How to conduct a successful procurement audit

Procurement tracking is a critical function, but let's be honest—it can feel like a minefield. You're juggling budgets, chasing deadlines, and navigating a complex web of regulations. It's easy to get lost in the weeds and overlook potential issues.

Procurement audits act as your organization’s financial health check. They're not just about finding mistakes (though they certainly do that!)—audits provide valuable insights into your procurement process, helping you identify areas for improvement, enhance efficiency, and, ultimately, save money. In this guide, we’ll walk you through conducting your own procurement audit with expert tips and best practices to keep your process on track.

What is a procurement audit?

Procurement audits are a systematic review of your organization's procurement processes. They’re a deep dive into how you buy things—from sourcing suppliers to paying the bills—so you can assess the effectiveness, efficiency, and compliance of your procurement strategy.

Procurement audits can take various forms, including:

• Compliance audits: Making sure you're playing by the rules ensures your procurement practices align with legal regulations, industry standards, and your own internal policies.
• Performance audits: Are you getting the most bang for your buck? These audits look at how efficiently you're buying things. They examine every step of the procurement process, from supplier selection to contract negotiation and order fulfillment. 
• Financial audits: These audits closely examine your financial records to check for accuracy and prevent fraud, like kickbacks, bid-rigging, or theft. This includes verifying the accuracy and completeness of invoices and supporting documentation, ensuring proper authorization and processing of payments to suppliers, and reviewing expense reports for accuracy and compliance with company policies.‍
• Special purpose audits: These audits are tailored to specific needs or concerns, like fraud, supplier performance, or post-implementation of a new procurement system. 

8 steps to conducting a procurement audit

Conducting regular procurement audits can help your organization pinpoint any problems that could hurt your wallet, land you in legal trouble, or even damage your reputation. Here’s how to do it:

1. Define your objectives and scope

Before you delve into the data, you’ll want to lay the groundwork for a successful audit. You need to be crystal clear about what you’re trying to achieve and what areas you’ll be focusing on. 

Start by asking yourself what you hope to gain from this audit. Are you primarily concerned with compliance? Are you looking to improve efficiency and reduce costs? Or maybe you're trying to identify and mitigate risks. Get buy-in from key stakeholders to ensure everyone is on the same page.

Once you have a clear understanding of your objectives, you can define the scope of your audit. What specific areas will you be reviewing? Will you be looking at all procurement processes, or will you focus on specific departments or suppliers? What time period will you be analyzing?

Here are some key areas to consider including in your scope:

• Supplier selection and management: Review supplier qualification processes, contract negotiations, and performance monitoring.
• Contract management: Analyze procurement contract terms and conditions, compliance with contract obligations, and dispute resolution processes.
• Procurement policies and procedures: Assess the adequacy and effectiveness of your organization's procurement policies and procedures.
• Financial controls: Examine invoice processing, payment approvals, and expense reporting to ensure accuracy and prevent fraud.
• Compliance with laws and regulations: Verify adherence to relevant laws, regulations, and industry standards.
• Use of procurement technology: Evaluate the effectiveness of procurement software and tools.

Don’t try to tackle everything at once. Choose a manageable scope with realistic objectives and timelines to avoid burnout before your team has a chance to finish. 

2. Involve key stakeholders

A successful audit relies on the active participation and support of all stakeholders. By involving them from the outset, you'll create a more collaborative and effective audit process.

First, you’ll need to identify who your stakeholders are—anyone with a vested interest in the procurement process. This could include:

• Management: They're the ones ultimately responsible for the success of the organization, so their input is invaluable.
• Finance: They oversee the budget and need to be aware of any potential financial risks or opportunities.
• Legal: They ensure compliance with laws and regulations, so their expertise is essential.
• Procurement: They're the experts in the field and can provide valuable insights into the day-to-day challenges and opportunities within the procurement function.
• Internal audit: They can provide valuable expertise and guidance on audit methodologies and best practices.

Start by communicating the purpose and scope of the audit to all stakeholders. Explain how the audit will benefit the organization and address any concerns they may have. Encourage their feedback and input throughout the audit process. This collaborative approach not only ensures the audit is relevant but also fosters buy-in and support from different levels and departments.

3. Develop a plan

Now that you've clearly defined your objectives and scope, it's time to develop a solid plan for your audit. This is where you outline the specific steps you'll take, the resources you'll need, and the timeline for completion.

First, you'll need to create a detailed timeline. When will the audit begin and end? Break down the audit into smaller, manageable tasks and assign deadlines to each one. This will help you stay on track and make sure the audit is completed within the allotted timeframe.

Next, consider the resources you'll need. Who will be involved in the audit? Will you need to hire external auditors? What tools and technologies will you need, such as data analysis software or procurement software? Don't forget to factor in the costs associated with these resources when budgeting for the audit.

Finally, document your plan. This will serve as a valuable reference point throughout the audit process, keeping everyone aligned and moving toward the same goal.

4. Review purchase order forms

Tracking purchase orders might seem like a small detail, but trust us, it's essential. Purchase orders are the backbone of any procurement process, so ensuring they're accurate and complete is essential.

First, you'll want to review a sample of purchase orders—ideally 20-50— to identify any potential issues. Here’s what to look for:

• Completeness: Are all required fields filled out, including vendor information, item descriptions, quantities, prices, delivery dates, and terms and conditions?
• Accuracy: Are all details accurate and consistent? Are there any discrepancies between purchase orders and requisitions or invoices?
• Authorization: Are all necessary approvals obtained? Are there any unauthorized purchases?
• Compliance: Do the purchase orders comply with company policies and procedures, as well as applicable laws and regulations?

By carefully reviewing purchase order forms, you can identify problems early on and take steps to address them. 

5. Assess suppliers

Your supplier relationships directly impact your bottom line and your reputation, so covering them in your audit is a must. By regularly assessing your suppliers, you can identify potential risks, negotiate better terms, and improve your overall procurement performance.

Start by evaluating your existing supplier base. Are you working with reputable and reliable suppliers? Are they meeting your expectations in terms of quality, delivery, and price? You can assess supplier performance by reviewing key performance indicators (KPIs) like:

• On-time delivery rates: Are suppliers consistently delivering goods and services on time?
• Quality of goods and services: Are you receiving products and services that meet your specifications and quality standards?
• Price competitiveness: Are you getting the best possible prices from your suppliers?
• Customer service: How responsive and helpful are your suppliers when you have questions or issues?

You can also gather feedback from internal stakeholders, like procurement managers, project managers, and end users, to better understand their experiences with different suppliers.

6. Analyze findings

Let's get to the heart of the matter: analyzing your findings. This is where you sift through all the data you've collected and uncover valuable insights. 

When going over your findings, look for the following:

• Compliance with policies and procedures: First, check if your procurement team is following the company playbook. Are they sticking to the rules and procedures set out by the organization? Note any unauthorized purchases, contracts that don't follow the guidelines, or missing paperwork. By cleaning up these issues, you can improve compliance and minimize the risk of errors and fraud.
• Effectiveness of internal controls: Assess the effectiveness of your existing internal controls by reviewing your policies and procedures, as well as your organizational structure and staffing. Identify any weaknesses in your controls, such as a lack of segregation of duties or inadequate oversight, and suggest ways to tighten things up.
• Supplier performance and compliance: Evaluate supplier performance to ensure they’re meeting expectations. Analyze performance data and KPIs to see where you can improve and negotiate better deals.
• Financial analysis: Analyze spending patterns, identify cost trends, and look for opportunities to reduce costs and improve efficiency. Are there any areas where you're overspending or underutilizing resources?

7. Create a report

Now it’s time to wrap up your audit with a compelling report. Think of this as your "report card" for your procurement processes.

First, compile all your findings into a comprehensive and well-organized report. Here’s what to include:

• Executive summary: A concise overview of the audit objectives, scope, methodology, and key findings
• Findings: A detailed description of all your findings, including any deviations from policies, procedures, or best practices, identified risks, and areas for improvement
• Recommendations: Specific and actionable recommendations for addressing the identified issues and improving procurement processes
• Action plan: A detailed plan for implementing the recommended actions, including timelines, responsibilities, and budget allocations

Then, you’ll need to present your findings to key stakeholders. This is your chance to share your insights and recommendations with management, finance, legal, and other relevant departments.

Here are a few tips for your presentation:

• Keep it concise and engaging: Use visuals like charts and graphs to illustrate your findings and make your presentation more impactful.
• Focus on the key takeaways: Highlight the most important findings and recommendations so stakeholders don’t get lost in the details.
• Be prepared to answer questions: Anticipate questions from stakeholders and be prepared to provide answers.
• Build consensus: Work with stakeholders to develop an action plan everyone agrees on.

8. Address areas for improvement

Now comes the exciting part: putting your findings into action! This isn't a one-and-done deal—improving and optimizing your procurement process is a continuous process.

First, prioritize the recommendations based on their potential impact and feasibility. Tackle the most critical issues first and gradually implement the remaining recommendations.

Regularly monitor progress and make adjustments as needed. This might involve tracking KPIs, conducting follow-up audits, and gathering feedback from stakeholders.

Remember, the goal is to create a culture of continuous improvement within your procurement function. By regularly reviewing and refining your processes, you can ensure your procurement operations are efficient, effective, and aligned with your organization's strategic goals.

Procurement audit checklist

Before you present your findings, make sure your audit covers all the bases. This checklist will guide you through the key areas you need to scrutinize during your procurement audit to make sure it’s as thorough and accurate as possible. 

Benefits of regular procurement audits

Regular procurement audits aren't just a box to check—they're a powerful tool for boosting your bottom line. Conducting these audits unlocks a world of benefits, like:

• Improved efficiency: Regular procurement audits help identify bottlenecks, wasted resources, and redundancies hampering your operations. Eliminating these issues will speed things up, boost productivity, and make your procurement team more agile.
• Enhanced compliance: Keep your procurement activities above board by following all the rules and regulations. This includes your company's internal policies and procedures and any relevant laws and regulations, like anti-bribery and data privacy laws. Staying compliant protects your organization from legal and reputational risks.
• Cost reduction: By conducting regular procurement audits, you can identify and eliminate unnecessary costs like overspending on certain items, late payment fees, or even contract breaches. You can also negotiate better prices with suppliers and leverage economies of scale to maximize savings. It's all about getting the most value for your money.
• Risk mitigation: Regular procurement audits help you proactively identify and address potential risks, like fraud, corruption, and supply chain disruptions. By uncovering and addressing these issues early on, you can protect your organization's financial stability and safeguard its valuable assets. 
• Stronger supplier relationships: Procurement audits can help you build stronger relationships with your suppliers by identifying and addressing any issues that may be impacting their performance. By conducting regular performance reviews and providing constructive feedback, you can help your suppliers improve their operations and meet your needs more effectively. This can lead to more reliable and cost-effective supply chains.

Best practices for conducting procurement audits

Let's talk about the secrets to a successful procurement audit. These best practices will help you conduct thorough and effective audits that deliver real value to your organization:

• Engage independent auditors: Bring in fresh eyes and expertise by engaging independent auditors to conduct regular assessments. They can provide an unbiased perspective and identify areas for improvement that internal teams might miss.
• Establish clear audit scopes: Define the scope of your audit clearly and concisely. This will ensure the audit remains focused and addresses the most critical areas of concern.
• Develop a standardized checklist: Create a comprehensive checklist that covers all key areas of the procurement process to maintain consistency and thoroughness across all audits.
• Implement strong internal controls: Robust internal controls, like regular reconciliations and approval workflows, are essential for preventing fraud and ensuring the accuracy and integrity of procurement transactions.
• Leverage technology: Utilize procurement software and data analytics tools to streamline the audit process and gain valuable insights into your procurement data.
• Conduct regular risk assessments: Regularly assess your procurement risks to identify potential vulnerabilities and take proactive steps to mitigate them.
• Foster a culture of compliance: Promote a culture of ethical behavior and compliance throughout the organization with regular training and education on procurement policies and procedures.
• Regularly review and update policies: Keep your procurement policies and procedures up-to-date to reflect changes in business needs, legal requirements, and best practices.
• Document everything: Maintain thorough documentation of all audit activities, findings, and recommendations. This will help you track progress, identify trends, and continuously improve your procurement processes.

Keep your procurement processes in check with Zip

Remember, procurement audits aren't just about finding problems; they're about unlocking opportunities for improvement. By following the checklist and implementing the best practices outlined in this article, you can streamline your procurement process and gain a competitive edge. 

Want to make your life easier for your procurement team? Zip's procurement orchestration platform provides scalable risk management, centralized Intake-to-Procure systems, and cross-functional intake workflows so you have all the information you need in one place. Try Zip today and learn how you can take control of your procurement.