Purchase System & Audit

WHAT IS A PURCHASING SYSYTEM?• A method used by businesses to buy products and/or services. A purchasing system manages

the entire acquisition process, from requisition, to purchase order, to product receipt, to payment. Purchasing systems are a key component of effective inventory management in that they monitor existing stock and help companies determine what to buy, how much to buy and when to buy it.

FUNCTIONS OF PURCHASE DEPARTMENT • Purchase materials at lowest possible cost while maintaining quality. Maintain good

relationship with the suppliers. Take advantage of economies of scale. Maintain records efficiently. Develop highly competent personnel. Co-ordinate with all the departments of the organization.

TYPES OF PURCHASING SYSTEM• Tender System Stockless Purchase System • Blanket Order E-Purchasing• E-Procurement Subcontracting Rate Contract• Method Petty Cash System• Capital Equipment Purchase • Imports

WHAT IS TENDER?

• In this system the entity invites suppliers to give their quotations. The supplier with the lowest quotation wins the contract. It is a kind of contract mostly followed by large organizations and governments when purchases are of large value.

TYPES OF TENDER

• Open Tender. • Restricted Tender• Negotiated Tender

ADVANTAGES & DISADVANTAGES

• Advantages: Competitive Lower Cost Transparent Process • Disadvantages: Low Price usually Detriment of Quality Time consuming

WHAT IS BLANKET ORDER?

• Company purchase many small items on day to day basis. It becomes difficult to have inventory for all. It is most popular method for purchasing items which are used regularly. There are two methods: Agreement is made to supply a Fixed Quantity of the product at a Fixed Price for a Specific Period. Agreement is made to supply for a Specific Period but the Quantity is unknown.

ADVANTAGES & DISADVANTAGES

• ADVANTAGES: Flexible Avoid negotiation Avoid placement of new order again and again Advantage to supplier to plan the work at his place Reduces clerical activities Protections against higher pricing in future

• DISADVANTAGES Petty frauds It requires flexible internal control Poor vendor performances Difficult to determine and forecast the quantity

WHAT IS SUBCONTRACTING?

• Subcontracting refers to the process of entering a contractual agreement with an outside person or company to perform a certain amount of work. The outside person or company in this arrangement is known as a subcontractor. Many small businesses hire subcontractors to assist with a wide variety of functions. Example: A small business may use an outside firm to prepare its payroll.

SUBCONTRACTING IS ALSO KNOWN AS OUTSOURCING

• Outsource means to send part of a company’s work to outside providers to simplify or reduce cost.

ADVANTAGES & DISADVANTAGES

• Advantages: Cost Saving Increased Efficiency Continuity & Risk Management• Disadvantages: Loss of Managerial Control Quality Problems Hidden Costs

WHAT IS CAPITAL PURCAHSE EQUIPMENT? • It is a purchasing system which requires high capital. It is used to purchase large value

assets such as Machinery and Equipment's.

ADVANTAGES & DISADVANTAGES • Advantages: Flexible One Time Investment Increased Co-ordination & Communication • Disadvantages: Requires lots of capital Decision making is difficult

WHAT IS PETTY CASH SYSTEM? • A small fund of cash is kept in hand for purchases or reimbursements which are too

small to be worth submitting to the more rigorous purchase and reimbursement procedures of a company or institution. Petty cash funds must be safeguarded and documented to ensure that thefts do not occur. The most common way of accounting for petty cash expenditures is to use the impress system.

ADVANTAGES & DISADVANTAGES• Advantages: Easy Time saving • Disadvantages: Embezzlement of Funds Cuts down on accountability Accounting Errors

Lot of Paper Work

WHAT ARE IMPORTS?

• It is a method to purchase the goods from the area or the country outside the India Territory. Imports are not easy and are governed by the Central Government.

PROCEDURE OBTAINING IMPORT LICENSE

• Obtaining Foreign Exchange Placing an order Receipt of Shipment Advice Appointing C & F Agents Dispatching letter of credit Receipt of Documents Bill of Entry Delivery of Goods

ADVANTAGES & DISADVANTAGES

• Advantages: Stabilize seasonal market fluctuations Maintain cost competitiveness in your domestic market Enhance potential for expansion of your business Higher quality More variety Cheaper goods

• Disadvantages: High Tax Increased Transportation Cost Foreign exchange risk

E-PURCHASING / E- PROCUREMENT• procurement is the business-to-business or business-to- consumer or business-to-

government purchase and sale of supplies, work, and services through the Internet. E-procurement helps to achieve benefits such as increased efficiency and cost reduction.

ADVANTAGES & DISADVANTAGES • ADVANTAGES Reducing Cost Visibility of spend Productivity Control Quicker processing times

Better communication • DISADVANTAGES High Learning curve Human or system errors in orders No hardcopies

Training costs System failure

WHAT IS ORDER ON TELEPHONE? • It is a method used to place orders of small value. In this method the purchase department

does not prepare a formal purchase order. The order is placed by telephone. The price is discussed an finalized on the telephone. This works well with the captive type of vendors

WHAT IS RATE CONTRACT METHOD? • A Rate Contract or a Rate Agreement (RC in short) is a procurement cost reduction strategy

aimed at standardizing procurement prices for commonly procured, homogenous and price varying inputs. The basic idea behind a rate contract is to aid a company in establishing parameters for the purchase of goods and services necessary for the continued operation of the business.

WHAT IS STOCKLESS PURCHASING?

• Stockless purchase system can be defined as Arrangement in which a supplier holds the items ordered by the customer in its own warehouse, and releases them as and when required by the customer. It is also known as just-in-time purchasing. In this system the vendor has a clear idea of the requirements of the buyer and holds the stock in convenient location. The seller has the financial responsibility of holding the stock.

EXAMPLES

• Tyre warehouse near automobile manufacturing units. Petrol pumps in transport undertaking. Aviation fuel pumps at airport.

ADVANTAGES & DISADVANTAGES

• Advantages: Reduced warehouse space Eliminate the cost of storing, maintaining and distributing supplies Increased inventory turnover Less manpower

• Disadvantages: High cost Need of complex technology

GOOD PURCHASE SYSTEM

Separation of dutiesTo ensure proper separation of duties, assign related buying functions to different people. With proper segregation, no single person has complete control over all buying activities.

Best practice is to have different people:

• Approve purchases• Receive ordered materials• Approve invoices for payment• Review and reconcile financial records• Perform inventory counts

Potential consequences if duties are not separated:

• Unauthorized or unnecessary purchases made• Improper charges made to department budgets• Excessive costs incurred• Goods purchased for personal use

Accountability, authorization, and approvalYou maintain accountability when you authorize, review, and approve purchases based on signed agreements, contract terms, and purchase orders.

Best practices: • Comply with ethical buying practices and policy.• Review and update signature authorizations periodically.• Obtain pre-approval of consultant agreements by Purchasing.• Verify receipt of goods and services against contract/ purchase order and invoice

information.• Reconcile ledgers for accuracy of recorded transactions.• Monitor to ensure that invoices are paid in a timely manner.

Potential consequences if accountability does not exist: • Unauthorized, unnecessary, or fraudulent purchases• Unauthorized work performed by suppliers• Lost supplier discounts due to late payments• Improper charges to incorrect account/ funds resulting in a misappropriation of funds• Conflict of interest when paying employee for unauthorized outside work

Security of assetsOnce you have received your purchased goods, secure the materials in a safe location. To ensure that your resources are accounted for, periodically count your inventory and compare the results with amounts shown on control records.

Best practices:

• Secure goods received in a restricted area.• Restrict inventory access to appropriate staff.• Lock goods and materials, and provide key or combination to as few people as

possible.• Keep inventory records and periodically calculate beginning and ending inventory

amounts.

Potential consequences if your assets have not been secured:

• Theft of goods• Inventory shortages• Additional costs incurred for replacement of goods

Review and reconciliationPractice timely review of supplier’s invoice, packing slips, and purchase orders. Check accuracy of the information for prior payment, correct quantity ordered, and price charged. Monthly ledger reconciliation enables you to find improper charges and validate appropriate financial transactions.

Best practices:

• Review supplier invoices for accuracy by comparing charges to purchase orders.• Verify that the goods and services purchased have been received.• Perform monthly reconciliations of operating ledgers to ensure accuracy and

timeliness of expenses.

Potential consequences if review and reconciliation is not performed:

• Improper charges to your department budgets• Disallowances resulting from costs charged to incorrect accounts/funds• Payments made for items or services not provided

AUDIT PLAN ON PURCHASE

GENERAL:

• The primary responsibility of the Purchasing Department is to provide for the purchase of materials, supplies, and services, with the objective that they will be available at the proper time, in the proper place, in quantity, quality and price consistent with the needs of the District.

• This audit will concentrate on ensuring internal controls are in place to maintain the objectives stated above.

AUDIT OBJECTIVES:

• Comprehensive policies and procedures addressing purchasing activities have been developed and documented;

• The District is in compliance with the established policies and regulatory requirements;

• Validate that there is proper segregation of duties within the purchasing department;

• Ensure that adequate internal controls have been implemented to limit exposure to unauthorized or inappropriate transactions;

• Verify that transactions are processed in accordance with purchasing guidelines and District policies and procedures.

PRELIMINARY WORK:

• Prepare an engagement memo to announce the audit. • Prepare Auditor’s Independence Statement. • Obtain an understanding of the auditee’s operations through research and

interviews. • Perform a general overview of the internal control environment and establish the

scope of the audit. • Develop appropriate audit tests to provide assurance that management’s

objectives are being met, document in audit work program.

AUDIT PROCEDURES & TESTINGG

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Obtain the following, where applicable:

Policies and Procedures

Organizational Charts

Prior Audit Reports

External Auditor Management Reports

Regulatory Examination Reports

Related Information Regarding Laws and Regulations

Review policies and procedures to determine adequacy. Ensure the policies and procedures have been communicated to appropriate personnel.

Review any prior examination reports to determine whether corrective action has been implemented for noted deficiencies

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a.From the Purchase Order listing for the audit period, obtained from CIMS, review the listing for numerical sequence of the PO’s and scan the listing for any unusual amounts (i.e. frequently repeating amounts, credit balances).

b.Ensure numerical sequence of PO’s.

note first PO number in April2013 and last PO number in March 2014.

inmate last PO number for August 2014 and first PO for September 2014.

c. Scan listing for gaps within the sequence of PO numbers.

d. Run a query from CIMS of all processed invoices for the audit period and scan the list for those without a PO.

Select a sample of those without a PO and verify that a PO is not required (i.e. expense reports).

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g a.Review the process for obtaining new vendors (new tax identification #, certificates, etc)

b.Review vendor list for inactive vendors (no activity for 3 or more years)

c.Review vendor list for active vendors under several different vendor numbers and the same address (duplicates).

d.Compare database of employee addresses to the vendor file addresses. Review/investigate any matches (are they reasonable, is there a Conflict of Interest Form on file).

e.Select a judgmental sample of sole source vendors to review and verify the documentation for determination of the vendor as a sole source.

f. Determine how vendor performance and experiences are measured, documented and used for future relationships.

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g a.From the total number of purchase orders processed during the audit period Select a judgmental sample of purchases for testing purposes:

under RS.10,000

RS.10,000 – RS.24,999

over RS.25,000

i.For all POs selected for testing note whether: Ensure documentation is original and free from alteration

ii.Additionally, for purchases between RS.10,000 and RS.25,000. test the following:

Determine whether the purchases were competitively bid or phone quotes were obtained.

Verify that the awarding criteria, was one of the following:

purchase price

reputation

quality of goods/ services

specialty of district needs

past relationship

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g Ascertain how the vendor was selected and determine whether the selection was reasonable and complied with policy.

Ensure that documentation is available to support the selection process.

iii. Additionally, for purchases over $25,000. Perform testing for the following:

Determine which method as used to secure the selection.

competitive bid

competitive sealed bid

newspaper notification

request for proposal (RFP)

purchase catalog

inter-local contract

reverse auction procedure

Determine whether the selection appears reasonable and is justified.

Ensure that documentation is available to support the selection process.

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gB.Determine the total number of sealed bids obtained/processed during the audit period. Select a judgmental sample to Bid proposals were properly completed, with scope specifications and special terms and conditions. Sealed bids received were properly completed (i.e. references, felony conviction notification, conflict of interest disclosure and dollar amount for items).Bids were properly advertised. Bid summary sheet was complete. Bid Sign-In sheet documenting who was present at the opening of the sealed bids was properly filled out. Determination for selection of vendor was documented. Vendors’ sealed bids reviewed at “opening”, were received by the stated deadline. Board approved.

Run a query by commodity codes and select a sample of those with a total >RS.25,000 and verify that a bid was obtained.

Closed/Outstanding PO’s

a.Gain an understanding of how PO’s are closed and purged from the system.

b.Run a query for the audit period for all “open” PO’s.

i.Select a judgmental sample of PO’s to verify the following:

Check for PO’s not properly “closed”

“Approval” Files a.Review authorization limitations for consistency and reasonableness.

b.Evaluate personnel authorized to approve and check for terminations, transfers, etc.

Customer Service

a.Determine the method and frequency in which the Purchasing Department assesses its service delivery and measures performance (i.e., online surveys, questionnaires). Ensure that quality and timeliness of service are evaluated.

Miscellaneous a.Determine whether it is acceptable for buyers to never switch commodities.

WORK PAPERS:

• Organize all relevant work papers in a clear and logical and manner and cross reference audit steps to their corresponding work papers.

• Create a final index for the work paper bundle.• Compile and securely store audit CYA files for reference if needed.

AUDIT FINDINGS & REPORTING:

• Document summaries of all audit findings as soon as exceptions are noted.• Recommend to auditee any appropriate adjustments, internal control or

operational recommendations as a result of the review.• Determine whether to include each audit finding in final audit report based on the

audit disposition, the overall materiality to the audit and the relative risk exposure.

• Prepare the draft audit report for review by auditee.• Distribute tentative and preliminary audit report to auditee and request responses

within two weeks.• Compile final audit report with auditee’s responses, review for errors, and

distribute to appropriate District management.

THANK YOUBy

Raghav

9962869008raghav057@ymail.com