Purchase System & Audit.pptx

8/10/2019 Purchase System & Audit.pptx

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WHAT IS A PURCHASING SYSYTEM?

A method used by businesses to buy products and/or services. A purchasing systemmanages the entire acquisition process, from requisition, to purchase order, to product

receipt, to payment. Purchasing systems are a key component of effective inventorymanagement 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 recordsefficiently. Develop highly competent personnel. Co-ordinate with all the departments of theorganization.

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


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WHAT IS TENDER?

In this system the entity invites suppliers to give their quotations. The supplierwith the lowest quotation wins the contract. It is a kind of contract mostlyfollowed by large organizations and governments when purchases are of largevalue.

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


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WHAT IS BLANKET ORDER?

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


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

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


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WHAT IS SUBCONTRACTING?

Subcontracting refers to the process of entering a contractual agreement with anoutside person or company to perform a certain amount of work. The outsideperson or company in this arrangement is known as a subcontractor. Many smallbusinesses 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 companys work to outside providers to

simplify or reduce cost.


Advantages: Cost Saving Increased Efficiency Continuity & Risk Management

Disadvantages: Loss of Managerial Control Quality Problems Hidden Costs


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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: 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 toosmall to be worth submitting to the more rigorous purchase and reimbursementprocedures of a company or institution. Petty cash funds must be safeguarded anddocumented to ensure that thefts do not occur. The most common way of accountingfor petty cash expenditures is to use the impress system.

ADVANTAGES & DISADVANTAGES Advantages: Easy Time saving

Disadvantages: Embezzlement of Funds Cuts down on accountability Accounting ErrorsLot of Paper Work


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WHAT ARE IMPORTS?

It is a method to purchase the goods from the area or the country outside theIndia 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 AdviceAppointing C & F Agents Dispatching letter of credit Receipt of Documents Bill ofEntry Delivery of Goods


Advantages: Stabilize seasonal market fluctuations Maintain cost competitivenessin your domestic market Enhance potential for expansion of your business Higherquality More variety Cheaper goods

Disadvantages: High Tax Increased Transportation Cost Foreign exchange risk


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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 Reducing Cost Visibility of spend Productivity Control Quicker processing timesBetter communication

DISADVANTAGES High Learning curve Human or system errors in orders No hardcopiesTraining costs System failure

WHAT IS ORDER ON TELEPHONE?

It is a method used to place orders of small value. In this method the purchase departmentdoes not prepare a formal purchase order. The order is placed by telephone. The price isdiscussed 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 strategyaimed at standardizing procurement prices for commonly procured, homogenous and pricevarying inputs. The basic idea behind a rate contract is to aid a company in establishingparameters for the purchase of goods and services necessary for the continued operation ofthe business.


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WHAT IS STOCKLESS PURCHASING?

Stockless purchase system can be defined as Arrangement in which a supplierholds the items ordered by the customer in its own warehouse, and releases themas 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 andholds the stock in convenient location. The seller has the financial responsibility ofholding the stock.

EXAMPLES

Tyre warehouse near automobile manufacturing units. Petrol pumps in transportundertaking. Aviation fuel pumps at airport.


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

Disadvantages: High cost Need of complex technology


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Accountability, authorization, and approvalYou maintain accountability when you authorize, review, and approvepurchases 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 invoiceinformation.

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


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Security of assetsOnce you have received your purchased goods, secure the materials in a safelocation. To ensure that your resources are accounted for, periodically count

your inventory and compare the results with amounts shown on controlrecords.

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 aspossible.

Keep inventory records and periodically calculate beginning and ending inventoryamounts.

Potential consequences if your assets have not been secured:

Theft of goods

Inventory shortages

Additional costs incurred for replacement of goods


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Review and reconciliationPractice timely review of suppliers invoice, packing slips, and purchase

orders. Check accuracy of the information for prior payment, correct

quantity ordered, and price charged. Monthly ledger reconciliation enablesyou 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 andtimeliness 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


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AUDIT PLAN ON PURCHASE


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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 beavailable at the proper time, in the proper place, in quantity, quality and priceconsistent with the needs of the District.

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

AUDIT OBJECTIVES:

Comprehensive policies and procedures addressing purchasing activities havebeen developed and documented;

The District is in compliance with the established policies and regulatoryrequirements;

Validate that there is proper segregation of duties within the purchasingdepartment;

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

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


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PRELIMINARY WORK:

Prepare an engagement memo to announce the audit.

Prepare Auditors Independence Statement.

Obtain an understanding of the auditees operations through research and

interviews.

Perform a general overview of the internal control environment and establish thescope of the audit.

Develop appropriate audit tests to provide assurance that managements

objectives are being met, document in audit work program.


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AUDIT PROCEDURES & TESTING

General

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 determineadequacy. Ensure the policies and procedures havebeen communicated to appropriate personnel.

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


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Completene

ssTesting

a.From the Purchase Order listing for the audit period, obtained fromCIMS, review the listing for numerical sequence of the POs and scan the

listing for any unusual amounts (i.e. frequently repeating amounts,

credit balances).

b.Ensure numericalsequence of POs.

note first PO number in April2013 andlast PO number in March 2014.

inmate last PO number for August2014 and first PO for September 2014.

c. Scan listing for gaps within the sequence of POnumbers.

d. Run a query from CIMS of allprocessed invoices for the audit periodand scan the list for those without a PO.

Select a sample of those without aPO and verify that a PO is notrequired (i.e. expense reports).


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VendorTesting

a.Review the process for obtaining new vendors (new taxidentification #, certificates, etc)

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

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

d.Compare database of employee addresses to the vendor fileaddresses. Review/investigate any matches (are they reasonable, isthere 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 solesource.

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


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PurchaseOr

derTesting

a.From the total number ofpurchase orders processed duringthe audit period Select ajudgmental sample of purchases

for testing purposes:

under RS.10,000

RS.10,000RS.24,999

over RS.25,000

i.For all POs selected for testing note whether: Ensure documentation isoriginal 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 wereobtained.

Verify that the awarding criteria, was

one of the following:

purchase price

reputationquality of goods/ services

specialty of district needs

past relationship

HUB


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PurchaseOrd

erTesting

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

Ensure that documentation is available to support the selection process.

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

Determine which method as used to securethe selection.

competitive bid

competitive sealed bidnewspaper notification

request for proposal (RFP)

purchase catalog

inter-local contract

reverse auction procedure

Determine whether the selection appearsreasonable and is justified.

Ensure that documentation is available tosupport the selection process.


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PurchaseOrd

erTesting

B.Determine the total number of sealed bids obtained/processedduring the audit period. Select a judgmental sample to Bidproposals were properly completed, with scope specifications and

special terms and conditions. Sealed bids received were properlycompleted (i.e. references, felony conviction notification, conflict ofinterest disclosure and dollar amount for items).Bids were properlyadvertised. Bid summary sheet was complete. Bid Sign-In sheetdocumenting who was present at the opening of the sealed bidswas properly filled out. Determination for selection of vendor was

documented. Vendors sealed bids reviewed at opening, werereceived by the stated deadline. Board approved.

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


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Closed/

Outstanding POs

a.Gain an understanding of how POs are closed and purged

from the system.

b.Run a query for theaudit period for allopen POs.

i.Select a judgmentalsample of POs toverify the following:

Check for POs notproperly closed

Approval Files a.Review authorization limitations for consistency andreasonableness.

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

CustomerService

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.

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


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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 theaudit disposition, the overall materiality to the audit and the relative riskexposure.

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 auditees responses, review for errors, and

distribute to appropriate District management.


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TH NK YOU

By

Raghav

9962869008

[email protected]