Purchasing Cycle

Audit Program Audit Program March 2003 Purpose

1. Purchasing, receiving, and recording functions are clearly separated. 2. Procedures for initiating purchases and purchase orders are adequate, including leverage of buying power, selection of qualified vendors, competitive bidding, etc (authorization, efficiency). 3. Goods are inspected upon receipt (delivered in quantity and quality specified), and properly recorded via receiving reports (completeness, existence, accuracy). 4. Goods are safeguarded from damage and theft. 5. Inventory, and liability to vendors, is properly recorded (completeness, accuracy). 6. Purchase Orders, Receiving Reports, and Invoices are properly reconciled (completeness, existence, accuracy). 7. The full process is efficient and effective.

Scope
1. This audit is financial and operational in nature. Focus will be on, and other entities operating and financial processes, specifically Purchasing/Requisition, Inventory Management, and limited Accounts Payable (focusing on P.O. Invoice processing). The testing period will cover 10/1/02 to present.

Audit Procedures
1. Perform and document walkthroughs of the following functions: a. Requisition of Stock Items b. Transfers between Warehouses c. Stock Credits d. Purchase Orders (for stock items, non-stock items, and Xtype items) e. Receiving f. Vendor Credits, Returns and Allowances g. AP processing of PO and nonPO invoices h. Process for resolving discrepancies between POs and invoices i. Payment of Drop Ship items, focusing on how receipt of goods/service is ensured before payment 2. Through observation and interviews, determine the adequacy of warehouse and receiving security from theft and damage. 3. Through observation of the receiving function, determine the adequacy of routines for ensuring accuracy of quality and quantities received. If receiving clerks use sampling techniques, ensure sample sizes are adequate and samples are selected properly. 4. Obtain an understanding of methods used to determine PAR levels. 5. Determine what inventories exist outside of the Materials Management function (i.e. emergency or weekend OR inventory). 6. Understand what report are used to analyze and monitor: a. Purchasing b. Inventory

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Audit Program Audit Program March 2003
7. Determine if cycle counts are performed. If yes: a. assess whether process is appropriate and consistent (results compared with perpetual inventory records, variances investigated and resolved timely, etc); b. ensure adjustments are booked appropriately; 8. Obtain and document an understanding of the methods and procedures for costing inventory, and: a. perform audit procedures to ensure inventory costs are appropriate (using ACL, identify price changes to POs and for a sample, trace to inventory master file to ensure product price was updated); b. determine whether the method of inventory pricing is consistent with the prior year. 9. Obtain an understanding of the Contract Management function and how Purchasing and Legal are involved. 10. Obtain from Lawson a list of $1 P.O.s during the test period. Test all or a sample to determine: a. trends in users, vendors, or types of materials dont show a pattern of inappropriate use.

11. Obtain data from Lawson, and identify (using ACL) product volume and price, and determine: a. % change in product volume. For significant increases, determine if vendor contract exists or has been revised recently to obtain best price. b. % change in product price. For significant increases, determine if vendor contract exists and is appropriate. 12. Obtain data from Lawson (using reports created for the Clinical Value Analysis Coordinator), and identify where the same item was purchased by a facility at different prices during the test period. Identify any problem products and/or vendors. 13. From a sample of closed (non-Drop Ship, Capital, Directs, etc) POs, determine: a. appropriate levels of authorization were obtained prior to receipt of goods; b. bids were obtained, if appropriate, and the lowest selected. Ensure that all bids are for the same product and are based on the same specifications. Determine if bid selected was last bid received, and if such trends exist with any particular product, vendor, or purchasing agent. If lowest bid is not selected, ensure adequate documentation exists corroborating the decision. c. Trace capital invoices to quotations to ensure quote price = PO price = Invoice price d. GL distribution is appropriate e. Receiving information is documented before payment was made.

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Purchasing Cycle
Audit Program Audit Program March 2003
f. Using ACL, compare PO units to Receiving units to Invoice units, noting discrepancies. g. Using ACL, compare PO unit price to Invoice unit price, noting any discrepancies. h. Ensure purchase is from an approved vendor (contract exists). 14. Obtain the last Open Req Lines Report from the Materials Management Information Analyst, and also run the report periodically throughout the audit field work. Ensure the history of the warehouse to warehouse transfers ties to the GL suspense account. Review for any long term outstanding items or unusual trends. 15. Using ACL, obtain data from Lawson for POs that were subsequently changed during the test period. For a sample, determine that reasons for changes are adequately documented. 16. Determine if any goods are held on consignment. If yes, ensure adequate records are maintained and good are adequately secured. 17. Using ACL, obtain data from Lawson for Drop Ship POs during the test period: a. Categorize by dollar value into POs less than $1000, $1000 to $5000, and greater than $5000, denoting any unusual patterns in each category; b. For a sample, determine if documentation exists confirming receipt of the good or service; c. Identify the Drop Ship PO percentage of total POs, per entity, denoting any unusual trends. 18. Obtain a listing of all blanket, standing, and/or service agreement POs. Depending on the volume, determine reasonableness for the population or for a sample. 19. Verify integrity of the vendor master file by identifying any duplicate vendors (using ACL). 20. Using ACL, obtain quantity received data from Lawson. Identify any negative receipts and research for appropriateness. 21. Using ACL, run Benfords Law on PO amounts during the test period. Identify any anomalies that may be indicative of signing authority or bidding work-arounds. 22. Compute financial and operational ratios during the test period, comparing results with industry standards for: a. BMCs average rate of nonstandard surgical purchases. Compare to the HFMA 2002 Supply Chain Survey of 26% (median 20%). b. Inventory Turnover ratio - cost of goods sold/average inventory c. Inventory balances prior to and subsequent to FYE d. Trends in inventory reserve balances (i.e. obsolete, slow moving, damaged, etc) e. Compare other monthly statistics to industry standards.

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Purchasing Cycle
Audit Program Audit Program March 2003
23. Obtain account histories for any inventory adjustment GL accounts during the test period. Review transactions for reasonableness. 24. Review records of returned goods/claims against suppliers, and credit memos to determine appropriate posting and processing. Also, review for any unusual trends in returns, claims, or credits. 25. Using ACL, obtain a listing of current year capital purchase orders, in dollar value order. As part of #13, determine that bids were appropriately obtained for a sample of the top dollar value items. 26. Run and review obsolescence reports for each warehouse. Determine reasonableness of any significant items.

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