AUDIT PROGRAM INTERNAL AUDIT AND

BUDGET DEPARTMENT

AP-PUR-01
Sheet 1 of 1

PROCESS/ACCOUNT: PURCHASING

I. RISKS

● Inability to cancel a purchase order resulting in unneeded materials and legal liabilities.
● Excessive or unwanted open purchase commitments.
● Goods may not be purchased at the best price, and buyers may use their positions for personal gain.
● Buyers routinely initiate, authorize, and execute both the purchase requisition and purchase order
forms for materials ordered for all departments.
● Quantities in excess of need may not be ordered.

II. CONTROLS

◙ Purchase order review by legal counsel; description of conditions for cancellation; formal
agreements with suppliers specifying the terms, conditions, and time intervals required (PC).
◙ Rules on commitments and contracts, policies and procedures; clear responsibilities between
local purchase and central purchases, authorization levels; delegation of authority for approving
purchases (PC).
◙ Obtain competitive bids from approved vendors (PC).
◙ Segregation of duties between initiating and authorizing the purchase requisitions and executing
the purchase orders (PC).
◙ Have a department supervisor receive each purchase requisition prior to its being forwarded to
the purchasing department (PC).

III. AUDIT OBJECTIVE

To determine whether purchase transactions are authorized and are for needed materials only,
and that the inventory is obtained at the best price.

IV. AUDIT PROCEDURES

· Review a sample of purchase orders and their related purchase requisitions for proper approval
signatures. "Predetermined stocking levels" help ensure that unnecessary purchases of inventory
are not made.

· Ascertain that production budgets and economic order quantities are integrated and have been
used in determining quantities purchased.

· Purchase orders, receiving reports, and bid quotation provide evidence appropriate to determine
that recorded purchase transactions were valid at the best price.
Jan. 27, 2011
 AUDIT PROGRAM INTERNAL AUDIT AND
BUDGET DEPARTMENT

AP-PUR-02
Sheet 1 of 1

PROCESS/ACCOUNT: PURCHASING

I. RISKS

● Buyers purchasing from a vendor-relative.

● Goods may not be purchased at the best price, and buyers may use their positions for personal gain.
● Buying from unstable or poor qualiy suppliers

II. CONTROLS

◙ Maintain an approved-vendor file for purchases (PC).

◙ Obtain competitive bids from approved vendors (PC).
◙ Procedures for screening of suppliers (PC)

III. AUDIT OBJECTIVE

To determine whether the company has established a formal process of appraisal for selecting
vendors.

IV. AUDIT PROCEDURES

· Determine whether the company has published comprehensive vendor appraisal criteria.
Understand the procedures, including form layout, document flow, and authorization requirements
for the appraisal process.

· Confirm, for each of the A-class items in the sample, that at least two alternative suppliers have
been identified.

· Examine the procedures to test financial and technical reliability, including obtaining credit reports,
financial statements, and bank references.

· Inquire if the purchasing department has a formal procedure for periodic review of appraisals.

· Verify that purchasing department has a mechanism for monitoring the performance of vendors
and that it uses this information to update vendor appraisals. Review quality records and collect a
sample of goods rejected on quality grounds. Review goods delivery records and collect a sample
of significantly late deliveries. Trace these problem samples to the vendor appraisal files and
confirm they have been updated.
Jan. 27, 2011
 AUDIT PROGRAM INTERNAL AUDIT AND
BUDGET DEPARTMENT

AP-PUR-03
Sheet 1 of 2

PROCESS/ACCOUNT: PURCHASING

I. RISKS

● Buyers receiving expensive gifts from a vendor in return for directing a significant amount of
business to that vendor.
● Buyers purchasing from a vendor-relative.
● Buyers favoring certain suppliers in placing orders for personal gain.
● Buyer irregularities or obtaining kickbacks.

II. CONTROLS

◙ A policy stating competitive bids should be solicited on purchases to the maximum extent that is
practicable (PC).
◙ Maintain an approved-vendor file for purchases (PC).
◙ · Periodic rotation of buyer assignments (PC).
· Implement a team approach to vendor selection (PC, DC).
◙ Conduct analytical techniques such as change analysis and trend analysis of buyer or vendor
activity (DC).

III. AUDIT OBJECTIVE

To ascertain whether procedures for sourcing vendors are adequate.

IV. AUDIT PROCEDURES

· Verify that each production item is classified into one of these categories: make inside only, make
and buy, make or buy, buy outside only. Confirm that the head of the purchasing department is one
of the members of the make-or-buy committee and is active in that role.

· Ascertain whether the purchasing department has a reliable indication of total amount of usage
for each part.

· Confirm that the purchasing department receives quality specifications for the goods or services
to be purchased. Test for a sample of such specifications and confirm that they exist and are
up-to-date.

· Take a sample of orders and compare actual delivery dates with those originally requested. Find
out how lead times are monitored. Ensure that regular contacts are maintained with the vendor so
that purchasing is aware of problems as they develop and that they are resolved promptly.

· Review the mechanisms used to ensure that the purchasing department is aware of current
prices quoted by suppliers. Confirm that for each part on the A-class item list, there are at least
three suppliers with price quotations received.
 Jan. 27, 2011

AUDIT PROGRAM INTERNAL AUDIT AND

BUDGET DEPARTMENT

AP-PUR-03
Sheet 2 of 2

PROCESS/ACCOUNT: PURCHASING

· Confirm that the purchasing department documents the vendor selection process. Review the
process for getting quotations and ensure that they are considered confidential and in no case
divulged to a vendor’s competition. Confirm that low bids from reputable suppliers are not to be
used to reduce prices from existing suppliers.

· Determine whether there is a policy about single sourcing and multiple sourcing. Prepare a
schedule of the significant one-vendor purchases indicating the items, vendors, and amount
purchased. Determine the peso impact of one-vendor purchases in relation to total purchases.
Investigate the reasons for significant one-vendor purchases and evaluate the risks for using
only one source of supply.

· Review the policy about acceptance of gifts from vendors. Interview purchasing department staff
about their views on receiving gifts. Obtain a list of visits and meetings with suppliers on the part of
purchasing staff, review the expense reports for the associated periods, and confirm whether the
expenses were shared each time or alternatively with the vendor.

· Inquire whether there is a program to qualify minority-owned suppliers who are capable of
providing quality materials, supplies, and services. Determine whether the company is able to
identify which of its supplier are minority-owned business enterprises.

· Inquire whether the company has a program of cost reduction and cost increase avoidance
integrated into its vendor relations policy. Obtain the most recent calculation of money saved
through cost reduction or cost increase avoidance. Evaluate the rationale of the calculation and
prove the validity of the figures.

· Confirm that all employees in the purchasing department are aware of the existing government
laws, rules and regulations. Review all of the correspondence files for any indication of an illicit
attempt, by either the buyer or a supplier, to introduce reciprocity as a criterion for doing business
(i.e., placing orders). Identify all businesses that are both suppliers and customers. From that list of
suppliers or customers, select a sample of those where the volume of business is significant and is
of the same magnitude in each direction. Understand the reasons for this activity and inform
management about the possible reciprocity.

Jan. 27, 2011

 AUDIT PROGRAM INTERNAL AUDIT AND
BUDGET DEPARTMENT

AP-PUR-04
Sheet 1 of 2

PROCESS/ACCOUNT: PURCHASING

I. RISKS

● Excessive or unwanted open purchase commitments.

● Employees not understanding the purchasing procedures.

II. CONTROLS

◙ Rules on commitments and contracts, policies and procedures; clear responsibilities between
◙ Develop a procedure manual for purchasing (PC).

III. AUDIT OBJECTIVE

To determine whether placement of the order for purchase of goods is proper and timely.

IV. AUDIT PROCEDURES

· Confirm that the purchase order cannot be processed unless there is a corresponding requisition,
which can be verified by the requisition number on the order. Verify that requisitioners have been
given lists of delivery lead times for major commodities and groups of commodities and that the
lists are updated as significant changes occur. The listed lead times should include an adequate
allowance for administrative and clerical time. Inquire whether the traveling requisitions are used
on repetitive items purchased-some constant information is not printed each time a request is
made, and all subsequent requests will be cross-referenced to the original requisition number for
convenience.

· Confirm that purchasing staff is following the rules prescribed for open purchase commitments.
This is described as the maximum allowable limit of peso that can be spent for each type of
materials, such as production materials, interplant materials, subcontracted material, and
installation materials. Confirm that the maximum allowable limit for total purchase commitments
placed during a time period does not exceed the management-approved limits. Ask about the
frequency of updating these open purchase commitments.

· Verify that all purchase orders are printed with a sequential numbering system. Identify and
investigate missing numbers. Confirm that there is regular review of missing numbers by the
purchasing department.

· Verify that all individual purchase orders for A-class items are written on a single-item basis only
for each required production item for better tracking. Take a sample of an A-class item purchase
orders and test for the presence of this information: purchase order number and date; vendor name
and address; part number and description; quantity, including correct unit or measure; unit cost;
purchase and payment discounts; freight terms, including method of shipment.
 Jan. 27, 2011

AUDIT PROGRAM INTERNAL AUDIT AND

BUDGET DEPARTMENT

AP-PUR-04
Sheet 2 of 2

PROCESS/ACCOUNT: PURCHASING
· Perform analytical reviews in the form of calculating time lags or elapsed times among identifying
a need to purchase, initiating the purchasing order, and issuing the purchase order. The purpose is
to make sure that the time taken to issue orders is not adding significantly to the need to forecast
demand for material requirements planning items or to hold safety stocks for order point items.

· Test to see if buying practices reflect rush or emergency conditions, and determine if these
practices have had any impact on price or possible quality of material accepted.
Jan. 27, 2011
 AUDIT PROGRAM INTERNAL AUDIT AND
BUDGET DEPARTMENT

AP-PUR-05
Sheet 1 of 1

PROCESS/ACCOUNT: PURCHASING

I. RISKS

● Inability to cancel a purchase order resulting in unneeded materials and legal liabilities.

II. CONTROLS

◙ Purchase order review by legal counsel; description of conditions for cancellation; formal
agreements with suppliers specifying the terms, conditions, and time intervals required (PC).

III. AUDIT OBJECTIVE

To ascertain whether the procedures for canceling the purchase order are adequate.

IV. AUDIT PROCEDURES

· Verify that each type of material has a time classification by the freedom to cancel the purchase
order and confirm that these time frames were approved by the legal department and are
continually updated by the purchasing department.

· Compute the proportion of cancellations rejected by the vendor by classifying the rejections by
reason, and obtain explanations for these rejections. Perform trend analysis for the number of
cancellations over a certain time period.

· Identify a sample of canceled orders on which a deposit had been paid and the deposit had
been repaid by the vendor.

· Confirm that the documentation canceling a purchase order is distributed to the same parties
as the original order and that the cancellation notice is issued in a timely manner. Identify the
communication media. Compute the time lags between the rising of the cancellation and issuing
the cancellation, and find out how the purchasing department is planning to speed up
communication for unacceptable delays.
Jan. 27, 2011
 AUDIT PROGRAM INTERNAL AUDIT AND
BUDGET DEPARTMENT

AP-PUR-06
Sheet 1 of 1

PROCESS/ACCOUNT: PURCHASING

I. RISKS

● High inventory holding costs.

● Buyers ordering materials which at that time were being disposed of as surplus.

II. CONTROLS

◙ Reduce purchasing lead time for materials ordered (CC).

◙ Develop and distribute periodic reports of surplus stock (PC).

III. AUDIT OBJECTIVE

To determine whether product demand forecasting techniques produce reliable data for
purchasing decisions to be made.

IV. AUDIT PROCEDURES

· Analyze the method of forecasting product demand: salesperson's projections, market surveys,
economic indicators, management's input.

· Evaluate the method of exploding forecast demand down to component parts and that forecast
is time phased throughout the year.

· Test to see if purchase order firm commitments are made much earlier than established
lead times.
Jan. 27, 2011
 AUDIT PROGRAM INTERNAL AUDIT AND
BUDGET DEPARTMENT

AP-PUR-07
Sheet 1 of 1

PROCESS/ACCOUNT: PURCHASING

I. RISKS

● High inventory holding costs.

● Buyers ordering materials which at that time were being disposed of as surplus.

II. CONTROLS

◙ Reduce purchasing lead time for materials ordered (CC).

◙ Develop and distribute periodic reports of surplus stock (PC).

III. AUDIT OBJECTIVE

To ascertain whether product demand forecasts are updated throughout the year to reflect actual
demand patterns and changing market conditions.

IV. AUDIT PROCEDURES

· Inquire about the method of updating forecasts, that is regeneration, net change, and exponential
smoothing.

· Regeneration involves discarding the old forecast and substituting a new one. This technique is
generally appropriate where there are widely varying forecasts and relatively few inventory levels.

· Net change involves updating only those items for which a forecast change is indicated,
either in quantities or timing. This technique is appropriate where there are few changes and
many levels in the bills of materials.

· Exponential smoothing technique uses the formula of

New forecast = Old forecast + (Sales - Old forecast).

· Review techniques for tracking actual demand to the forecast, and comment on significant
deviations from forecast and adequacy of tracking techniques.
Jan. 27, 2011