Procurement Audit Training - April 2015

Training:

Procurement Audit

April 2015

Course Introduction and Participants’

Expectations for the Training

2© 2015 KPMG Ghana, a partnership incorporated under Ghanaian law and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative,

a Swiss entity.

All rights reserved. Printed in Ghana.

Getting the best out of the Training

This is your training and the results depend on your contribution

Participate actively in the discussions

Be willing to share your experience with other participants

Keep to the subject matter

Express your thoughts and ideas to others

Only one person at a time. Avoid private discussions

Be patient with other participants

Switch off your phones here


a Swiss entity.


Course Objectives

After completing this course, you should be able to understand the

following:

Components of the procurement life cycle

Emerging procurement risks and trends

How to audit the procurement life cycle

Lean audit techniques


a Swiss entity.


Course Outline

Overview of Procurement

Components of the Procurement Cycle

Emerging Procurement Risks & Trends

Performing Procurement Audit

Lean Audit Techniques


a Swiss entity.



- Modern Trends

Procurement Trends

The activities of procurement functions are emerging in line with the

complexities of procurement trends.

Procurement functions are positioned to provide additional value in line with

the following:

i. Shareholder returns

ii. Sustainability

iii. Regulatory compliance

iv. Quality performance

v. Cost reduction

Procurement leaders need to work strategically with suppliers to manage

risks, develop innovative improved product/services and reduce price.


a Swiss entity.



- Modern Trends

Procurement Trends

According to a KPMG report on Strategic Sourcing and Procurement,

sourcing and procurement functions typically manage between 40 to 80

percent of an organisation’s total spend.

By controlling spend, there remains a significant opportunity for

procurement to stretch beyond cost savings to deliver more strategic value

to the organisation.

Despite the critical role the procurement function plays in today’s business,

there are indications that the functions are typically under resourced in most

organisations.

KPMGs 2014 global survey only half (50%) benchmark cost savings is

achieved.


a Swiss entity.


Overview

Procurement functions need to invest in broadening their skills

beyond negotiation.

Skills to enable a more strategic, value enhancing procurement

function.

According to the Transparency International, annual procurement

fraud within the Sub-Saharan economy is between $ 30- 50billion.

People managing contracts may turn a blind eye and give contractors

opportunities to cut corners and save money.

Procurement fraud is not confined to the public sector. Private

businesses can be equally and badly affected.

Thus managing procurement fraud within an organisation and

suppliers can make a significant difference being a winner or a loser.


a Swiss entity.


Overview

- Assessing the value contribution of Procurement (Questions)

• Are the objectives of the function aligned with the organisation’s

goals and objectives?

• Is the function undertaking the appropriate activities to achieve it’s

objectives?

• Are the activities creating sustainable economic value?

• Are the activities effective and efficient?


a Swiss entity.


Overview

- Definition of Procurement?

“the acquisition of goods, services or works at the best possible total cost, in the right

quantity, at the right time, in the right place for the direct benefit or use of

governments, corporations or individuals generally via but not limited to ,a contract.”

Procurement can be defined as:

The acquisition can be either from in-house providers or from third parties.


a Swiss entity.


Overview

- Objectives of Procurement Function

Overall objective of procurement function is to

contribute to the profit maximisation of the

organisation.

Other objectives of any Procurement Unit/Function in

an organisation include the following:

Value for Money: “Optimisation of whole-life costs and quality needed to meet the user’s requirements, while taking into consideration potential risk factors and resources available”.

-Cost related factors

- Non- cost related factors

Compliance with statutory laws and regulations;

- Fines

-Reputational risks

Minimise opportunity for fraud as mush as possible

-Control environment


a Swiss entity.


Question

Question

What factors have influenced recent procurement trends within your

organisation?


a Swiss entity.


Question

Question

List some of the key benefits of good procurement function in an

organisation.


a Swiss entity.


Answer

Answers

o Security of supply

o Lower total cost

o Reduced risk

o Improved quality

o More added value

o Greater efficiency

o New innovations

The Procurement Life Cycle


a Swiss entity.


The Procurement Life Cycle

The significant processes in procurement life cycle

Planning

Identify goods/services/works required

Requisition

Define requisition

Approve requisition

Sourcing Strategies

Selection

Negotiation

Purchasing Order

Approval/Processing Purchase Orders

Receiving

Goods Receipt Process

Payment Processing

Invoice processing

Disbursement

Contract Management Processes

Vendor Performance Management/Indicators


a Swiss entity.


Procurement Planning

Deciding what to buy and from what source

Objective

To schedule procurement activity for the period

Processes

- Coordinating and integrating the needs of various departments timely.

- A good procurement plan typically include the following information:

1. Procurement objectives in line with performance indicators

2. Details of procurement activities in line with selected procurement methods

3. Timelines

4. Budgetary allocations

Practical Challenge

- Coordinating inputs from all departments/business units for the planning

- Forecasting levels of demand for services and products to meet the business needs

Components of Procurement Cycle

- Procurement Planning


a Swiss entity.


Component of Procurement Cycle

- Requisition

Requisitioning

Internal processes for requesting for a need to be procured

Objectives

This process should be designed to ensure individual with the appropriate level of understanding of the

technical/functional requirements identifies what is needed. The need ought to be authorised by an

individual with appropriate authority.

Processes

- Department identifies a need

- The need is reviewed and approved

- A requisition is generated and submitted to the relevant department timely

Practical Challenges

1. Requisition not authorised by an individual with the appropriate authority

2. Requirements not properly defined


a Swiss entity.


Components of procurement life cycle

- Sourcing

Sourcing

The processes aimed at identifying, evaluating and engaging suppliers/vendors of goods and

services.

Objectives

To find the "best" vendor (reliable, trustworthy, value and etc.)

Processes

Include the following

1. Identify vendor(s) to supply goods/services. (Request for quotation, Request for Proposal and etc. )

2. Review proposals, quotes, offers and etc.

3. Select vendor(s) based on an objective assessment (initial requirements defined)

4. Meet with vendor (s) to agree on terms and conditions


a Swiss entity.


Components of procurement life cycle

- Sourcing

Sourcing


- Identifying the suitable vendor

- Lead times for delivery

- Conflict of interest

- Lack of a robust assessment process


a Swiss entity.


Components of Procurement Life Cycle

-Purchase Order Processing

Purchase Order

A contracting document that is generated to commit the organisation to purchase transaction

Objectives

To formally commit the organisation to the purchase transaction (favorable terms)

Processes

- Require approval by appropriate authority

- Specify the exact need of the organisation

- Communicates the quantities and prices of items


- Segregation of duties

- Complicated legal terms


a Swiss entity.


Components of Procurement Lifecycle

- Receiving of Goods

Goods Receipt

Receiving orders that are placed with suppliers

Objectives

Goods are received in the right condition, right quantities, by the right person and at the right time

Processes

Involves the following :

- Goods/Services inspection report

- Document support which identify the vendor, date, description and quantity of goods delivered

- Update system/records to reflect the goods receipt


• Receipt of sub-standard goods/services

• Lack of appropriate segregation between ordering and receiving function


a Swiss entity.



- Payment Processing

Payment Processing

Processing payments for items purchased/services contracted

Objectives

- To pay for what was ordered

- Take advantage of float

- Not violate contractual obligations

Processes

• Performing three ("3") way matching

-Purchase Orders (PO)

-Goods Receipt Notes (GRN)

-Invoices

• Approval of invoices for payment

• Updating supplier account to reflect payment


a Swiss entity.





- Unauthorised or inappropriate payments may be processed

- Failing to utilise cash discounts for early payments


a Swiss entity.



- Contract Management

• Contract Management

Executing contracts/agreements in line with agreed terms

• Objectives

To monitor the execution of contracts in accordance with contract terms (value, quality, time,

specifications, and etc.)

Processes

- Contract prices

- Formula for calculating variations


- Cost overruns

- Delays in delivery

- Contract disputes


a Swiss entity.


Components of Procurement Cycle – Cont’d

- Vendor Performance Management

Vendor Performance Management

A framework to effectively track and measure supplier performance

Objectives

To manage, measure and analyse vendors in line with key performance indicators

Process

-Identify and agree key performance indicators with vendors

-Evaluate vendors

-Rank vendors


- Lack of well defined performance indicators

- Lack of service level agreements


a Swiss entity.


Question

Question

Key Performance Indicators /metrics (KPI’s)

- In your groups List about five KPI’s in monitoring the performance of vendors


a Swiss entity.


Important Question on Emerging Trends

Evaluate the Procurement Function in your organisation by considering the following questions:

1. Is the Procurement function organised to deliver optimal value to the organisation by focusing on

outcomes rather than cost?

2. Are key organisational stakeholders fully engaged in the development of Procurement’s strategy,

and does this reflect the wider organisational strategy?

3. Does the Procurement function lead or get actively involved in demand management initiatives in

your organisation?

4. Is risk management an integrated part of Procurement’s daily? Are relevant stakeholders in your

organisation updated on key procurement risks?

5. Are there streamlined processes to manage vendor selection, vendor performance indicators and

quality of goods/services received from vendors?


a Swiss entity.


Some Identified Procurement Related Risks

QUALITY RISK

COST RISK

INNOVATION

RISK

AVAILABILITY

RISK

Risk of Procurement

costs becoming un-

competitive

Risk of purchased

items/service being

unavailable

Risk of not driving

innovation from

procurement

functions

Risk of purchases not

having required quality

Four identified areas of procurement

related risks.


a Swiss entity.


Drivers of Procurement Risk

Supply Market Risks

Logistics Risks

Regulatory Risks

Natural Disasters and Terrorism

Cost Risk

Purchase price

Transportation

Warehousing

Safety

Tariffs

Innovation Risk

Inadequate/improper supplier collaboration/integration

Supply Strategy Risks – inappropriate strategy creates revenue shortfalls

Technology Risks – technology systems breakdown creates supply interruption

Quality Risk

Inadequate attention to processes

Inadequate/improper supplier measurement and improvement

Supplier Risks – supplier failure

Ethics

Process Risks – supplier interfacing process breakdown interrupts supply

Availability Risk


a Swiss entity.


Emerging Procurement Trends and Risks

- Procurement Planning

Procurement Planning

1. Risks:

Inadequate/uncoordinated procurement planning.

Emerging Trends:

• Information Technology to conduct predictive analysis of organisations needs in the planning process

• A culture of continuous improvement to analyse organisational needs.

• Develop a clear and holistic strategy for procurement

2. Risks

-purchasing items not budgeted for

-Opportunity for fraud

Emerging Trends:

• Purchases are aligned with the strategic objectives of the organisation

• Senior management monitor adherence to procurement policies


a Swiss entity.


Emerging Procurement Risks

- Requisitions

Requisitions

1. Risk

Unauthorised/ additional procurement of materials

Emerging Trend:

• Access to purchase requisitions functions in System are appropriately restricted

• Aligned policy and procedures requiring Heads of Department to approve all requisitions

2. Risk

Not coding purchase requisitions may make it difficult to audit purchase transactions.

Emerging Trend:

• Enterprise systems are configured to ensure that purchase requisitions are appropriately coded


a Swiss entity.



- Requisitioning

3. Risk

Requirements definition

Emerging Trend:

• Aligned policy and procedures requiring involvement of user departments when specify need of an

item

• Need requirements are communicated in clear and unambiguous language


a Swiss entity.



-Vendor Sourcing

Vendor Sourcing

1. Risk

Vendor Selection Criteria

Emerging Trend:

• Enterprise systems are used to gather market and supplier intelligence

• Aligned policies and procedures that define criteria for evaluating and selecting suppliers. The criteria

should address key processes including the following:

-Quality and capacity to deliver

-Price, including discount arrangements and payment terms

-Order lead times

-Financial condition

-Management condition

• People involved in procurement are continuously trained to understand and embrace changes

2. Risk

Changes/edit to vendor List

Emerging Trend:

• Enterprise Systems are configured to restrict access to vendor list

• Aligned policies and procedures that require periodic review of vendor list


a Swiss entity.



- Sourcing

Tender preparation :

1. Risk:

Split order/work to circumvent tender requirement

Emerging Trend:

• Aligned policies that require review of reasons for repeated orders/work within a short period

• The policies require approvals from senior management whenever there is a need for repeated order

2. Risk:

Biased specifications/excessive standards/ requirements to favour colluded contractors

Emerging Trend:

• Tender specifications are aligned with functional need.

• Tender specification are not limited to choice of vendor.

Tender Invitation

1. Risk:

Inviting vendors that are not approved


a Swiss entity.



-Sourcing

Emerging Trend:

• Aligned policies that require receipt of tenders only from approved suppliers

• Senior management monitor strict adherence to this process

• Staff involved in procurement are trained in leading practices of procurement

Tender Information

1. Risk

• Leaking of tender information

• Tampering with the tenders submitted

• Accepting late tenders for corrupt motive

Emerging Trend:

1. Regular training sessions to all employees regarding policies and procedures in relation to privacy

and confidentiality of tender information

2. Communicating to suppliers of any implication as a result of release of confidential information

3. Aligned policies that require all tenders to be submitted in a sealed envelope without identification to

prevent leakage of tender information and interception.


a Swiss entity.



- Sourcing

Evaluation

1. Risks

Colluding tenderers/vendors

Emerging Trends:

• Aligned procurement policies that clearly define an evaluation criteria to select vendors.

• Independent tendering committee to evaluate tenders

• Review of tender evaluation report by independent party

Negotiation

1.Risk

Manipulating negotiation with tenderers

Emerging Trend:

• Aligned procurement policies requiring senior management’s authorisation for the negotiation

process

• Other management committee members/owners review/observe the negotiation process as far as

possible


a Swiss entity.



- Sourcing

Price Quotations

Risk

Insufficient segregation of duties(“SoD”) between creation/edit/maintain quotations and release

quotations.

Emerging Trend :

• Enterprise Systems are configured to segregate the responsibilities of creating/editing and release of

quotations

• Enterprise systems track quotes received from suppliers.


a Swiss entity.



- Sourcing

Vendor Master File/Data Management

1. Risk

Deleting active vendors from system may result in an incomplete audit trail

Emerging Trend:

• Enterprise system are configured to prevent deletion of vendors with recent trade activity.

Risk

Inaccurate vendor information may lead to incorrect distribution of funds

Emerging Trend:

• Enterprise systems are configured to restrict modifications to vendor information to appropriate

authority.

• Aligned procurement policies require periodic review of vendor master data


a Swiss entity.



-Purchasing

Purchase Orders ("PO")

1. Risk

Raising POs for items not in budget/excess of approved budget

Emerging Trend:

• Enterprise Systems require all generated POs to be approved by appropriate management authority

• Enterprise systems are configured to link budget function with PO module and thus reject POs for

items not budgeted for/exceed approved budget

• Aligned procurement policies require strict adherence to this

2. Risk

Changes to PO after approval.

Emerging Trend:

• Efficient enterprise systems should have in built controls to prevent this risk

• Enterprise system track all changes made to documents.


a Swiss entity.



- Purchasing

3. Risk

Duplicate purchase may result in excessive inventory

Emerging Trend:

• Generated POs are assigned unique reference numbers

• Enterprise system are configured to prevent duplication PO number.

• Aligned policies and procedures require periodic review and analysis of manual POs to detect no

duplication

• Aligned policies and procedures require strict adherence to this policy


a Swiss entity.



- Receiving Goods

Goods/Service Receipt

1. Risk

Defective/sub standard goods may be received

Emerging Trend:

• Enterprise systems validate, approve and post invoices

• Aligned policies and procedures that require only authorised persons to inspect and receive goods.

• Enterprise systems are configured to link goods receipt, invoices and POs (Three way match)

2. Risk

Goods receipts may be recorded multiple times

Emerging Trend:

• Enterprise systems are configured to prevent multiple entries

3. Risk

Goods receipts may not be recorded in the correct accounting period.

Emerging Trend:

• System configuration should only allow goods receipt posting only in correct accounting period.


a Swiss entity.



- Receiving Goods

4. Risk

Discrepancies between quantities of goods ordered and goods received

Emerging Trends:

• Enterprise systems validate, approve and post invoices

• Enterprise system are configured to match POs , Invoices and Goods receipt and thus detect any

such discrepancies

• Enterprise system ensure that an order cannot be closed until the differences between ordered and

received quantities are resolved


a Swiss entity.




Payment Processing

1. Risks

1. False claims/payments for incomplete/ unnecessary work/services

2. Speeding up or delaying payments for corrupt motive

Emerging Trend:

• The responsibilities for certifying and approving the work done/services and thus approval for payments

are segregated.

• Aligned policies and procedures set processing time for certification and payment upon receipt of the

necessary documents

• Enterprise systems are configured to reject payment to invoices that are not due


a Swiss entity.




2. Risk

Not recording payment transactions in the correct period.

Emerging Trend:

• Payments are processed through enterprise systems and thus automatically recorded

• Periodic review of manual transactions posted near period-end cut-off

3. Risk

Unauthorised changes to payment programs may result in inaccurate or inappropriate payments to

vendors.

Emerging Trend:

• Enterprise systems restrict access to process payment in the System.


a Swiss entity.



- Contract Terms and Conditions

Contract Terms and Conditions

Risks

1. Terms and conditions that are not clear(not enforceable).

2. Cost variations due to discretionary items/unforeseeable factors

Emerging Trends:

Aligned procurement policies and procedures require clear definition the following:

• Roles, rights and responsibilities of the parties to the contract, etc.

• Performance requirements and standards with a system of appraisal

• Work commencement and completion dates.

• Extension, penalty and liquidated damages


a Swiss entity.



- Contract Administration

Performance Monitoring

Risks

1. Lack of system and standards for assessing performance of contractors

2. Negligence and conniving at substandard work/services

Emerging Trend:

• A designated team (preferably different from the tendering team) monitor work progress/service

performance.

• A work plan/performance checklist with detailed schedule/ standards according to contract terms and

conditions.

• Performing surprise checks in addition to routine inspection


a Swiss entity.



- Contract Management

Long Term Contracts

1. Risk

Contracts with unapproved vendors

Emerging Trend

• The creation of contract agreements/terms with suppliers are restricted to authorised personnel

2. Risk

Unauthorised changes/modifications to contracts are performed

Emerging Trends

• Aligned policies and procedures require periodic review of changes to contracts

• Only authorised users have the ability to change contract

3. Risk

Rebates are not settled timely impacting vendor relationships.

Emerging Trends

• Enterprise systems are configured with appropriate settings for settlements


a Swiss entity.


Group Exercise

Instructions;

•Pick any industry of your choice

•In groups of say 5-7

•Identify the likely risks to your organisation at any 2 of the stages of the procurement

process

•Suggest some controls to mitigate the risks identified

•Choose a team leader to make a presentation to the rest of the class


a Swiss entity.


Day 2 - Recap


Procurement Life Cycle



a Swiss entity.



Planning Execution Reporting

Broadly, procurement audit activities can be categorised into the following areas:


a Swiss entity.


Planning

Audit Rationale

As part of the risk-based planning process, Internal Audit (IA) identifies the Procurement process

as a relevant testing area.

The decision to perform this test may include the following reasons:

• Due to the high percentage (approx. 45%) procurement spend

• Value for money is included in the Board agenda

• The previous Procurement audit identified significant audit findings


a Swiss entity.


Procurement Audit Plan

- Key Activities

Among the significant activities an auditor needs to

perform when planning procurement audit include the

following:

1. Pre Fieldwork Activities

• Understand the nature of operations

• Develop budget for the audit (risk, time and available

resources)

• Prepare and send initial data/information on

procurement activities:

Procurement plan for the period

List of procurement activities/transactions

Procurement policies and procedures


a Swiss entity.


Planning Procurement Audit

- Key Activities

Among the significant activities an auditor needs to perform

when planning procurement audit include the following:

2. Kick-off Activities

• Confirm the object and scope of the audit

• Discuss the roles and responsibilities of the audit

Process owner responsible for providing

information

• Discuss key milestone dates and deadlines

• Confirm the project deliverables

Draft report for the process owner comments

Final report with resolution timelines

• Discuss Communication Plan and Methods

Key client contact


a Swiss entity.


Planning Procurement Audit

- Key Activities

Among the significant activities an auditor needs to perform

when planning procurement audit include the following:

3. Post Kick-off Activities

• Analyse the procurement activities (information

request)

to identify significant transactions

to identify unusual transactions

• Develop audit programme based on key risks and

controls

• Execute the audit programme


a Swiss entity.


Procurement Audit Execution

Activities

Conduct Spend Analysis

Develop Audit programme

Execute programme

Document Evidence


a Swiss entity.


Procurement Audit Execution- Spend Analysis

Spend Analysis

The strategic importance of

each commodity group

Product definition of each spend

category

Total Spend with vendors

Supply market where vendors

operate

The objectives of performing spend analysis in procurement audit is illustrated below


a Swiss entity.


Procurement Audit

- Obtaining Procurement Data

Obtaining Procurement Data

• Obtain system information/data on all items

procured for the audit period.

• Confirm that the data provides you an overall

snapshot in terms of amounts, location, users,

volume of usage, pricing and type of

product/service.

• Perform data cleansing for consistency and

standardisation of data fields, codes and

descriptions.


a Swiss entity.


Procurement Audit

- Sampling Guidance

Frequency of

Control

Minimum Sample Size

Risk of Failure

Low High

Annually 1 1

Quarterly 1+1 1+1

Monthly 2 3

Weekly 5 8

Daily 15 25

Recurring 25 40


a Swiss entity.



- Spend Analysis

• Perform the following analysis on the extracted data:

o Amount spend and number of transactions per item/category

o Number of suppliers per item/category

o Average purchase order value

o Budget for the item/category

o Total payments per supplier

o Transaction distribution by amount (Cedi) range (e.g. less than Ghs 10,000, ghs10,000 –

250,000 etc)

o Spend distribution between main clients

o Spend and number of transactions per procurement officer

o Number of procurement officers involved in the transaction per commodity group, etc

• Reference spend to approved budget for the period

• Compare results of analysis to prior periods

• Use appropriate sampling methods to select samples for testing


a Swiss entity.



- Developing the Audit programme

Developing the Procurement Audit programme

The procurement audit programme sets out the procedures to be undertaken to help assess the existence and effectiveness of identified controls.

There may be issues with regulatory compliance that also require testing.

Information gained from a number of sources, including the spend analysis, will drive the areas focus in procurement audit programme.


a Swiss entity.



- Audit Evidence

Audit Evidence

•This is the information to support conclusions in audit report

•Auditors rely on documentary evidence more than other

types of evidence

•Auditors must obtain sufficient and appropriate evidence

which can be in the form of tests of controls or substantive

procedures

ISA 500 states that:

“The auditor should obtain sufficient and appropriate

audit evidence to be able to draw reasonable conclusions

on which to base the audit opinion.”


a Swiss entity.



- Audit Evidence

Sources of Audit Evidence

• The sources and amount of evidence needed to achieve

the required level of assurance are questions for the

auditor to answer to determine his opinion

• The auditor should be influenced by the materiality of the

procurement activity, the relevance, reliability, sufficiency

and appropriateness of evidence available from each

source

Examples of sources

Contract documents

Requisitions/Purchase Orders/invoices etc.

Management/employees

Third parties

Physical inspection

Physical examination and count

Observation

Enquiry


a Swiss entity.



- Documenting Audit Evidence

Internal auditors must document relevant information to support the conclusions and

engagement results (IIA 2330 – Engagement Work programme)

• The working paper documents the details of the work performed:

o Why it was tested

o Who provided the information (Name and Title)

o How it was tested

o What was tested

o Who performed the test

o Who performed a secondary review

• The auditor should make conclusions based on the work that was performed

• Documentation should have sufficient information such that the test performed could be replicated by

an independent party and reach similar conclusions from the evidence

• Working papers should be appropriate referenced to support findings in the report


a Swiss entity.



- Audit programme

Audit programme for Procurement Planning

Procurement Planning Process

Risk

Register

Ref

Schedule

Ref

Done

By

Objectives.

To verify the following:

1. A formal process to manage procurement activities

2. The plan is reviewed and approved by appropriate authority

Test Steps

1. Obtain a copy of the year’s procurement plan/budget

2. Verify relevant personnel(eg. User departments, procurement etc.)

were adequately involved in the preparation of the procurement plan

3. Verify the procurement plan was approved by appropriate authority

4. Verify the procurement plan was aligned to budget

5. Verify any changes to the procurement plan was approved by

appropriate authority and communicated timely

6. Verify mechanism for monitoring implementation of plan


a Swiss entity.



- Audit programme

Audit programme for Requisitions

Requisitioning Processes

Risk

Register

Ref

Schedule

Ref

Done

By

Objectives


1. Requisitions are created for budgeted/ approved items

2. Requisitions are created and approved by an authorised

personnel

3. Requisition are recorded accurately by an authorised

personnel

4. Requisitions have valid business purpose


a Swiss entity.



- Audit programme

Audit programmeme for Requisitions

Requisitioning Processes –Test steps- Cont’d

Risk

Register

Ref

Schedule

Ref

Done

By

Test Steps

1. Obtain copies of approved purchased requisitions for the period under

review

2. Verify the following

- Requisitions were created for budgeted or approved items

- Requisitions were authorised by the appropriate authority

- Requisitions had unique reference number

- Requisitions were appropriate recorded

-Requisitions had valid business purpose


a Swiss entity.



- Audit programme

Sourcing Processes

(Vendor Master File Management)

Risk

Register

Ref

Schedule

Ref

Done

By

Objectives


1. Vendor/supplier master file is created and maintained by

appropriate authority

2. Vendor/supplier master file is approved by an authorised

personnel

3. Access to vendor/supplier master file is restricted to an

unauthorised personnel

4. Vendor master data is accurate (No duplication)

5. Vendor master data is complete (Address, Name, Bank

Account and other relevant fields)

Audit programme for Sourcing


a Swiss entity.



- Audit programme


Sourcing Processes

(vendor master file management)

Risk

Register

Ref

Schedule

Ref

Done

By

Test Steps

1. Obtain listing of all approved vendors from the system

2. Select a sample and verify the following procedures:

-vendors creation or modification was done by authorised

personnel

- access to vendor master file or data was restricted to

unauthorised personnel

-vendor master file or data is accurate (no duplications)

-critical fields are completed for vendors (address, name,

bank account, etc.)


a Swiss entity.



- Audit programme

Sourcing Processes

- (Vendor Selection)

Risk

Register

Ref

Schedule

Ref

Done

By

Objectives


1. Quotations are sourced and purchased orders are generated

and authorised in accordance with authorised limits

2. Exceptions to the bidding procedure are justified and

documented

3. Purchases are made a most favourable payment terms(

negotiation)

4. Approved selection criteria ( capacity to deliver, lead times

etc.)



a Swiss entity.



- Audit programme

Sourcing Processes

- (Selecting vendors)

Risk

Register

Ref

Schedule

Ref

Done

By

Test steps

1. Obtain a copy of approved procurement policy

2. Obtain a copy of approved vendor listing

3. Select a sample of approved vendors and test check the

following:

- Competitive bidding

- Evaluation committee to select vendor

- Selection processes aligned to approved criteria

- Selection approved by appropriate authority

- Communication of selection to vendor( signed contract)

4. Note exception to bidding and verify approval by appropriate

authority



a Swiss entity.



- Audit programme

Purchase Orders Processes

Risk

Register

Ref

Schedule

Ref

Done

By

Objectives


1. Vendor payment terms are agreed by relevant parties

2. Purchase orders are only created from approved purchase

requisitions

3. Purchase orders are created and approved by an authorised

personnel

4. Purchase orders are recorded accurately by an authorised

personnel

Audit programme for Purchase Orders


a Swiss entity.



- Audit programme

Purchase Orders Processes

Risk

Register

Ref

Schedule

Ref

Done

By

Test steps

1. Obtain listing of procurement activities

2. Select a sample and verify the following:

- purchase orders were created from an approved

purchase requisition

- purchase orders were appropriately approved by an

authorised personnel

- purchase orders were accurately recorded by an

authorised personnel

- complete records of purchase orders are maintained

- purchase orders had valid business purpose

Audit programme for Purchase Orders


a Swiss entity.



- Audit programme

Goods Receipt Processes

Risk

Register

Ref

Schedule

Ref

Done

By

Objectives


1. Goods are received by an authorised personnel

2. Goods received are supported by adequate and appropriate

documentation

3. Quality and quantity of goods received match the

specifications in the purchase order

4. Goods received are completely recorded by an authorised

personnel

5. Damaged goods are returned in a timely manner

Audit programme for Goods Receipt


a Swiss entity.



- Audit programme

Goods Receipt Processes

Risk

Register

Ref

Schedule

Ref

Done

By

Test steps

Obtain listing of all goods receipt

Sample and verify the following procedures

- Goods were received by an appropriate personnel

- Adequate and appropriate supporting documents

- Inspection for quality & quantity( Appropriate sign off by

authority)

-Damaged goods were segregated from usable goods and

are returned promptly to vendors

Audit programme for Goods Receipt


a Swiss entity.



- Audit programme

Payment Processing

Risk

Register

Ref

Schedule

Ref

Done

By

Objectives:


1. Goods or services received are in accordance with approved

purchase orders.

2. Proper receipt and invoice approval procedures to minimise

inaccurate or double payment for goods and services

received.

3. Disbursements are approved in accordance with appropriate

delegation of authority.

4. Payment documents are effectively invalidated to prevent

duplicate payments.

Audit programme for Payment Processing


a Swiss entity.



- Audit programme

Payment Processing

Risk

Register

Ref

Schedule

Ref

Done

By

Test steps

For sampled procurement transactions, verify the following

procedures:

- Payment was adequately approved in accordance with

appropriate delegation of authority

- Trace and agree payment to supporting documents

(Requisition, PO &GRN)

- Paid invoices/supporting documents are invalidated

- Adherence to payment terms

Audit programme for Payment Processing


a Swiss entity.



- Audit programme

Contract Management

Risk

Register

Ref

Schedule

Ref

Done

By

Objectives:


1. Controls to support validity and competitive pricing for vendor

selection process

2. Process to formally monitor contract execution

Audit programme for Contract Management


a Swiss entity.



- Audit programme

Contract Management

Risk

Register

Ref

Schedule

Ref

Done

By

Test Steps:

1. Select a sample of contracts with suppliers

2. Review the contracts and verify adequacy of approval

process

3. Verify the involvement of user department

4. Verify that contracts include key performance indicators

5. Verify adequacy of monitoring process

Audit programme for Contract Management


a Swiss entity.


Procurement Audit Report

- Communicating findings

Analyse the Audience

• Who should be the most important readers of the report?

• How much do they know about the subject matter?

• How do they plan on using the report?

• How interested are they in the report?

• How are they expected to react to the report?

Findings from procurement audit are formally communicated timely to relevant authorities in a report.


a Swiss entity.


Procurement Audit Report- Communicating findings

Accurate

Objective

Clear

ConciseConstructive

Complete

Timely

Characteristics of a good procurement audit report:


a Swiss entity.



- Stages

Document Findings in a Draft

Report

Distribute the Final Report

Follow Up Recommendations

Initiate Tracking Validate and Close

Actions Taken

Conduct Audit Effectiveness

Survey


a Swiss entity.



Significant Components

Significant Components of Procurement Audit Report

Executive Summary

Scope, Critical Objectives & Approach to Audit

Ranking Criteria of Findings

Detailed Findings & Recommendations

Appendices


a Swiss entity.


Procurement Audit Report – Cont’d


Executive Summary

Cover the following:

o Background to the assignment

o Brief approach

o High level summary of significant findings with appropriate ranking

o Recommendations


a Swiss entity.




Scope, Critical Objectives and Approach to Audit

A good procurement audit report should communicate the following details:

1. A good coverage of the scope

1. Critical objectives of work performed and thus verified

- the organisation is achieving value of its spend

- there are adequate controls to mitigate procurement fraud risk

- compliance with applicable regulations

3. Approach to audit communicating the following among others:

- Sources of data used

- Procedures performed, including spend analysis

-Sample sizes tested

- Interviews conducted, etc.


a Swiss entity.




Ranking Criteria for Findings

A good procurement audit should communicate an appropriate criteria for classifying findings. The classification should be based

on perceived severity of the findings on the organisations operations if not corrected.

Sample Ranking Criteria

Categorisation of FindingsAction Priority Rating

Risk Nature of Issue

High Significant issue Immediate. Corrective action to begin within one month.

Moderate Reportable issue Necessary. Corrective action to begin within three months.

Low ObservationRecommended. Corrective action to be considered for implementation within six to twelve months.


a Swiss entity.




Detailed Findings and Recommendations

This section of the audit report communicates the nature and severity of the audit report. It also contains the auditors

recommendations and sometimes, management’s responses to audit findings.

Appendices

This section of the audit report will communicate any additional information that the auditor deems finds appropriate to bring to

the attention of readers.

Lean Audit Techniques


a Swiss entity.


Overview

-Lean Auditing

Definition

Lean auditing a continuous process where you constantly examine what you are doing and saying, is this

the best that I can do?”

The overall philosophy underpinning lean is to maximise customer value whilst minimising waste.

The Lean Institute states that lean means: “creating more value with fewer resources.”

Objective

To drive added value and efficiency in internal audit process.


a Swiss entity.


Overview

- Foreword

“Lean is a valuable concept, because it forces you to think about the bigger picture. It’s a

way of thinking; it’s a mindset, with related tools and process behind it.

We start with identifying what are the valuable services and products that matter to your

customer. And then thinking about what is necessary for you to deliver those in an

acceptable level of quality and all the rest of it. Everything else is waste.”

- Norman Marks (GRC thought leader)


a Swiss entity.


Benefits of Lean Auditing

Some of the key benefits of lean audit approach to internal audit include:

An audit function that can clearly demonstrate a positive return on its cost.

Precise and insightful audit reports and other forms of communication

An audit plan that is scheduled and delivered with the minimum of delays or difficulties

Audit engagement that are appropriately resourced, and aligned with budget

An audit plan that is more closely aligned with the key value drivers of the organisation on an ongoing basis

An audit function that is oriented towards engagement with key stakeholders, with a clear value add mindset.


a Swiss entity.


Key Principles of Lean Techniques

There are five key principles of lean

Specify value

• Have a deep and ongoing understanding of exact expectation and value

Identify the Value Stream

• Know the sequence of processes and activities to meet the need

Identifying Waste

Identify challenges that will hinder successful flow of value and address these challenges

Pull

Strive to deliver demand just on time

Perfection

• Seek ideal way- deliver exactly what is required at the right price and with minimum wastage


a Swiss entity.


Key Tools & Techniques in Lean Auditing

Understanding the needs by identifying the following attributes

• An expected basic requirement.

• If present, it only gives a neutral feeling

• If not present, it makes the reader dissatisfied/ unhappy.

Basic requirements / dissatisfiers

• The value perception will vary depending on the extent to which it is present

Performance factors or satisfiers

• May not be expected and makes the reader excited when present

Delighter or exciter factors


a Swiss entity.


Key Tools & Techniques in Lean Auditing- Cont’d

Identifying the value stream through the following:

• Identifying the sequence of activities and processes for improvement

Value Stream

• Anything that would impede value creationIdentify Waste

• A clear visible indicators/metricsMonitor Progress

• Looking deeper into problems to identify causesRoot Cause Analysis


a Swiss entity.


Tools & Techniques in Lean Auditing- Caution

A word of caution about lean tools and techniques:

• The lean tools should be used to facilitate efficient and value adding internal audit work.

• The tools should be rational and situation specific

• The only constant factor is value and continuous improvement


a Swiss entity.


Who are the customers of internal audit

Dilemma

A key challenge an audit functions faces is how to reconcile and prioritise between the different internal

stakeholders that have an interest in the work of internal audit.

“Focusing on who is the customer is an important question for Internal Audit. There may be differences

from organisation to organisation. However, you may be doing great things for the head of accounts

payable, but until the needs of the Board, Audit Committee, or the CEO are addressed, you’re not doing

your job.”

- Norman Marks


a Swiss entity.


Who are the customers of internal audit

From a lean perspective, the true customer is the external customer.

Key points to consider:

Rank the importance of interested stakeholders in the audit work

Obtain clear understanding of stakeholder expectations

Consider what key external customers (including regulators) would think of the work the internal audit function is doing

Identify a sponsor for the assignment who is at least one level more senior than the manager for the area of the assignment


a Swiss entity.


Adding Value to the Audit

To become a valued part of the organisation, it is essential to properly engage with key customers

about what they actually value.

4

Consider what external

customer would appreciate

1

Map out what stakeholders

value and what they do not;

drive out waste

3

Create a priority action

plan to manage dissatisfiers

2

Consider how things are

done, not just what is done


a Swiss entity.


The Audit Plan- A Value Approach

Aligns closely with key IIA requirements.

The audit plan considers the following key points to add value to the audit work:

Au

dit

Pla

n-

Va

lue

Ad

ditio

n

Keep track of past work (internal audit’s own work and others);

Support senior management and board engagement

Ensure there are no important blind spots

Not overly costly in terms of time or effort for the benefits gained


a Swiss entity.


Allocating Resource to Optimise Value

Points to consider in allocating resource to optimise value:

Impact and transparency of resource and

capability constraints

The scope for increased

coverage by management, compliance or other functions

Key value drivers

and risks


a Swiss entity.


Engagement Delivery – Managing What Really Goes on

Lean demands an awareness of, and focus on, all forms of waste and areas where value is not being

added.

Remember:

“Time waste differs from material waste in that there can be no salvage. The easiest of all wastes and

the hardest to correct is the waste of time, because wasted time does not litter the floor like wasted

material.”

- Henry Ford


a Swiss entity.


Executing the Audit

Points for the auditor to consider when executing the audit

Identify potential risk and issues

Obtain data and information directly

Establish timelines

Create an audit liaison role in

relevant departments

manage risk control matrices

Schedule effective meetings with management

Leverage data analytic tools

Incorporate root cause analysis

Test on step by step basis


a Swiss entity.


Adding Value to Audit Communication

Some common dilemmas/challenges in audit communication

Dile

mm

as

Disagreement with findings

The report wording and ratings of audit findings

With/Without Audit Management Software

Closing of audit meetings

The Audit Quality Process Introduces Delays and

Frustrations


a Swiss entity.


Adding Value to Audit Communication - Cont’d

Points to consider to add value to your audit communication

Agree the criteria for audit ratings with management

Leverage on audit software as an important tool

Be mindful of choice of words in reporting

Consider sensitivity of management in close-out meetings

Consider making an impact with the audit report


a Swiss entity.


Engagement Follow Up

Challenges/Dilemma

Challenges with Engagement follow up

Audit is expected to drive the process for

tracking remediation

Lack of clarity about the role and

process of remediation


a Swiss entity.


Engagement Follow Up

• Consider the following approach to manage follow up of engagements

Lean Approach

The process for tracking remediation

should owned by management

The criteria/evidence for closing issues is

clear

Exploit software solutions to streamline

chasing issues

Create a risk and value based follow up

approach

QUESTIONS


a Swiss entity.


Food for Thought

“The world is a dangerous place to live;

Not because of people who are evil,

but because of the people who don’t

do anything about it”

-Albert Einstein


a Swiss entity.


Presenters’ Details

KPMG Ghana

13 Yiyiwa Drive

Abelenkpe

Accra, Ghana

Tel: 0302 766304

Thank you

Procurement Audit Training - April 2015

Documents

Transcript of Procurement Audit Training - April 2015