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Description Comments Working Paper

Y/NO/NA Ref.
General

Read the SOP- Purchase


Ensure compliance with the Purchase SOP
Understand the policy (e.g. strategic purchases, emergency purchases)
followed for purchase of different items

Purchase Organisation

From the system obtain details of the number of items purchased for
each of the following categories of items:
• Raw Materials/Specific Items (BOM)
• Essential/Regular Items
• Capital Items

Review the purchasing function with reference to the number of staff,


their portfolio, qualifications and experience
Review the roles and responsibilities of the purchase personnel to
ensure adequate segregation of duties

Vendor Selection and Management

Obtain the vendor master from the system


Review the vendor master to ensure the completeness of details
Scrutinize the vendor master to ensure that:
• The same code has not been assigned to two different vendors
• The same vendor has not been assigned more than one code
• Inquire into any exceptions to understand the reasons therefore
• Obtain data on new vendors selected during the audit period

Select a sample of at least 5 new vendors covering all 5 categories and


verify the following:
• Source of vendor development
• Documented reasons supporting the need for selection of a new
vendor
• Evaluation of at least 3 quotations
• Field visit report if necessary
• Existence of each potential vendor who quoted (e.g. through
telephone calls)
• Comparative (technical and financial) evaluation of the
quotations. In cases where vendors quoting higher rates over
others were selected, inquire into the reasons for the same. Also
review the documented reasons therefore.
• Vendor Negotiations and the persons involved in the negotiation
process
• Approving authority for the final selection

Comprehensive vendor agreement covering:


• Terms and Conditions of Supply
• Payment Terms
• Warranty as to quality, if any
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• Manner of sampling and testing each shipment and the sample
size
• Tolerance limits regarding quality
• Tolerance limits regarding quantity
• Responsibility for late delivery
• Mode of payment
• Mode of settlement of disputes
• Jurisdiction of courts
• Non competition clause

Check if there is are standard terms and conditions governing the


vendor agreement and how they are adhered to in case of any
exceptions
Check if there is any practice of initially obtaining performance bank
guarantees from new vendors
Obtain the item master from the system along with the vendors
supplying each item
Ensure that alternate vendors exist and that some (minimal) purchases
are being made from them
Discuss the same and plan of action on any further vendor
development
Obtain the data on the share of business allocated to vendors and
compare the same with actual orders placed on the vendors
Analyse documented reasons for any deviations from the allocated
share of business to ascertain that certain vendors are not arbitrarily
preferred in lieu of others
Review the vendor performance evaluation process and the
parameters on the basis of which ratings are assigned to vendors
On test check basis, select a sample of 10 vendors across all 5
categories of items
Verify the ratings assigned w.r.t. the actual base data to ensure that the
rating given is not subjective and is in line with actual performance
Determine if any items have been shifted from one existing vendor to
another. Obtain a listing of such occurrences during the audit period
and inquire into the reasons therefore
Review the documented reasons and approvals for such shifting
Carry out a retrospective analysis for a sample of 5 such items to
ascertain if there has been any adverse financial impact of the
decision.
Obtain a list of vendors who have been terminated during the audit
period. Generally understand the reasons for terminations
Select a sample of 5 terminated vendors across all 5 categories of
items and review the process followed for termination
Ensure:
• Adherence to the agreement with the vendors
• Documentation of the termination
• Approvals obtained for the termination
• Full and final settlement with the vendor

Obtain a report of One-Time vendors from the system and inquire into
such cases

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Description Comments Working Paper


Y/NO/NA Ref.

Material Requirement Planning

For three months during the audit period, obtain the Production Plan
and the Material Requirement calculated based thereon (BOM related
and other consumables)
Review the derivation of the material requirement if any and reason
thereon
Ensure that maximum level, minimum level, re-order level, safety
stock level and lead time have all been defined for items as per SOP
Verify the actual materials purchased/ received against the
requirement
Inquire into variations
For the sample of three months, check the actual consumption against
the purchases. Check for any surplus items identified or items
indented with respect to the BOM

Ordering of Materials

Obtain a total list of individual items purchased within each category


of materials along with the value thereof
For each category (in terms of product), identify the top 6 items
constituting approximately 80% by value of the category of items
being purchased
Select a minimum sample of (30-60) Purchase Orders raised (during
the audit period) across all categories of items selected (the sample
may be relatively lower for Consumables and General Items).Note
that the sample size provided is for audit of the process once in a year.
In case of frequent audits, the sample size needs to be changed,
however, ensuring that total Pos checked during the year falls in that
range
Verify:
• The requisitions/ indents raised and approval thereof
• Determine how the order was placed on a specific vendor (e.g. as
per Share of Business allocation, through quotations, etc.)
• Purchase orders are serially numbered
• Purchase orders contain complete details such as item, quality/
grade, rate, terms of delivery, terms of payment, etc. and that
these are in conformity with the contract with vendor
• Rate Contracts entered if any, as a strategic measure for availing
benefit of price fluctuations.
• Purchase Orders are approved in accordance with SoA
• Communication of Purchase Orders to vendors
In exceptional cases where Purchase Orders were subsequently
cancelled or not fulfilled select an additional/ alternate sample
For a continuous period of 30 working days, sort all Purchase Orders
by vendor and review the same to ascertain if Purchase Orders are
being split up to bypass authority levels
Ensure that any amendment to a Purchase Order is duly approved as
per Schedule of Authority, and that the reasons for such amendment
are formally documented.
Ensure that Amended Purchase Orders are approved as per the

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Schedule of Authority
Verify the reasons for Amendment in the Purchase Orders to ascertain
if the Amendment is due to quantity variations , due to rate variations
or due to any other reasons.
In case of Purchase Order Amendments ascertain the no of cases of
variation as per category during the audit period.
Review the Purchase Order history data to determine if any open/
pending Purchase Orders exists.
Determine the age of open/ pending Purchase Orders and reason for
the same. Inquire into the reasons for not purging the same
Discuss the action planned by the management to close such orders
Ensure that in case of items having open/ pending Purchase Orders,
further orders are not being raised (especially at lower rates) unless
supplies against the pending order have been received fully or the
order has otherwise been closed.
Check to see if any penalty is levied on defaulting vendors (as per
terms conditions only)
If so, trace the entry for the debit note into the books of account
Inquire and verify the process of '‘Blacklisting” of defaulting vendors.
Review further transactions, if any, with such defaulting vendors.

Emergency Purchases

Verify the value of emergency purchases during the audit period


Obtain department wise value of emergency purchases made
Obtain a sample of (10-20) emergency Pos during the period and
ascertain the reasons. Check if the emergency purchases was due to
material planning, non receipt of Pos raised or breakdowns
Verify whether frequent emergency purchases have been converted
into rate contracts

Capital Purchases

Verify the Capital Pos raised during the Audit Period (within the
sample selected above)
Verify the approval process followed for the same
Verify the negotiation process followed for finalization of vendor
Verify the PO raised and the terms and conditions for the PO

Procurement of Services

Verify the process of raising Pos for Rate Contracts, Service


Contracts, Annual Maintenance Contracts
Verify the process of ascertaining the process of evaluating the
performance of services provided during the period
Verify the process of certification of receipt of services by the
respective department

Receipt of Goods

For the sample of Purchase Orders selected earlier, obtain the records
of Receipts. Check the receipts in detail and ensure that all necessary

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supports such as, Material Receipt Report (MRR), Inspection Report,
Delivery Challan/ Supplier’s Invoice are attached along with.
Visit the factory gate and check the Gate Entry Register maintained
by the security personnel at the factory gate. Ensure that there is no
cutting/ overwriting/ amendment in the register.
Trace the gate entry number in the register and verify:
• Date of entry in register and date as per the receipt report/
register.
• Quantity as per the register, as per the register/ report as well as
the Supplier’s Invoice
Verify for any discrepancies
Ensure that the material was physically inspected/ counted after
unloading to identify damages, rejections, shortages, excesses, etc.
Verify the MRR w.r.t:
• Purchase Order Quantity
• Purchase Order reference
• Purchase Order date
• Quantity per Supplier’s Invoice
• Authorization
Inquire into cases where the Purchase order number is not mentioned
on MRR, thereby implying the possible absence of a Purchase Order
at time of receipt of material.
Calculate the time gap between the date of Purchase Order and date of
entry in the Gate Entry Register. Compare the same with the lead time
of the vendor mapped in the system. Inquire into significant
variations. Cases where the actual time gap is much less than the lead
time could imply that a verbal/ informal order was placed on the
vendor and the Purchase Order was raised subsequently.
Inquire into variations between the quantity ordered and that received/
accepted. Check specific authorization for acceptance of same.
Verify the time gap between the date of MRR and Quality Inspection.
Inquire into delays in receiving the Quality Inspection Report.
Ensure that the quality assurance policies and procedures are in
agreement with the contracts with vendors.
Review the Quality Certification to ensure that the quality parameters
were tested and found within acceptable limits. In case of acceptance
of materials under deviation check the reasons provided by the
Quality department for the same.
In case the materials accepted under deviation then verify:
• The total number of such occurrences
• The total value of such acceptances
• The items involved
• The vendors involved
• Specific approvals for the same
Compare the entry date as per the Gate Entry Register with the
delivery schedule mentioned in the Purchase Order. Inquire into
deviations. Check if any recourse was available against the defaulting
vendor. Also discuss such cases with the Head Purchase
Ascertain whether any penalty was actually imposed on the vendor for
delay in delivering the goods. Otherwise, check the waiver for such
penalty. (if penalty clause is there in the Purchase Order)
Obtain the data on Lead Times for various items of raw materials and

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packing materials and compare the same with:
• The actual lead time (i.e. gap between Purchase Order data and
gate entry date)
• The delivery date mentioned on Purchase Orders
• Through the system compare Purchase Order dates with the MRR
date. Inquire into exceptions

Short Deliveries

Review procedures in place to ensure that short deliveries are


recorded and communicated to vendors immediately.
From the open Purchase Orders/ Pending Purchase Orders report in
the system, select a sample of 10 short deliveries during the audit
period. Ensure that:
• The vendor was formally intimated of the short delivery;
• The vendor history database was updated for the short delivery;
and
• The short delivery was clearly endorsed on the documents
accompanying the payment voucher

Ascertain whether the shortfall in delivery was made up by procuring


the required quantity from another vendor.
Check to see that additional costs incurred (if any) to purchase the
required parts/ components from another vendor, were debited to the
defaulting vendor.

Inventory Levels/ Stock Outs

Obtain a listing of inventory by category of items. Select the top 20


items in each category and compare the existing stock levels with the
minimum and maximum levels. Follow up any exceptions noted.
Review Production Reports for each month during the audit period to
determine if shortages of inputs and raw materials had occurred
during the period. Discuss cases where production was adversely
affected due to stock outs or non-availability of the required materials.
Select at least 10 instances of “Stock Outs” for detailed review and
inquire into the same. Trace the occurrence to the root cause to
identify the control which failed, resulting in the stock out.
Obtain a listing of inventory by category of items. Select the top 20
items in each category. For each month, compare the month end
inventory with the actual consumption and calculate the inventory
holding period. Review the results revealed by the above exercise and
inquire into any unusual trends.

Job Workers

Obtain a list of all materials (along with value), which are sent to third
parties for processing.
From the above, select a judgmental sample of top 5 (high value)
dispatches of materials for job work during the audit period.
Review agreements with the job workers for adequacy and
completeness of the terms and conditions contained therein.

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For the above sample, check that:
• A complete record is maintained of all goods sent to job workers;
• The materials were accompanied by delivery schedules;
• Provisions of excise laws were complied with while framing
delivery schedules;
• The delivery schedules were actually adhered to; and
• Receiving and acceptance procedures were followed completely,
at the time of receipt from the job worker
• Ascertain whether the job work could have been carried in house,
instead of outsourcing
Ascertain that balance confirmations are obtained from job workers
on a half yearly basis. Check balance confirmations for the above
sample.
Inquire whether surprise physical verifications of materials lying with
job workers are carried out. Check the documentation for the physical
verifications for the above sample.
Ensure that quantitative reconciliations are carried out at least half
yearly to ensure that the entire quantity sent to job workers is
accounted for. Check balance the reconciliations prepared for the
above sample. Inquire into the follow up action taken in respect of any
discrepancies revealed by the reconciliation.

Rejections

Obtain report of all rejections during the audit period, from the
system. Review the time taken in return of rejected material to the
vendor and inquire into cases of undue delay and reasons thereon
In case of part rejection, ensure deduction for the rejection from the
vendor’s invoice.
For rejections that are still lying in the unit at the time of checking,
physically inspect the same to ensure that these exist and are
segregated from usable materials.
Vendor Payments

For the sample of Purchase Orders selected earlier, generate a report


from the system containing the following fields:
• MRR No & date
• Purchase Order No & date
• Due date of payment
• Invoice amount

Ensure that a ‘Three Way Match’ is independently carried out by the


Accounts/ Finance Department, prior to release of payment
For the payment vouchers relating to the Purchase Orders selected,
verify:
• Payment terms w.r.t Purchase Order
• Authorization of Purchase Voucher
• Time gap between Inspection Report and passing the Payment
Voucher
• Amount of invoice and Payment Voucher
• Actual and due date of payment
• Accounting treatment (i.e. whether all costs of the purchase

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transaction have been booked correctly)

For the payment vouchers relating to the Purchase Orders selected,


check that CENVAT credit was correctly availed immediately upon
inspection of goods and receipt of the supplier’s invoice (in original)
Ensure that all vendor’s bill are defaced upon payment
Verify that the payment is made as per the due date. Inquire into
exceptions.
Check whether cheques are sent directly to the mail/ dispatch section
for dispatch to vendors
Inquire into the policy of reconciliation of accounts with vendors. For
all vendor payments checked (i.e. covered by the above sample),
review the account reconciliation carried out.
Obtain and review an age analysis of creditors. Inquire into cases of
long pending payments and the plan of action of the management to
deal with the same.

Cut - Off Testing

Select a sample of the last 5 MRR’s for March (XXXX) and the first 5
MRR’s for April (XXXX) and carry out a cut off test.

Master Data Controls

Review the procedures followed for accessing and updating vendor


master files. Ensure that only authorized individuals can update the
vendor and the price master files.
An audit trail of all changes made to master files should be available.
Review the log of changes made during the audit period. Trace the
last 10 changes back to the change request form and the authorisation
for the same.
Check if the Purchase Head or Location Head periodically reviews a
report of all changes (additions, deletions and modification) made to
the vendor and price master files.
Verify for any duplicate vendor codes and the action for the same

MIS

Take a sample of MIS reports and verify the follows:


Review the process of collating information for the MIS to assess
whether:
• accurate information was considered for preparing the MIS
• complete information was considered for preparing the MIS
• Information/ data was collected from the correct/ authentic source
• Unauthorized access to the MIS report/ information/ data was
restricted
All assumptions for preparing the MIS were disclosed to the users
Assess whether the periodicity of the MIS was adequate?
All MIS was circulated to the designated personnel in a timely basis

Notes:

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This checklist covers audit steps for Procurement and related audit areas which Internal Audit should verify as part
of the audit However, these audit steps should not be considered as an all inclusive list of audit steps to be
performed. The Internal Audit Team should amend these audit steps on the basis of information gathered and audit
observations made during the course of the audit.
Thus, in addition to the sample checking outlined above, additional specific reviews/ analysis may also be
undertaken or the sample size may be appropriately extended if and when circumstances so warrant.

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