How to Conduct an Audit of the Purchasing Department

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Business may seem busy enough without piling on more tasks, but companies need to prioritize regular, thorough purchasing audits if they want to stay on top of their cash flow. Performing an internal purchasing audit is all about ensuring money in/money out is really adding up, whether money is being wasted and if embezzlement or other fraud is taking place.

Fraud in the Workplace

Employers usually trust their employees, but $50 billion in workplace crime occurs every year, and much of it is conducted by “trusted employees.” In fact, 28.7% of trusted employees' embezzlement schemes last over five years and add up to amounts of $2.2 million on average. Having regular audits means cutting down on waste, catching bad mistakes before they become big problems and even deterring criminal activity.

7 Steps to Auditing

There may be other types of procurement audits for deeper dives into the numbers, but this is the basic process that should help most companies do a starter audit. How far you go into the audit and with how much detail is up to you. Spot checking may be sufficient for many, but if you’ve noticed any employees behaving a bit more lavishly and dressing much better, it can’t hurt to take a closer look.

  1. Talk to the team. Get the low down on processes and approaches in use by anyone in purchasing or procurement. Find out all their data sources and tracking methods. Learn about any concerns they may have about what, why and whether they feel there’s anywhere to improve.

  2. Prioritize. Talking to the team can also lay the groundwork for prioritizing parts of purchasing and procurement, such as vendors and accounts, supplies and so on. Each section will have challenges and processes to understand.

  3. Dive into purchase orders. Random samples or a deeper pool of forms will need to be sifted through and analyzed. Are they for legitimate orders with real vendors and prior approval? Are the amounts consistent in their various entries? If anything smells fishy, look for similar entries and follow where the trail goes.

  4. Inspect vendors. Make sure all vendors have been approved. Look for anything that seems odd and dig in. If vendors seem suspect, set them aside to look closer. Sometimes, the vendors are fine, but employees find a way to over-bill for that vendor every time. Investigating vendor estimates, websites and literature may mean finding discrepancies between costs, invoiced amounts and actual payments.

  5. Audit the processes. Can things be done more efficiently? Are there areas you’ve encountered that seem primed for abuse or embezzling? Make a note of where changes can happen and what can be improved.

  6. Compilation time. List processes done incorrectly or that were overlooked entirely. If you’ve found strange things among select vendors or purchase orders or you’ve noticed one employee’s name on too many conflicting documents, then now’s the time to make note of all these things. Some auditors may want to revisit the team or managers to discuss findings and make suggestions for future practices.

  7. Submit a report. Put it in writing and have copies for the necessary higher-ups. If there are areas that leave you uneasy but you’ve been unable to suss out why, be sure to at least divulge these to upper brass so they can choose to take the investigation further if they feel it’s needed. 

Prevention: Purchasing Controls Checklist

Small businesses suffer hugely through procurement and purchasing fraud because too few safeguards are in place. Oversight is needed to deter fraud and ensure purchasing stays in line, and this comes in the form of things like never letting anyone have end-to-end control of funds. Having banking statements sent directly to the company owner’s home can prevent cover-ups.

There are all kinds of accountability measures companies can adopt to make embezzlement and theft trickier to do, but performing an audit is an important step in finding out what sort of measures may be missing.