Procurement Audit Overview

Procurement Audit

• Procurement is the process of purchasing goods and services for a business.
• A procurement audit focuses on the systems within the purchasing department.
• Internal auditors review the system to ensure it meets key objectives and adheres to company guidelines.
• Auditing is a business function that reviews internal processes.
• Internal audits provide information to business owners. This ensures employees follow guidelines and allows owners to identify areas needing improvement or enhancement.
• Procurement is responsible for major purchases and acquisitions.
• Procurement faces scrutiny due to the expenditure of company capital.
• Procurement transactions include:
  • Acquisitions of goods and services
  • Cash disbursements
  • Purchase returns and allowances/purchase discounts

Acquisition and Payment Cycle

• This cycle involves decisions and processes for obtaining goods and services needed for business operations.
• The cycle begins with an authorized employee initiating a purchase requisition.
• It concludes with payment on accounts payable.

Classes of Transactions (Table 18-1)

• Acquisitions:
  • Inventory
  • Property, plant, and equipment
  • Prepaid expenses
  • Leasehold improvements
  • Manufacturing expenses
  • Selling expenses
  • Administrative expenses
• Cash Disbursements:
  • Cash in bank (from cash disbursements)
  • Accounts payable
  • Purchase discounts

Complete Purchase Cycle (Diagram)

• The cycle begins with a supplier extending credit to the company.
• A purchase requisition is raised by the purchasing department
• The purchasing department sends a purchase order to the supplier.
• Goods are received, and a goods received note (GRN) is raised.
• Payment is sent to the supplier.
• Records of the transaction are kept.

Control Objectives, Controls, and Tests of Controls

• Occurrence and Existence:

  • Recorded purchases represent goods and services received.
  • Authorization procedures and policies are in place for ordering goods and services.
  • Segregation of duties.
  • Purchase orders are raised and authorized by appropriate senior personnel.
  • Purchase orders and approvals ensure each receipt of goods contains proper authorization.
  • Receiving staff check goods against purchase orders.
  • Stores clerks sign for received goods.
  • Tests involve inspecting policies, procedures, segregation of duties, sample of purchase orders to ensure authorization, and reviewing the list of authorized personnel.

• Completeness:

  • All purchase transactions that occurred have been recorded..
  • Purchase orders and GRNs are matched with supplier invoices.
  • Periodic accounting for pre-numbered GRNs and purchase orders.
  • Independent check of amount recorded in the purchase journal.
  • Tests involve examining supporting documentation, review of entity procedures for accounting, and application controls.

• Rights and Obligations:

  • Recorded purchases represent the liabilities of the entity.
  • Purchase orders and GRNs are matched with supplier invoices.
  • Tests involve examining documentation for a sample of invoices.

• Accuracy, Classification, and Valuation:

  • Purchase transactions are correctly recorded in the accounting system.
  • Purchase orders and GRNs are matched with supplier invoices.
  • Mathematical accuracy of supplier invoices is verified.
  • Amount posted to the general ledger is reconciled to the purchase ledger.
  • Chart of accounts is in place.
  • Tests involve examining supporting documentation, recalculating mathematical accuracy, and reviewing reconciliations.

• Cut-off:

  • Purchase transactions are recorded in the correct accounting period.
  • All goods received reports are forwarded to the accounts payable department daily.
  • Procedures are in place for recording purchases as soon as possible after goods/services are received.
  • Tests involve comparing dates on reports and vouchers.

Types of Audit Tests

• Cash in Bank: Audited by TOC, STOT, and AP.
• Payments: Audited by TOC, STOT, and AP.
• Accounts Payable: Audited by TOC, STOT, and AP.
• Acquisition Expenses: Audited by AP and TDB.
• Ending Balances: Audited by AP and TDB.
• Acquisition of Assets: Audited by TOC, STOT, and AP
• Tests of controls (TOC), Substantive tests of transactions (STOT), Analytical procedures (AP), and Tests of Details of Balances(TDB) are performed to verify balances and transactions.

This quiz explores the essentials of procurement audits. It delves into the systems within purchasing departments and the role of internal auditors. Understanding the procurement and payment cycle is also highlighted, providing insights into effective business operations.