Purchasing process audit: what to check first

Purchasing is an area where small irregularities rarely make a noise, yet together they can weigh heavily on a company's results. Orders placed outside the system, prices nobody compares, contracts renewed out of inertia: each of these on its own looks innocent. An audit of the purchasing process is there to see them together and to establish where to start putting things in order.

Below I describe the elements I check first. These are the areas where, in a typical review, it is easiest to find a gap between how the process looks on paper and how it works in practice.

1. From requisition to purchase order

The first question is: who can initiate a purchase, and on what basis. Check whether there is a clear path from raising a need, through budget approval, to the purchase order, and whether people actually use it. A good test is a random sample of a few dozen orders from recent months. For each order, check whether you can reconstruct who raised the need, who approved it, when the order was issued and when the goods or service were delivered.

Pay particular attention to orders issued after the invoice date. This is a common symptom of the process being bypassed, and it is always worth asking where it comes from in a given department.

2. Supplier structure

Put together a list of suppliers with the value of purchases over the last year and sort it in descending order. In most companies a small group of suppliers accounts for a large share of spend, while a long tail covers many suppliers from whom purchases are made rarely and without any contract. The two ends require different approaches.

• For the largest suppliers, check the contract terms, their expiry dates, price indexation mechanisms and dependence on a single source.
• For the long tail, check whether the same goods are being bought from several entities at different prices and whether the number of suppliers can be reduced.
• Check for duplicates in the supplier master data: the same entity under two names is a common way of spreading volume.

3. Prices and commercial terms

Compare the prices paid for the same items in different periods and from different suppliers. You are interested in three things: whether prices rose in line with the contract, whether anyone has negotiated them since the last contract, and whether volume discounts are being applied. In practice it happens that a term from the contract is not applied on invoices because nobody checks.

It is also worth setting the price against the total cost: transport, packaging, payment terms, the cost of complaints and the working time of the people who deal with the supplier. A low unit price does not always mean a low cost.

4. Contracts and their deadlines

Gather all contracts in a single register: supplier, subject, annual value, end date, notice period, automatic renewal clauses. This register alone often reveals contracts that renewed themselves without any commercial discussion because nobody was watching the notice deadline. A contract review calendar, kept by one responsible person, removes this problem at little cost.

5. Goods receipt and settlement

Check that three documents agree: the purchase order, the receipt confirmation and the invoice. Quantity and price discrepancies that make it through to payment are a direct loss. Ask accounting how many invoices come back for clarification and for what reasons. The list of reasons is a ready-made map of the weak points in the process.

Also look at liabilities that are not in the system: services performed but never formally ordered, and work that started on the basis of verbal arrangements.

6. Supplier evaluation and complaints

If the company has a quality management system, supplier evaluation is one of its requirements. Regardless of certification, it is worth checking whether the evaluation is based on data, such as on-time delivery, delivery quality and the number of complaints, or on the buyer's impressions. Complaint records should lead to specific actions towards the supplier, and the evaluation results should influence decisions about continuing the relationship.

7. Authorisations and segregation of duties

Check who has the right to create suppliers, change their bank details, place orders, receive goods and approve invoices. If one person can perform several of these activities without a second pair of eyes, the risk of error or abuse increases. Segregation of duties is a standard control mechanism that also protects the employees themselves.

How to gather the data for the review

Most of the information can be pulled from the accounting or ERP system: the list of orders, invoices, suppliers and payments for the chosen period. Add to that the contracts from the archive and short conversations with buyers, the people who receive goods, and accounting. The conversations matter because they reveal workarounds that cannot be seen in the data. Ask each person what takes up most of their time in the process and what they do differently from what the procedure prescribes. The answers usually form a pattern that points to the main weak spots.

The review does not require a months-long project. For a medium-sized company, a first picture of the situation can be built in a few weeks, provided the data is available from the outset.

How to set priorities

After going through these seven areas you usually end up with a long list of observations. Sort it by two criteria: the financial value the problem affects and how easy it is to fix. It is worth dealing first with matters of high value and a simple solution, for example the contract calendar or discount checks. Changes that require tools or a reorganisation of roles go into the plan for the second stage.

It is also a good idea to record the starting point: the number of suppliers, the percentage of orders issued after the invoice, the average time from requisition to order. Without a reference point it is hard later to show whether the changes had an effect.

We describe the detailed scope of our purchasing process audit on the Purchasing audit (in Polish) page.