Internal Audit Function: Purchase
In the realm of internal audit, meticulous scrutiny of purchase expenses stands as a cornerstone for financial integrity and regulatory compliance. In this comprehensive article, the author unveils a strategic checklist tailored for navigating the intricate landscape of purchase-related transactions within the internal audit function. From vendor evaluations to invoice validation, each crucial aspect is dissected to empower auditors with the tools needed to ensure transparency, mitigate risks, and bolster organizational financial health. Join us as we unravel the key components of this indispensable checklist, providing a roadmap for internal auditors to navigate the intricacies of purchase expenses with precision and effectiveness.
Documents to be reviewed:
i. Procurement policy of the organization.
ii. Standard operating procedures for purchase
iii. Purchase register
iv. Creditors Aging schedules as per Schedule-III
v. List of pending purchase order
vi. List of employees by designation with limits of authority.
vii. List of registered vendors for various types of material and agreement.
viii. List of unpaid trade payables
ix. Duly verified quality report / satisfaction report.
x. Gate-entry record
xi. Purchase order and original invoice on sample Basis
xii. Lorry documents for freight payment and for TDS, if applicable.
xiii. GRN/MRN Material receipt note showing actual quantity.
xiv. Product wise or segment wise cost sheet and comparison of Budgeted cost and Actual cost and variance analysis
Process:
- Whether the organization has clear and comprehensive (up to date) procurement policy contracts, whether purchases are centralized in the purchase department or purchases are made from approved authorities.
- Opening of tender/ quotations.
- Internal purchase requisition is properly vetted/ validated and authorized.
- The internal requisition clearly mentions the specification and quantity of material to be procured and the supply date.
- Purchases and procurement of goods are based on competitive quotations as received from two or more suppliers.
- Whether comparative quotation analysis sheet drawn before purchases are authorized.
- Purchase order is given to lowest bidder subject to satisfaction of all other conditions/ specifications. If the lowest quotation is not accepted, whether the purchases have been approved by senior official.
- Whether purchase orders are pre-numbered and strict control exists over unused forms.
- Whether List of pending purchase order is compiled by purchase department, at least once in every quarter.
- Whether quotations are called as per company’s policy from the registered vendors.
- Whether quotations are opened and registered, and a comparative chart is prepared and authorized.
- The purchase order is issued as per the requirement of internal requisition and mention the supply date. It should also contain a penalty clause if supply is not made as per terms and specification of purchase order.
- Whether one copy of each purchase order is made available to the store and accounts department.
- Material is supplied as per purchase order and material receipt note (MRN) is prepared after quantity and quality checks and authorization.
- 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.
- List of unpaid trade payables prepared and reconciled periodically.
Special Attention:
- Purchase budget and its comparison with the actual and authorization of variation, if any.
- In the case of capital buying, reason, and cost benefit analysis of such buying.
- In case of make or buy decision, the calculation of actual cost.
- In case of related party transactions, actual arm’s length price.
- Control over vendor developments.
- Cost reduction in unit price due to technology up gradation and/ or development of new source of supply.
- Pending requisitions for which Purchase Order is not raised.
- Long outstanding advance made to suppliers.
- On Time Supply (OTP) of material report.
- Material purchased without Purchase Order and/ or emergency purchases.
- Comparative chart of technical and financial bidding.
- Approval of rates in case purchase order is not raised.
- Issue of debit/ credit note for return/ rejection of material/ rate difference.
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