A procurement audit forms a vital part of the procurement cycle. Procurement can be a complicated area for an organization due to an influx in purchases made and the amount of data handling involved.
An audit program for the procurement department helps streamline a company’s procurement processes. It can result in reduced overspending, improved supplier relationships in the long-run, better procurement efficiency, and higher profit margins for your business.
This article will delve into the intricacies of how to conduct a procurement audit successfully and why procurement audits are important.
A procurement audit refers to the process of a business reviewing all its different supplier agreements and contracts to ensure that they’re constantly adding value to the firm.
Conducting an audit helps to understand whether the procurement process in place is complete, efficient, and accurate.
Audits look at the different contracts and processes in a procurement management system. They also look at the transaction history with vendors to make sure that the terms and conditions in your procurement contracts are upheld.
The procurement audit process aims to enhance procurement efficiency.Audits should be facilitated on a periodic basis to ensure that all business procurement operations are operating smoothly.
There are three essential procurement audit objectives:
Regular procurement audits help identify any irregularities across your procurement management system.
By looking into your procurement history and carefully assessing each process, you will be able to identify any existing issues with your system.
This makes it easy to recognize and eliminate possible fraud.
When you enter into a procurement agreement with a new supplier, there will be specific contract terms that will need to be maintained.
With a procurement audit, you can monitor these contracts to ensure that the suppliers have been following the terms as agreed to in the contract.
This allows you to identify suppliers which are underperforming, and either replace them or make changes to how your supplier relationship operates.
Procurement audit programs take a deep dive into your procurement system and how it operates. By closely investigating the procurement process, you can easily identify the areas that need improvement to achieve better outcomes.
A successful procurement audit should reveal any unnecessary steps that might be slowing down your company’s procurement efficiency.
The main goals of a procurement audit are to improve efficiency, compliance, and eliminate irregularities or fraud.
Here are six of the main reasons why running a procurement audit is so important for your business.
During a procurement audit, you’ll be able to unpack your procurement system to see exactly where your money is being spent.
A procurement audit allows you to discover new ways to eliminate barriers to increased efficiency, improve the quality of suppliers, negotiate problematic contracts, and generally optimize your spending patterns.
When executed properly, a procurement audit can make a big difference to your bottom line.
Digging into your procurement processes gives you a detailed understanding of your supply chain function and it’s running.
A procurement audit lends itself as a good opportunity to re-evaluate this process as a whole, identify spending errors, and restructure the supply chain to make it more efficient.
This could lead to a knock-on effect by motivating suppliers to ensure that their own compliance and supply chain efficiency is a priority, and direct them to evaluate their own processes.
By analyzing your purchasing processes through an audit, you’ll be able to identify any business practices that are slowing down or affecting your purchasing cycle.
Small details, like the volumes that you order and which vendors you order from, can make a big difference to purchasing efficiency.
Regular audits result in a more legitimate procurement system. With high-volume procurement departments, any unaccounted for amounts or illegitimate spending can be easily overlooked.
An audit carefully tracks overall spending and helps identify possible fraudulent activities.
Running internal procurement audits is important, however, you may also face audits from external organizations.
By having a clear internal auditing system and trail in place, external audits will become much easier to manage as your processes will already be established and well-defined.
A well-executed procurement audit ensures that your organization meets the industry standards and complies with legal requirements.
By regularly reviewing your purchasing processes, you reduce the risk of non-compliance.
An audit program for procurement can be an intensive process. It requires an in-depth examination of your procurement system and related processes, and involves multiple steps.
Here are seven essential steps to running a procurement audit:
It is important to ensure that management and stakeholders are involved and kept up to date during the process from the start.
Procurement involves handling a lot of data and technicalities, thus it is imperative that key players are included to make sure that the audit operation runs smoothly.
The first step would be for the audit team to meet with management to get a full understanding of the current state.
They will subsequently be able to conduct a gap analysis accordingly (step two).
A procurement audit should focus on three main areas:
Each one of these areas will require its own detailed audit. .
When commencing with a procurement audit, it is vital to identify all areas of improvement and to plan how each one will be investigated.
You will still need to do an end-to-end audit of the entire procurement process, but it's important to understand the different areas that require immediate focus.
Reviewing all purchase order forms will give a detailed insight into the ongoing activities in the procurement department.
Purchase order forms are filled out each time the procurement department orders inventory.
If fraud exists in the procurement system, there’s a good chance that these forms will be manipulated to cover up any indiscretions.
Procurement departments generally tend to have a high volume of purchase orders, so analyzing every document will be tedious.
A better approach to detecting any procurement fraud is to select a random sample of documents across different vendors and review each one carefully.
The end goal is to ensure that all of the details and figures for each vendor are accurate and reflect genuine organization demand for goods and services.
Each company will have its own specific approach for choosing vendors. Various factors like risk ratings and pricing are considered to make sure that the right vendor/s are selected.
Your procurement audit should review each vendor’s details.
You should look into the profile of each vendor to check that they match the selection criteria of your company, and are following the terms as agreed in the contract.
The procurement process should be clearly defined. Each step including creating purchase requisitions, placing orders,processing supplier invoices and managing general procurement tasks need to follow a documented approach that makes sense for your business.
You should investigate how time-consuming each task is, whether any important steps are skipped and whether there’s a way to simplify existing processes.
An effective approach is to meet with the procurement team and get their feedback on how to make the procurement process more efficient.
At this stage in the procurement audit, you would have gathered many insights into how the purchasing process operates and identified problem areas.
The next step is to put all of these insights together for a careful assessment.
You will meet with management and stakeholders to discuss these insights and find actionable solutions.
To officially close the procurement audit, draw up a clear report with all the findings.
Management and senior stakeholders should be able to access this information to guide their own decision-making and ensure that procurement systems run at the highest possible efficiency.
A procurement audit is an essential process for a business to ensure that all systems and procedures are functioning effectively and without fraudulent activities.
Running regular internal audits along with external ones will help in ensuring that your business stays compliant with any legal and business regulations.
Follow the steps mentioned above to ensure that your procurement process is operating at an optimal level.