Chapter 5

Checklist for Purchase and

Procurement
5.1 Material is an important cost in any manufacturing organisation as it
involves major portion of the total production cost. The objective of checking
of material procurement is to ensure that right material is procured at the
right price, at the right time and in the right quantity.

Documentation
5.2 Ensure availability of all the requisite documents such as:
(i) Purchase/ service policy of the organisation.
(ii) Purchase order/ service contracts.
(iii) Original invoice (excise invoice, if claiming CENVAT).
(iv) State and/ or city entry form.
(v) Lorry documents for freight payment and for TDS, if applicable.
(vi) Gate-entry record.
(vii) Material receipt note showing actual quantity.
(viii) Duly verified quality report / satisfaction report.
(ix) Purchase register
(x) Custom clearance and receipt for payment of custom duty, in case of
import.

Legal Compliance
5.2 Ensure documentary proof for compliance of following:
(i) Payment of state/ city entrance cess or availability of proper document
showing exemption for such payment.
(ii) Payment of custom duty and custom clearance of imported material.
(iii) Deduction and payment of TDS on freight on purchases and services.
(iv) Payment of VAT on the goods purchased from unregistered dealer.
Internal Audit Checklist

(v) In case of purchase from related party, compliance with relevant

provisions of Section 188 of Companies Act, 2013.
(vi) The procurement price is reasonable according to Section 40 A(2) of
Income Tax Act, 1961, if purchase is made from sister concern.
(vii) Government notifications and guidelines regarding compulsory
purchases from Micro, Small and Medium Enterprises.

Authorisation Matrix
5.3 Ensure that the following documents have been authorised properly:
(i) Requisition for purchase of store material/ service contracts as well as
direct debit items (including its amendments/ modifications).
(ii) Opening of tender/ quotations.
(iii) Comparative chart of technical and financial biddings.
(iv) Purchase order/ service contracts (including amendments/
modifications).
(v) Inward entry at company gate.
(vi) Quality check and its approval / satisfactory report from user.
(vii) Material receipt note.
(viii) Approval of rates, in case purchase order is not raised.
(ix) Issue of debit/ credit note for return/ rejection of material/ rate
difference.

Compliance with Accounting Standards and

Standards on Auditing
5.4 Ensure compliance with following Accounting Standards;
(i) AS 1 Disclosure of Accounting Policies.
(ii) AS 2 Valuation of Inventories
(iii) AS 11 The Effects of Changes in Foreign Exchange Rates
(iv) AS 18 Related Party Disclosures
Ensure compliance with following Standard on Auditing:
(i) SA 550 Related Parties

34
 Checklist for Purchase and Procurement

Ensure compliance with following Standard on Internal Audit:

(i) SIA 18 Related Parties

Procedures/ Controls
5.5 Ensure and confirm that:
(i) The organisation has clear and comprehensive (up to date)
procurement policy/ service contract whether purchases/ services are
centralised in purchase/ service department or purchases/ services are
made from approved authorities.
(ii) Internal purchase requisition is properly vetted/ validated and
authorised.
(iii) The internal requisition clearly mentions the specification and quantity
of material/ service to be procured and also the supply date.
(iv) Purchases and procurement of services are based on competitive
quotations as received from two or more suppliers.
(v) Whether comparative quotation analysis sheet drawn before
purchases/ service are authorised .
(vi) If lowest quotation is not accepted, whether the purchases/ services
has been approved by senior official.
(vii) Whether purchase/ service orders are pre-numbered and strict control
exists over unused forms.
(viii) Whether list of pending purchase/ service order is complied by
purchase/ service department, at least once in every quarter.
(ix) Whether quotations are called as per company’s policy from the
registered vendors.
(x) Whether quotations are opened and registered and a comparative
chart is prepared and authorised.
(xi) Purchase/ service order is given to lowest bidder subject to
satisfaction of all other conditions/ specifications.
(xii) Purchase/ service order is issued as per the requirement of internal
requisition and also mention the supply date. It should also contain
penalty clause, if supply/ service is not made as per terms and
specification of purchase order.

35
Internal Audit Checklist

(xiii) One copy of each purchase order/ service order should be made
available to store and accounts department.
(xiv) Material is supplied as per purchase order and material receipt note
(MRN) is prepared after quantity and quality checks and authorisation.
Similarly, service is executed as per service order.
(xv) Bill is passed by accounts department for the quantity as accepted by
stores after making deduction for any quality discrepancy and breach
of any other term/ condition including delay/ non-supply of material/
service in time.

Recording of Transactions
5.6 Ensure that proper accounting entry has been recorded in books of
accounts:
(i) Raw material has been booked as raw material and stores and spares
has been booked as consumables (The direct debit items may be
booked either as expenditure or as part of project, if the company
policy permits) and service has been booked to direct expenses.
(ii) Procurement for project or capital expenditure is not booked as
revenue expenditure.
(iii) The value of purchase/ service is recorded net of CENVAT/ Service
Tax and VAT credit, if claimed.
(iv) All the related expenditure, such as toll tax, cess, freight, etc., are
recorded as part of purchase/ service.
(v) TDS, if applicable, should not be charged to purchase/ service.

Quality/ Good Governance

5.7 For good governance and better control, following may be available:
(i) Purchase budget and its comparison with the actual and authorisation
of variation, if any.
(ii) In case of capital buying, reason and cost benefit analysis of such
buying.
(iii) In case of make or buy decision, the calculation of actual cost.
(iv) In case of related party transaction, actual arms length price.
(v) Control over vendor developments.

36
 Checklist for Purchase and Procurement

(vi) Cost reduction in unit price due to technology up gradation and/ or

development of new source of supply.
(vii) List of employees by designation with limits of authority.
(viii) List of unpaid trade payables prepared and reconciled periodically
with the General Ledger Control Accounts for supply of goods and
services.

Reporting
5.8 Though reports are generated as per requirement of a particular
organisation, the following exceptional reports may be useful from the
internal audit/ management point of view:
(i) Pending requisitions for which Purchase Order is not raised.
(ii) Pending Purchase Order for which supply is not made.
(iii) On Time Supply (OTP) of material report.
(iv) List of registered vendors for various type of material.
(v) Material purchased without Purchase Order and/ or emergency
purchases.
(vi) Long outstanding advance made to suppliers.
(vii) Long pending sale tax “C” forms issued, but not used.

Suggestions, if any
5.9 Suggestions may be given for improvement in the system or steps to
be taken/ avoided to make the purchases easier, systematic as well as
transparent.

37