from the beginning and not just trust what others say, but involving managers at the start helps you know what to focus on during the whole auditing process.

2. Check for any problems

Procurement audits typically focus on three areas which are:

• Contracts
• Procurement process
• Previous documents or records of procurement

Each of these areas should have its own detailed audit.

When you start a procurement audit, it’s really important to find all the ways things can get better and decide how to look into each one.

You still have to do a complete audit of the whole buying process, but it’s crucial to know the specific areas that need more attention right away.

3. Check your requisition and purchasing documents

Looking closely at all the purchase order forms provides a clear understanding of what’s happening in the procurement department.

Every time the procurement team purchases materials, they fill out these forms. If there are any inconsistencies in the procurement system, these forms might be changed to hide any fraudulent actions.

Usually, procurement teams deal with a lot of these forms, so checking each one can be tedious.

A better way to find fraud in purchasing is to pick a random group of forms from different suppliers and carefully go through them.

The main goal is to ensure that all the details and numbers for each supplier are correct and truly represent what the organization needs to buy.

4. Audit your supplier selection

Your company may have rules for assessing suppliers before adding them to your selection list. These rules might look at how risky a supplier is, how well they’ve done in the past, prices, and comparing different options to find the best deal from numerous suppliers.

This is also a spot where fraud could happen. People in your company might change the rules a bit for specific suppliers to let them in even if they didn’t really meet the standards agreed upon.

During audits, this is where you look at how good your suppliers are and see if they match the standards. As you go along, make a note of your findings.

5. Conduct audits in your procurement process

Your procurement process should be defined clearly. Every action, like making purchase orders, handling supplier bills, and taking care of regular purchasing activities, should follow a clear plan that fits your business.

You need to look into how much time each activity takes. This will allow you to know if any important parts are missed and if there’s a way to make things easier.

A good approach is to talk to the procurement team and ask them for suggestions on how you can make the procurement process better.

6. Collect and evaluate your insights

After you’ve finished your research and auditing, now it’s time to explain everything in detail to the management.

For all the places where you found issues, you can talk to managers, employees, and key personnel in the company to come up with ways to solve the problems. For things that work in certain areas, you can think together about what changes could be made to get even better results.

Gather all the information you’ve collected and spend time looking at it closely. Get help from the people who know about those things to help you understand everything. This will help you make sense of everything you’ve found.

7. Make a report

To formally finish your procurement audit, create a clear report that includes all the things you discovered.

Make sure managers and key personnel in the company can read this report. It will help them make informed decisions and ensure that the procurement process runs as smoothly as it can.

The Advantages of Procurement Audit

The aim of a procurement audit is to make things work better, follow rules, and stop fraud. Here are five advantages that you can gain by conducting procurement audits in your company:

1. Helps companies avoid fraud

When you deal with a lot of purchases, it’s easy to miss any money that can’t be explained or any spending that’s not right. Thus, regular audits ensure your procurement process is free from any errors or fraud. 

2. Enhances supply chain visibility

Looking closely at how you purchase materials or services for your company helps you really know how your supply chain works.

When you conduct procurement audits, it’s a good chance to look at the whole process again, find any mistakes, and change how the supply chain works to make it better.

This may also make your suppliers ensure they follow the rules and work better in their own supply chains, and they may be encouraged to start checking their own ways of doing things too.

3. Reduces costs

A successful procurement audit can decrease wasteful, old-fashioned, or extra spending in the office. It does this by looking really closely at things inside and outside the company.

The outcome will result in a new way of procurement practices that will eventually become the normal way for different parts of the company or even as a whole. This new way of purchasing materials or services helps save money, especially on costs that were thought to be fixed and unchangeable.

4. Streamlines the procurement process

When you look at your procurement processes in an audit, you can find some business activities that are making your procurement slow or causing problems. Even small things, like how much you purchase at a time and who you buy from, can have a big impact on the procurement process.

5. Reduces risks

Conducting a procurement audit properly ensures that your company follows industry standards and legal requirements. Additionally, when you keep reviewing your procurement process, you can decrease the risk of non-compliance in your company. 

Procurement Audit Checklist

Here’s a useful checklist to follow whenever you perform a procurement check that will ensure your reports remain consistent:

• Allocate roles for audit responsibilities
• Inform the management team about the audit
• Gather input from the purchasing team
• Examine purchase orders, requisitions, and requests for quotations (RFQs)
• Evaluate connections with suppliers
• Review the entire procurement procedure
• Scrutinize spending that doesn’t align with the process

Conclusion

In summary, a procurement audit is a careful review to make sure your company’s procurement process follows the rules and laws of the industry. It also ensures that all the employees and other stakeholders follow the standards set by the company.

It’s a step-by-step approach to make things work better, find problems, and prevent fraud in your procurement process.

In the end, a procurement audit helps your company know what to do, work better, and stay strong in the market.