Step-By-Step Guide for an Effective Procurement Audit (With Checklist)

Some common procurement challenges are inadequate documentation, ambiguous contracts, insufficient internal controls, risk management, and non-compliance with industry standards.

There are only two ways to identify such issues: wait for repercussions to disrupt the supply chain or conduct a procurement audit.

This post will cover how to conduct a comprehensive procurement audit with a step-by-step process and checklist.

What is a Procurement Audit? 

A procurement audit is a systematic process that companies take up to ensure that the procurement procedures are being followed to ensure compliance, efficiency and effectiveness

The auditing team carefully reviews documents like contracts and purchasing records in a procurement audit. It examines each phase of the procurement process, from bid assessments to contract management, to identify discrepancies and optimize efficiency. The main goal is ensuring adherence to regulations, minimizing risks, and refining procurement practices for optimal organizational outcomes.

How To Prepare for a Procurement Audit 

For an effective procurement audit, consolidate all the documents with proper access for relevant stakeholders. Employ procurement software to create a single source of truth and avoid unnecessary friction.

Implement access controls to restrict permissions to view-only access for sensitive procurement data. This step ensures that only authorized individuals, such as the audit team, can access critical information, minimizing the risk of unauthorized alterations or data breaches.

Here is an exhaustive list of documents you will need for the procurement audit:

1. Procurement policies and procedures, including the updates or revisions to these documents
2. Contracts and agreements with vendors — amendments, renewals, or modifications to existing contracts
3. Purchase orders issued during the audit period and supporting documentation for each purchase order
4. Invoices related to procurement and payment records, including dates and amounts paid
5. Goods received notes and delivery records, including dates, quantities, and item condition
6. Vendor profiles, including contact information and details of vendor qualifications and any evaluation or performance assessment reports of vendors
7. Bid and proposal documents, the evaluation criteria, and scoring records for vendor selection
8. Records of communication that are related to procurement decisions and processes — correspondence with vendors, internal departments, and other stakeholders
   
9. Documentation outlining internal controls within the procurement process — evidence of segregation of duties and authorization processes
10. Previous internal and external audit reports and any actions taken or improvements made based on earlier audit recommendations
11. Procurement budgets and any adjustments or variances with the original budget

Five Steps for Conducting a Procurement Audit

With all the documents ready, begin the procurement audit process. Here is an end-to-end five-step audit process with checklists for a successful audit:

1. Gather Stakeholder Input 

Conduct interviews with key stakeholders to gather insights. This adds a layer of understanding regarding the human aspects of the procurement process, helping identify challenges and opportunities for improvement.

Additionally, collaborate with relevant stakeholders, such as department heads and key project managers, to decide the scope and create an audit plan. This inclusive approach ensures an understanding of organizational needs and contributes to developing an effective and targeted audit strategy. 

2. Assign Roles

Create a clear roadmap for team members. First, designate a lead auditor to oversee the entire process. This person ensures coordination and consistency. 

Then, distribute specific responsibilities among team members, such as document analysis, interviews, and data assessment. This division of labor maximizes efficiency, expertise, and accountability, contributing to a well-executed procurement audit.

Here are the top four best practices when assigning roles to an audit team:

• Clearly define team tasks to prevent confusion and streamline workflow
• Implement segregation of duties for an unbiased audit process
• Rotate roles periodically to encourage collaboration and shared expertise
• Foster collaboration among diverse team members for a comprehensive assessment

3. Identify Problem Areas 

Examine the procurement process to identify weaknesses and assess the overall efficiency of the procurement process. Here are the top four steps to keep in mind:

Assess Purchase Orders, Purchase Requests, and Invoices

Examine the purchase orders, requests, and invoices for accuracy, completeness, and adherence to established protocols. Ensure that the documentation is easily accessible. Any discrepancies or missing information indicates inefficiencies or errors in the procurement process. 

Potential Loopholes: 

• Misplaced signatures, unclear specifications, or missing supporting details
  
• Discrepancies in recorded quantities, prices, or delivery dates
• Mismatched product codes, incorrect quantities, or inaccurate pricing

Healthy Practices:

• Implement a standardized checklist for purchase orders and requests, ensuring all necessary information is included
• Conduct regular training for procurement staff on accurate and comprehensive documentation practices
• Employ procure-to-pay software for storing and retrieving documents, enhancing accessibility and reducing errors

Review Vendor Relations

Evaluate the strength and effectiveness of relationships with vendors. Examine vendor agreements and contracts to ensure they are clear, comprehensive, and aligned with organizational needs. Also, verify the effectiveness of vendor vetting processes.

Potential Loopholes: 

• Contracts lacking specificity in payment schedules, service levels, or delivery terms
• Failure to verify vendor credentials, financial stability, or past performances

Healthy Practices:

• Conduct periodic vendor performance reviews to ensure ongoing reliability
• Develop transparent and standardized contract templates specifying payment schedules, service levels, and delivery terms
• Diversify vendor partnerships to diminish dependency and enhance resilience

Analyze Procurement Practices

Assess the entire procurement process to check if it adheres to industry standards and complies with organizational policies and legal requirements. This involves comprehensively examining sourcing, contracting, and purchasing practices to identify deviations or shortcomings.

Potential Loopholes: 

• Failure to adhere to industry standards or legal requirements, showcasing a disregard for regulatory protocols
• Continued reliance on outdated or non-competitive suppliers, hindering cost-effectiveness
• Lack of systematic identification and mitigation of potential risks, exposing the organization to unforeseen challenges

Healthy Practices:

• Provide training sessions on industry standards and legal requirements to ensure ongoing compliance
• Organize quarterly workshops focusing on proactive risk identification and mitigation strategies, fostering an aggressive risk-aware culture

Examine Internal Controls

Evaluate the segregation of duties, authorization procedures, and overall internal controls. Make sure that checks and balances are in place, preventing fraud, errors, or unauthorized activities that compromise the integrity of the procurement process.

Potential Loopholes: 

• Allocation of responsibilities for both approval and execution to a single individual increases the risk of errors or fraudulent activities 
• Insufficient checks and balances in the approval process, allowing unauthorized transactions
• Absence of mechanisms to detect irregularities, fostering an environment conducive to fraudulent activities

Healthy Practices:

• Provide employee training on fraud prevention and promote a culture of ethical behavior
• Implement proper approval workflows to enhance control mechanisms

4. Spot Out-Of-Process Spending

Investigate expenditures to ensure they align with approved procedures. Any out-of-process spending indicates a lack of adherence to procurement guidelines, necessitating corrective measures. 

Potential Loopholes: 

• Missing or inaccurately recorded receipts, making it challenging to validate and track expenses
• Insufficient supervision that enables unsanctioned spending to go undetected

Healthy Practices:

• Implement strict spending approval processes with explicit guidelines
• Conduct periodic spending reviews to identify and rectify discrepancies
• Use spend management software for real-time monitoring to detect and address unauthorized spending promptly 

Here is a list of elements to assess for the internal procurement audit: 

Procurement Audit Checklist

Check the following items to get a comprehensive overview of your procurement process. 

• Standard operating procedures (SOPs)
• Clear audit trail for procurement transactions, documenting each step in the process
• Delegation of authority matrix 
• Roles and responsibilities as per the matrix
• Training manuals to help users
• Logical access rights to respective users
• Segregation of duty (SOD) rules in the software
• The purchase order dump — pick samples to check

• If each purchase is supported by at least three vendors
• Cost-benefit sample for vendors
• Terms for purchase orders

• Agreements of major purchases
• Terms of sample agreements
• Annual procurement budget aligned with annual operations planning 
• Goods received notes (GRN) report
• Open purchase requests and purchase orders
• Exceptions to the process being approved
• The aging of material available in the warehouse
• If the same material was purchased by multiple vendors
• Vendors approval process
• Duplicate vendors in the system (identified via PAN)
• Dummy vendors
• Minimum order quantity (if created)
• If the company maintains any risk register related to the procurement function
• Sample vendor payouts (as per purchase order terms)
• Internal control over financial reporting related to procurement
• Measures to secure procurement data and ensure confidentiality
• Ethical vendor selection practices, ensuring fairness, transparency, and avoiding conflicts of interest

5. Prepare Audit Report

Compile all audit findings related to internal procurement processes. Then, based on the following inspection, create an audit report:

• Ensure procurement aligns with policies, standards, and legal requirements, identifying non-compliance and assessing organizational risk and reputation impact
• Analyze the workflow, pinpointing bottlenecks and assessing control effectiveness for optimal procurement efficiency
• Evaluate resource utilization in personnel, technology, and budget to optimize productivity without compromising quality
• Assess risk identification, assessment, and mitigation in procurement, recommending improvements for enhanced resilience and threat minimization

Once the assessment is complete, document recommendations to address identified issues and improve procurement processes. Also, highlight aspects of the procurement process that align with best practices. 

Compile all findings, analyses, and suggestions into an audit report. Present the identified strengths and weaknesses, seeking input and additional context to enrich the audit findings. Finally, establish a monitoring mechanism to track the outcomes of the implemented changes. Regularly revisit and update procurement practices based on changing organizational needs, industry standards, and regulatory requirements.

What Are the Benefits of a Procurement Audit?

A procurement audit offers numerous advantages that extend beyond merely identifying inefficiencies. Conducting a procurement audit ensures that your procurement processes align with industry standards, legal requirements, and organizational goals. Here are the key benefits:

1. Compliance

A procurement audit ensures adherence to internal policies, industry regulations, and legal requirements. This helps avoid costly penalties and maintain the organization's reputation.

2. Risk Mitigation

By identifying potential risks early, a procurement audit allows for proactive measures to minimize these risks. This includes detecting fraudulent activities, preventing contract loopholes, and ensuring vendor reliability.

3. Cost Savings

A thorough audit can uncover unnecessary expenses, outdated contracts, and non-competitive suppliers. Streamlining these areas can lead to significant cost reductions, boosting the organization's bottom line.

4. Improved Efficiency

Auditing the procurement process helps identify bottlenecks and inefficiencies, enabling you to optimize workflows. This leads to faster processing times, reduced errors, and more efficient resource allocation.

5. Better Vendor Relationships

Regular audits facilitate transparent and standardized vendor management practices. This strengthens vendor relationships by ensuring fair dealings and clear communication, ultimately contributing to long-term partnerships.

6. Strategic Decision-Making

The insights gained from a procurement audit empower leadership with data-driven decisions. By understanding the strengths and weaknesses of the procurement process, leaders can make informed choices that align with the organization’s strategic goals.

Regular Audits for Efficient Internal Processes 

Routine procurement audits aren't just crisis management tools; they are proactive investments. By dedicating time and resources to periodic evaluations, you prevent issues before they arise. The long-term gains in efficient processes, improved vendor relations, and heightened compliance far outweigh the initial investment.

Automation adds a transformative layer to your procurement process, speeding up audits and providing real-time insights. We have covered in-depth how procurement automation can reinforce your internal processes without impacting your supply chain. Read how you can automate procurement without unnecessary complications. 

Procurement Audit - FAQs

What Are the Main Principles of a Procurement Audit?

The main principles of a procurement audit revolve around ensuring transparency, compliance, and efficiency within the procurement process. Key principles include:

• Accountability: Ensuring all procurement activities are properly documented and can be traced back to responsible individuals or teams.
• Compliance: Verifying that procurement practices adhere to internal policies, legal requirements, and industry standards.
• Transparency: Maintaining clear and open communication with all stakeholders, ensuring that procurement decisions and processes are easily understood and accessible.
• Efficiency: Streamlining processes to eliminate waste, reduce costs, and improve the overall speed and effectiveness of procurement activities.
• Risk Management: Identifying, assessing, and mitigating potential risks to avoid disruptions and ensure continuity in the supply chain.

How Often Should Procurement Audits Be Completed?

Procurement audits should be completed regularly to ensure ongoing compliance and efficiency. The frequency can vary depending on the organization's size, industry, and regulatory environment. However, a best practice is to conduct a comprehensive procurement audit annually. For organizations with complex procurement processes or those operating in highly regulated industries, more frequent audits—such as quarterly or semi-annually—may be necessary. Regular audits help in early detection of issues, ensuring that corrective actions can be taken promptly to maintain the integrity of the procurement process.

Procurement Audit Best Practices

Adopting best practices in procurement audits is crucial for achieving accurate and actionable results. Some of the top best practices include:

• Thorough Documentation: Ensure that all procurement processes, transactions, and decisions are meticulously documented to provide a clear audit trail.
• Stakeholder Involvement: Engage key stakeholders throughout the audit process to gain comprehensive insights and ensure all perspectives are considered.
• Segregation of Duties: Implement strong internal controls by separating responsibilities among team members to reduce the risk of errors and fraud.
• Use of Technology: Leverage procurement software and automation tools to streamline the audit process, improve accuracy, and provide real-time insights.

Continuous Improvement: Treat each audit as an opportunity to identify areas for improvement and implement changes that enhance the overall procurement process.