Internal Audit Program Framework for Procurement Function.

Submission Date: 2 Feb 2004.

Objectives of the Document

The primary objective of the document is to provide a framework for carrying out
an internal control activity in the area of Procurement. The Framework is
expected to assist the internal audit prepare a detailed audit program after taking
into consideration industry-specific and organization-specific aspects. I

Internal Audit Program Framework for Procurement Function.

1.0 AUDIT SCOPE

1.1 Procurement procedures and related documentation-authorization,

purchase orders, receiving, inspection, payment etc.,.

a) How Procurement Decisions are taken- responsibilities,

authority delegation etc
b) Preparation and approval of Purchase Requisition
c) Preparation and approval of Purchase Orders
d) Solicitation and evaluation of quotations
e) Tendering process where relevant
f) Selection and Registration of vendors-criteria, preferences,
reliability
g) Receipt of goods and recording of quantities received
h) Preparation of relevant documentation confirming procedure
compliance.

1.2 Recording of and accounting for purchases.

1.4 Internal control over purchases.
1.5 Receivables/claims, if any, from purchases.- for e.g., Insurance
1.6 Purchase analysis and reporting.

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 2.0 AUDIT OBJECTIVES.

2.1 To determine the adequacy of internal controls over purchases,

both in terms of existence and use.

2.2 To verify whether all purchases have been updated in inventory

records, all payments on account of purchases represent
values of items purchased and taken into inventory, and,
generally whether all purchases have been accounted for.

2.3 To verify whether the items, and quantities of the items, purchased
are reasonable and within the justifiable requirements of the
Auditee.

2.4 To ascertain whether descriptions, classifications, and, related

disclosures are adequate and not misleading.

2.5 To determine whether the purchase management function is

directed towards the accomplishment of organizational
objectives, targets and goals.

2.6 To establish the adequacy of MIS relating to purchases, to facilitate

analysis of information, management control and decision support.

3.0 CONTROL FRAME WORK

3.1 Segregation of the functions of approval of purchases, receiving,

recording, and, payment for the same.

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 3.2 Specific policies and procedures to be established to guide
purchase routines, including approval requirements, related
documentation, tendering procedures, group purchases and price
preferences etc .

3.3 All items normally purchased to be classified and codified. A master

list of suppliers and items to be drawn up.

3.4 Purchase action to be initiated on the basis of a departmental

requisition approved by designated management level. A
purchase order to be issued on a pre-numbered form preferably
through one central office, for all purchases.

3.5 Incoming materials to pass through a receiving section for counting

and inspection. Goods received note (or similar document)
to be prepared covering the receipt. The goods received note to
be pre- numbered and signed by a designated officer who
also makes the count and inspection.

3.6 All invoices for purchases to be sent to Accounts Department

directly. All invoices to be specifically approved by a
designated level, and, supported by goods received note,
purchase order etc before payment.

3.7 Detailed purchase budgets to be prepared. Decision to purchase to

be made on a systematic basis- analysis of requirements,
lead time etc to be taken into consideration.

3.8 All purchase returns to be approved and authorized.

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 4.0 INTERNAL CONTROL ASSESSMENT QUESTIONNAIRE.

4.1 Are all purchases centralized in accordance with laid down Policy. If
not, is the exception approved, and was the specific purchase
activity sufficiently organized to ensure accountability and control.

4.2 Is there a thorough compliance with purchase policy. Are

procedures laid down to guide purchases followed adequately.

a) Is a proper Purchase Requisition issued by the department

requiring goods or services before the Purchase Order is
initiated?

b) Are proper and adequate number of quotations received

from approved vendors before the order is issued.?

c) Where the vendors are not from the approved list, are they
properly selected and prima facie, do they have capacity to
supply the goods or services ordered?

d) If the least price quote is not accepted, is the purchase

adequately documented with reasons. Is the reason for
accepting the quote justified?.

e) Are Purchase Orders signed only by officers authorized to

do so?.

f) Are the Purchase Order amendment justified and properly

authorized?.

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 g) Are the Purchase Orders in the laid down formats?

h) Are the Purchase Orders pre-numbered?

i) Are the Purchase Orders complete in all respects?

j) Is acknowledgement obtained from vendors for purchase

orders- at least for the critical purchases?

k) Are outstanding Purchase Orders properly reviewed and

followed-up?.

l) Are the goods received directly by stores?.

m) If the goods are received by the user department directly, is

the documentation correctly carried out?.

n) Are the goods received at the Warehouse, segregated for

inspection before taken into stock or issued to the user
departments?.

o) Is the Goods Received Note updated immediately on receipt

of goods?.

p) Are the Goods Received Note or other receiving document

pre-numbered?.

q) Are unused Goods Received Note maintained in safe

custody?.

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 r) Is inspection carried out immediately?.

s) Is the result of inspection recorded on the Goods Received

Note?.

t) If the goods are accepted, are the goods promptly removed

and stored in the proper storage area?.

u) Is the Goods Received Note promptly and properly

completed for acceptance?.

v) Is the stock record promptly and properly updated?.

w) Is an appropriate copy of the Goods Received Note promptly

forwarded to the Accounts Department?.

x) Is Purchase Department notified of the receipt?.

y) Does Accounts Department regularly review the Goods

Received Note for which no invoice has been received?.

z) At the month-end, is the last Goods Received Note raised by

the Warehouse compared with the last Goods Received
Note accounted?.

aa) Are shortages and rejections properly dealt with. Are

rejections promptly returned to vendors. Are vendors
informed of rejections?.

bb) Are goods returned to suppliers recorded on the Goods

Received Note and is a Discrepancy Note raised?.

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 cc) Is a copy of the discrepancy note forwarded to the Accounts
Department promptly?.

dd) Is the Discrepancy note promptly acted upon- for e.g., where
advances have been provided to vendors. Is a debit note
promptly raised.?.

ee) Is an insurance claim promptly raised?.

ff) Are unused Purchase related forms kept in safe custody and
fully accounted for?..

gg) Are outstanding Purchase Orders periodically reviewed?..

4.3 Are purchases planned?. . Is a purchase budget prepared?..

4.4 Is a requirement planning exercise carried out?.. Are factors like

historical trends, lead time, uncertainties in availability,
general economic scene etc taken into consideration?..

4.5 Are proper inventory records maintained? . Are inventory levels

set?.

4.6 Does Auditee have a master list of suppliers, and, normally

purchased items?. . Is the list regularly updated?. .

4.7 Does Auditee invite tenders for large volume or high value
purchases?.

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 4.8 Is there compliance with the procedure provide for prior approval of
purchases by designated levels, comparison of several
quotations, registration of suppliers etc?.

4.9 Are the specific procedures laid down to take care of stock out
situations and emergency purchases complied with?.

4.10 Are current suppliers rated on the basis of their performance?.

4.11 Are purchases and variances from budgets/targets reported by

responsibility centres/departments?.

4.12 Is an analysis of purchase information carried out?. Are price trends

analyzed to forecast future prices?. Is a regular
comparison made between average purchase price paid by
the Auditee, and, average market prices?.

4.13 Does Auditee keep constant track of latest market information

regarding new products, substitutes, new suppliers etc?.,.

4.14 Are the various procedures and controls (including limits of

authority) and the compliance generally adequate to prevent
mis- utilisation of Procurement powers?.

4.15 Are the functions of requisitioning for purchases, approval for

purchases, placing a purchase order, receiving the goods,
recording the purchases, and, related payment
segregated?.

4.16 Are all costs directly associated with Procurement function

identified with purchases?.

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 4.17 Are there separate heads of accounts for separate classifications of
purchases?.

4.18 Is a purchase order issued for all purchases?.

4.19 Are goods received notes prepared?. . Are the purchased items
received by a centralized receiving department or section?.
Are the items counted and inspected?.

4.20 Does the accounts department receive the suppliers invoice

directly?. Is a copy of goods received note send to accounts
department immediately after it is raised?.

4.21 Is there a periodical reconciliation between ledger account totals for

purchases, inventory records, and, Cost of Sales/consumption
amounts?.

4.22 Are all purchase returns approved and authorized?.

4.23 Are advance payments for purchases, properly authorized,

separately recorded and followed up?.

4.24 Are there adequate controls to promptly detect unauthorized

purchases or setting up payables if goods are not received?.

4.25 Are there adequate controls to detect cases where liability is

incurred on Purchases but not promptly recorded?.

5.0 ANALYTICAL TESTS

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 5.1 Compare purchases of current period, prior period and budgets to
determine unusual variations and trends.

5.2 Compare relationship of purchases and inventory to relevant

revenue amounts and investigate unusual trends.

6.0 DETAILED TESTS

6.1 Examine the time lag between date of Purchase Requisition and
date of issue of Purchase Orders

6.2 Review Purchase Requisitions for proper documentation and

authorization.

6.3 Review adequacy of Purchase Orders in terms of lowest quotation,

approvals etc.,.

6.4 Review instances of cancellation of Purchase Orders

6.5 Review amendments of Purchase Orders

6.6 Are the Purchase Orders complete in all respects- specifications,

terms of delivery, unit price, quantity, insurance, terms of payment
etc.?,.

6.7 Does the Purchase Order refer to vendor’s quotation?.

6.8 Review approved vendor listing and ensure that the same is
properly and periodically updated. Review vendor identification and

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 selection criteria. Ensure fairness in selection. Also ensure that if
there is only one vendor, the internal control is working and
adequate.

6.9 Review import purchase orders for completeness and adequate

authorization.

6.10 Are instances of urgent buying justified?

6.11 Are petty cash purchases in accordance with the laid down policy?

6.12 Are the controls over blank Purchase Orders adequate?

6.13 Are purchases handled by departments directly, when they are to

be handled by the Purchase Department?. Are decentralized
purchases handled strictly in accordance with laid down
procedures?.

6.14 Test check purchase vouchers with vendor invoices, purchase

orders, purchase requisitions, and goods received note to ensure
that all purchases are properly authorized properly documented.
Review procedures to confirm performance of vendors. The test
check will also ensure that goods are received in respect of
purchases set up as payable.

6.15 Test check purchase vouchers for proper accounting distribution

6.16 Review accounts payables for old unpaid items. Relate the listing to
unpaid Goods Received Notes.

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 6.17 Where goods received note are not supported by vendor invoices,
prepare a listing of missing invoices and ensure follow-up.

6.18 Review instances of fresh purchase orders being raised when

existing purchase orders are not fully executed. Confirm justification
for the same.

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