The purchasing department in most organizations is critical because it represents a large percentage of the total spending for the entire organization and because it keeps the organization supplied with the goods and services it needs to operate. The cost of inefficiencies and/or flawed processes can be very high since they will impact the entire organization. Also the purchasing function can be especially vulnerable to fraud since it involves cash disbursements. Operational audits of the purchasing department can help eliminate waste, inefficiency and fraud thus adding value to the organization’s bottom line.
Adopt a risk assessment approach to the purchasing department functions instead of attempting to audit all functions on an annual basis. Identify the purchasing department functions and assess the risks associated with each one. Using a risk assessment is crucial because it places the limited internal audit resources in the areas where they are most needed.
Evaluate the internal control structure of the purchasing department. Use the COSO integrated framework for the evaluation. This model will help put controls into perspective and help to relate specific controls with specific business activities.
Perform tests of those controls related to the high risk business activities under audit. Obtain or prepare process maps of the controls being tested and perform a walk-through of each of these controls to verify how they function. Select a sample of data for the business activities being audited and test for compliance with the related controls.
Analyze the results of the control testing to identify any weaknesses or control failures. Management should be made aware of these types of situations so corrective measures can be taken as soon as possible.
Perform substantive tests on the detailed data for the business activities under audit. These tests should include analytical procedures as well as testing source documentation. Since purchasing departments initiating cash disbursements fraud is a big concern, auditors should look for fraud indicators and/or anomalies in the data as part of the analytical procedures.
Conduct an exit conference with the purchasing department managers. Provide a list of findings and issues that need to be resolved and recommendations on how to resolve them. If fraud is found, it should be reported to upper management outside of the purchasing department. Provide the purchasing department managers an opportunity to present additional information and/or evidence that might change the audit results and to provide a corrective action plan to resolve remaining audit finding and issues.
Write the audit report to the appropriate level of management and/or the board of directors. Include the corrective action plan from the purchasing department managers in the report.
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