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Internal Audit of Operations: Episode 08, Procurement Process Auditing

Internal Audit of Operations: Episode 08, Procurement Process Auditing

Relevant Article: Supply Chain Management, Episode 01, Procurement Process, Simplified

The internal audit of the procurement process is a crucial component in evaluating an organization’s financial integrity, operational efficiency, and regulatory compliance. Using the Audit Road Map, auditors begin by identifying the revenue cycle and procurement’s impact on it. Then they consider management’s assertions about procurement-related accounts such as accounts payable, inventory, and expense recognition. These assertions—existence, completeness, accuracy, rights and obligations, classification, and cutoff—guide the risk assessment of material misstatements. Auditors then evaluate whether internal controls are adequately designed and operating effectively, followed by substantive testing procedures to gather sufficient evidence.

Procurement Audit by Process Step

  • Identify (Determine Needs)

    • Assertion Focus: Completeness, Authorization

    • Internal Control: Procurement planning policy requiring department head approval.

    • Audit Tests: Examine request logs and ensure all requisitions align with business needs; verify no purchases bypassed requisition phase.

  • Request (Purchase Requisition & Approvals)

    • Assertion Focus: Authorization, Accuracy

    • Internal Control: Approval matrix for purchase requisitions with documented sign-offs.

    • Audit Tests: Sample requisitions to test for proper authorization; verify budget availability check was documented.

  • Source (Supplier Selection)

    • Assertion Focus: Fair Presentation, Completeness

    • Internal Control: Competitive bidding process with RFQs and RFPs logged and stored.

    • Audit Tests: Review RFQ documents and bid evaluations for fairness; verify contracts were approved and retained.

  • Order (Purchase Order Issuance)

    • Assertion Focus: Occurrence, Accuracy

    • Internal Control: Centralized system for issuing POs with sequential numbering.

    • Audit Tests: Match POs to approved requisitions and supplier quotes; ensure prices and quantities are accurate.

  • Receive (Goods/Service Acceptance)

    • Assertion Focus: Existence, Cutoff

    • Internal Control: Receiving log matched to POs and inspection reports.

    • Audit Tests: Trace receiving documents to inventory records; verify goods received match PO and were recorded in the correct period.

  • Pay (Invoice Matching and Payment)

    • Assertion Focus: Completeness, Rights and Obligations

    • Internal Control: Three-way match (PO, receipt, invoice) prior to payment approval.

    • Audit Tests: Sample payment vouchers and ensure proper matching and timely disbursement; inspect for duplicate payments or errors.

  • Review (Supplier Evaluation and Records)

    • Assertion Focus: Accuracy, Classification

    • Internal Control: Periodic supplier performance evaluations; audit trail of procurement records.

    • Audit Tests: Confirm review procedures were completed; evaluate documentation retention for compliance and audit readiness.

Practical Example: Public Sector Procurement Audit

In a Company ACME procurement audit, the auditor identified that while supplier selection was documented, the bid evaluation lacked transparency, violating the completeness assertion. Moreover, the audit found delayed payments due to inconsistent three-way matching, indicating weak internal controls. By tracing the source documents and testing a sample of transactions, the auditor provided management with recommendations to automate approvals and enforce mandatory evaluation templates for sourcing decisions.

Summary Table – Procurement Audit Focus

Step Key Assertions Key Controls Audit Tests
Identify Completeness, Authorization Needs assessment approval Verify all needs are properly documented
Request Authorization, Accuracy Approval workflow Test approval levels and budget availability
Source Fairness, Completeness RFQ/RFP process Review bid logs and selection criteria
Order Occurrence, Accuracy PO system controls Match PO to requisition and contract
Receive Existence, Cutoff Receiving logs and inspections Match deliveries to PO and inventory records
Pay Completeness, Rights 3-way match before payment Sample payments for accurate and complete match
Review Accuracy, Classification Evaluation reports, documentation Confirm supplier reviews and records maintained

This structured approach helps internal auditors assess procurement effectiveness while ensuring compliance, minimizing fraud risks, and improving overall value in the procurement cycle.