Ultimate Guide to Conducting a Procurement Audit in 2024

Introduction

Did you know, a recent research by an international independent advisory firm, Accuracy stated that procurement fraud in the UK jumped 13% in the past year. The report indicated that such manipulation in the procurement process happened due to disruptions in the global supply chain in the wake of various economic downturns. Multiple businesses had to find alternative suppliers within a tight timeline. Hence, they could not conduct the same level of due diligence as one would normally, leading to fraudulent activities. This is a genuine concern with severe implications.

At an organization’s level, procurement disruptions can be in the form of inadequate documentation, internal manipulation, contract ambiguity, prejudicial unfair treatment, price rigging, or non-compliance with industry standards. As procurement teams handle an influx of purchases and heavy amounts of data, any discrepancy can be financially draining, coupled with reputational damage and other complexities. Hence, one must develop appropriate controls to attack and mitigate procurement fraud.
This is where conducting a procurement audit comes into place.
With delegated authority aligned to company goals and management needs, procurement audit reviews the entire procurement cycle for any inefficiency to improve the process, reduce chances of fraud, and contribute to savings.

But let’s not scratch the surface; instead, deep dive into the nitty gritty of a procurement audit plan.

What is a procurement audit?

Procurement audit refers to a systematic and scrutinized review of an organization’s complete procurement cycle. It involves carefully examining and evaluating various procedures, documentation such as agreements, invoices, and historical data such as financial history and supplier lists to ensure adherence to relevant laws, regulations, and internal policies. In case of any discrepancy, a procurement audit can minimize risk for the business by taking timely corrective actions, ensuring procurement efficiency.

What does a procurement audit cover?

A procurement audit plan review-

• Procurement-related documentation
• Interviews relevant stakeholders
• Agreement of contracts
• Analyzes data related to supplier lists and their performance records
• Pricing data, purchase information
• Financial statements relating to procurement
• Any other relevant documents and information

What is a procurement audit checklist?

Procurement is a complex process, comprising a multitude of documents and activities that one needs to be on top of constantly. Having a ready-to-go internal procurement audit process checklist can lessen the burden.

Here’s a useful procurement audit checklist businesses can follow when they are ready for a procurement check:

• Allocate roles for audit responsibilities
• Uprise the stakeholders and management about the audit
• Focus on the problem
• Examine purchase orders, requisitions, and requests for quotation forms
• Evaluate supplier relationship
• Review the entire procurement procedure
• Evaluate insights
• Create audit report

Let’s look at these points in detail.

How to run a procurement audit plan in 8 steps?

A procurement audit is not just about uncovering problems or pointing out a glaring oversight. Are vendors upholding their procurement contracts? Are there gaps in the company’s policies and procedures? Are there any areas for improvement? Are businesses meeting their compliance goals? – These are some pertinent questions procurement teams should have answers to ensure operational efficiency and risk mitigation measures from the security and compliance points of view.

Follow the below-mentioned eight steps of the procurement audit plan in a consistent and structured manner for reliable results:

1. Allocate roles for audit responsibilities

The first step in the procurement audit program is to state who will conduct the procurement audit. In some organizations, the procurement team, led by a dedicated manager, performs the process. They are tasked with the responsibility of the entire audit process. Some businesses want to avoid any conflict of interest, hence hire external auditors to analyze the audit of the procurement process.

2. Uprise the stakeholders and management about the audit

A comprehensive procurement audit process is only possible by informing all stakeholders about it. Since the audit will involve managing hoards of data and other critical technical information, the people looking after those areas must be kept in the loop from the beginning to avoid any issues. After all, they are the ones who will give you all sorts of inputs or voice their concern regarding a problem. Thus, the meetings can be one-on-one with the managers of various departments or group meetings with the entire leadership.

3. Focus on the problem

There are majorly three areas where a procurement audit should focus on to evaluate the performance:

• Contracts and agreements
• Procurement processes
• Procurement history

A detailed audit of these three areas can uncover problems in the procurement process. If these three areas are efficient, the auditor must go on to scrutinize the whole process to find any hidden problem.

4. Examine purchase orders, requisitions, and requests for quotation forms

A purchase order is a document created by the buyer and shared with the supplier to order inventory. It contains detailed information about the supplies; thus, thoroughly examining this document can highlight any manipulation, fraud, or other discrepancies. Cross-check PO numbers of ordered items, supplier information, product descriptions and pricing accuracy, and authorized signatures for any concern.

Understandably, going through volumes of documents can be overwhelming; hence, picking them randomly from each category and vendor list is suggested for auditing. Apart from purchase order forms, the auditing team can also go through-

• Purchase requisitions
• RFPs (request for proposal)
• RFIs (request for information)
• RFQs (request for quotation)

5. Evaluate vendor relationship

Although procurement teams conduct due diligence to mitigate risk before onboarding a vendor, reviewing and authenticating the vendor selection process is always good. This step in the procurement process is also prone to red flags at times. Other than that, checking whether the suppliers meet the business requirements, their consistency in meeting their delivery, and other agreeable terms can avoid any inconsistency.

6. Review the entire procurement procedure

Lay out all the steps in the procurement process to uncover any suspicious activity. It is essential to assess every action, whether creating purchase orders, handling invoices, or managing day-to-day procurement inventory. During this step, the procurement auditor can scrutinize how time-consuming each task is, whether any critical step needs to be included, and the ideal way of simplifying the existing process.

7. Evaluate insights

Once the audit is complete with data collection, it is time to evaluate the insights. Make a list of every possible detail or outcome of the research to discuss the discovery and plan of action with management and relevant stakeholders.

8. Create a procurement audit report

An audit is complete with a procurement audit report highlighting each finding in detail. A procurement audit report is a final and formal document summarizing the audit results, with further suggestions for preventative measures. It will be the cornerstone for decision-making in the future.

There isn’t a specific period as to how often a business should conduct an audit of the procurement process, but making it a regular practice can help companies remain compliant and achieve the most significant value from their purchasing decisions. Industry experts suggest procurement audits should be conducted each time a business changes its policy and regulations or onboard a new supplier.

Also, every business is different, and so is its need. Hence, the procurement audit checklist is not set in stone. Procurement leaders can always create checklists according to their requirements and circumstances.

Why you need to focus on the procurement audit program

Needless to say, an audit of the procurement process is the backbone of any business. Its fundamental goal is to protect the business, stakeholders, and assets against threats by carefully assessing various documents, processes, and procedures. Here are a few reasons why businesses think it is indispensable-

• The procurement audit process prevents fraud and malpractice:
  A procurement audit is so comprehensive that it can improve fraud detection and prevention in companies, whether big or small. By recognising a red flag, procurement auditors safeguard the procurement process from any vulnerability or glaring irregularity. They help teams reflect and consider what the issue may be and help resolve it, which protects the integrity of the business.
• Procurement audit process improves business efficiency:
  Armed with clear insights into the sourcing and purchasing process, comprehending various opportunities and whether they can be optimized to improve processes and policies, savings, and timelines, the procurement audit program enhances transparency, which improves efficiency in business operations.
• The procurement audit process ensures compliance with rules and regulations:
  Regular audit of the procurement process keeps suppliers, vendors and the procurement team in check. It ensures they comply with the procurement standards in the procurement activities to avoid any legal or financial challenges that constitute an obstacle to the company’s success.

Who conducts the audit of the procurement process?

The decision on who conducts a procurement audit often rests on the company’s size, the business’s complexity, and the budget in hand. Ideally, procurement audits should be done by those individuals or teams with the necessary expertise, knowledge, and skills to effectively evaluate the entire procurement cycle and derive and provide valuable insights with recommendations for improvement. Here is our suggestion to consider:

• Internal staff members: Internal staff members with a sound understanding of the existing procurement process can be made responsible for conducting a procurement audit alongside their regular duties. These representatives are from different departments, and small to medium companies with budget issues can undertake this route.

• Internal audit department: Some large businesses have an internal audit team dedicated to conducting independent and objective audits across different functions, including procurement. These individuals are experts in their field and well-versed in auditing practices, risk assessment.

• Procurement department: In some companies, the procurement team may audit the procurement cycle. They leverage their knowledge of the procurement function and associated risks and efficiently conclude this task.

• External audit firm: organizations can also engage external audit firms or consultants to perform procurement audits. These external auditors have no bias and hence bring objectivity when assessing the procurement function.

Conclusion

The procurement audit program gives businesses a clear picture of their procurement process. If, as a company, you are not tracking your procurement performance, you’re sitting in a minefield of impending disaster. But our motive here is not to scare you but to prepare you against the unforeseen. The power of artificial intelligence today can give you visibility of your entire procurement workflow with real-time review and optimization. Along with improved collaboration and communication, procurement audit tools ensure the onboarding of credible vendors, procurement at the best pricing and terms with automated three-way matching, and complete transparency for financial analysis, reporting, and forecasting, eliminating chances of fraud or malpractice.