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) b) c) d) e) f) g) h) How Procurement Decisions are taken- responsibilities, authority delegation etc Preparation and approval of Purchase Requisition Preparation and approval of Purchase Orders Solicitation and evaluation of quotations Tendering process where relevant Selection and Registration of vendors-criteria, preferences, reliability Receipt of goods and recording of quantities received Preparation of relevant documentation confirming procedure compliance. 1.2 1.4 1.5 1.6 Recording of and accounting for purchases. Internal control over purchases. Receivables/claims, if any, from purchases.- for e.g., Insurance 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 generally whether 2.3 items purchased and taken into inventory, and, all purchases have been accounted for.

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 objectives, 2.6

To determine whether the purchase management function is directed towards the accomplishment of organizational targets and goals. 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 through one 3.5 to be

Purchase action to be initiated on the basis of a departmental requisition approved by designated management level. A order to be issued on a pre-numbered form preferably central office, for all purchases. Incoming materials to pass through a receiving section for counting and inspection. Goods received note (or similar document) prepared covering the receipt. The goods received note to numbered and signed by a designated officer who count and inspection.

be prealso makes the 3.6

All invoices for purchases to be sent to Accounts Department directly. All invoices to be specifically approved by a level, and, supported by goods received note, before payment.

designated purchase order etc 3.7 lead 3.8

Detailed purchase budgets to be prepared. Decision to purchase to be made on a systematic basis- analysis of requirements, time etc to be taken into consideration. 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) h) i) j)

Are the Purchase Orders in the laid down formats? Are the Purchase Orders pre-numbered? Are the Purchase Orders complete in all respects? 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) m)

Are the goods received directly by stores?. 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) s)

Is inspection carried out immediately?. 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) w)

Is the stock record promptly and properly updated?. Is an appropriate copy of the Goods Received Note promptly forwarded to the Accounts Department?.

x) y)

Is Purchase Department notified of the receipt?. 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) ff)

Is an insurance claim promptly raised?. Are unused Purchase related forms kept in safe custody and fully accounted for?..

gg) 4.3 4.4 general 4.5

Are outstanding Purchase Orders periodically reviewed?..

Are purchases planned?. . Is a purchase budget prepared?.. Is a requirement planning exercise carried out?.. Are factors like historical trends, lead time, uncertainties in availability, economic scene etc taken into consideration?..

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 4.11

Are current suppliers rated on the basis of their performance?. 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 4.13

Auditee, and, average market prices?. 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 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

mis-

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 4.19 Are the 4.20

Is a purchase order issued for all purchases?. Are goods received notes prepared?. . Are the purchased items received by a centralized receiving department or section?. items counted and inspected?. 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 4.23

Are all purchase returns approved and authorized?. 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 6.1

DETAILED TESTS 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 6.5 6.6

Review instances of cancellation of Purchase Orders Review amendments of Purchase Orders Are the Purchase Orders complete in all respects- specifications, terms of delivery, unit price, quantity, insurance, terms of payment etc.?,.

6.7 6.8

Does the Purchase Order refer to vendors quotation?. 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 6.11 6.12 6.13 Are instances of urgent buying justified? Are petty cash purchases in accordance with the laid down policy? Are the controls over blank Purchase Orders adequate? 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 6.16 Test check purchase vouchers for proper accounting distribution 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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