How to conduct a procurement audit in 7 steps

Conducting a procurement audit is critical to ensuring your accounts payable (AP) processes are efficient, compliant, and cost-effective. The earlier you get involved in procurement, the better your odds of detecting and correcting major payment delays before they impact your bottom line.

With that in mind, our procure-to-pay audit guide helps you proactively approach AP optimization. You'll learn how to conduct a procurement audit in just seven steps.

What is a procurement audit?

A procurement audit thoroughly examines your organization's procurement processes, policies, and activities. You will identify inefficiencies and assess compliance with internal and external regulations throughout the process. A detailed audit report will help your procurement department make improvements that support healthier vendor relationships and better cash flow.

One of the key objectives of procurement audits is to identify shortcomings in your accounts payable (AP) processes. You might discover that you are manually typing most invoices into your accounting software.

Roughly 68% of businesses manually input AP data into their enterprise resource planning (ERP) or accounting platform. Automating the input process could improve efficiency and address other procurement processes.

Audit findings will also help ensure your team is following internal controls. For instance, your audit team can determine whether your purchasing department is segregating responsibilities, verifying invoices before payment, and reconciling invoices with purchase orders.

Finding out what you can do better is just the first step. Your audit reports will go on to help you make targeted improvements that can promote cost savings and increase efficiency.

The procurement audit checklist

Our internal audit checklist for procurement will help ensure that your audit team thoroughly examines all areas of your accounts payable workflows and procurement activities. Here are a few items to include in your auditing process:

• Review procurement policies
• Analyze documents related to procurement and AP
• Ensure compliance with legal and regulatory requirements
• Examine internal controls
• Review procurement software tools
• Assess the accuracy and completeness of procurement data
• Check for instances of procurement fraud
• Include budget and expenditure data in your audit report
• Assess vendor management protocols
• Evaluate the diversity of your supply chain ecosystem
• Review training programs for procurement teams

Your auditing team can use this procurement audit checklist to ensure the final audit report covers all relevant areas of your workflows and procedures. Effective procurement processes require a combination of sound policies, well-trained staff, vendor buy-in, and robust technological solutions. A single weak link can have severe consequences for your business and its trade partners.

How to conduct a procurement audit

The typical procurement audit process includes seven key steps. However, you can consolidate steps or add extra tasks to your procurement audit workflow based on organizational needs and your supply chain's complexity. The steps below are meant to serve as a baseline that you can use to conduct a successful procurement audit.

1. Define the audit scope and objectives

Start by clearly defining the scope and purpose of your procurement audit. Do you have specific concerns about your procurement practices or want to conduct a general health check on your procurement function?

Establish goals for your audit team so that they know how to allocate resources and where to focus their attention. Setting clear objectives makes it easy for external auditors or your internal procurement team to conduct a successful audit.

2. Assemble your team

Next, you need to build a diverse team to lead your audit process. Your team should have expertise in purchasing, procurement, and accounts payable. Each member can provide a unique perspective when evaluating your purchasing processes and strategies.

Consider whether your audit will include internal team members or external auditors. Bringing in an outside entity can help ensure your audit report is objective and thorough. They can honestly assess your procurement process and may be able to catch shortcomings that your internal team has missed.

Make sure that you scale the size of your team based on the scope of your audit. Broader procurement audits require a larger team and more time to compile reports. A comprehensive procurement audit can take weeks or months, especially if you have a complex supply chain.

3. Gather documents and data

Your team is ready to start gathering data about your procurement practices and workflows. They should collect all relevant documents, including:

• Contracts
• Purchase orders
• Supplier invoices
• Records of procurement transactions

Organize these documents systematically to facilitate easy access and review. Accurate and complete documentation is essential for identifying issues and ensuring a thorough procurement audit report.

If you manage your procurement function using manual processes, this step may prove difficult and time-consuming. Conversely, consolidating your procurement contracts, AP invoices and other procurement activities into a centralized platform will make life much easier for your audit team.

Keep that in mind when you are evaluating procurement performance during the audit review process. Implementing modern contract management tools will help you strategically address some of the concerns your team discovers during their analysis of your procurement functions.

4. Review policies and procedures

Examine your organization's procurement policies and procedures closely. They must be up-to-date, comprehensive, and aligned with industry best practices and regulatory requirements.

If you don't know how to write (or rewrite) a procurement policy, brush up on this process while reviewing your existing procedures. Creating an effective policy is easier than you might expect and involves just three key steps:

1. Putting together a procurement committee
2. Determining the purpose and scope of your policy
3. Hammering out the details
4. Evaluate supplier performance

An audit isn't just about reviewing your internal procurement operations. It's also an opportunity to assess your suppliers' performance by reviewing key metrics such as delivery times, quality of goods, and adherence to contract terms.

Gather feedback from relevant stakeholders who regularly interact with suppliers to gain insights. This evaluation helps ensure that your suppliers meet your organization's standards and expectations.

You can use this audit data during procurement negotiations. Be honest with your suppliers about your expectations and needs. If they cannot meet them, consider diversifying your supply chain ecosystem to provide flexibility and increase resilience

5. Analyze transactions to look for trends

Reviewing transactions will shed light on your procurement process flow's efficiency. Scrutinize deals from every angle to ensure compliance, accuracy, and cost-effectiveness. Look for patterns or anomalies that could indicate fraud or inefficiencies. Verify that transactions adhere to your procurement policies and internal controls.

A transaction analysis helps identify areas where you can improve your procurement process. For example, let's say that two of your suppliers offer net 30 payment terms, meaning you have 30 days to pay invoices after receiving them. However, if you pay the invoices within seven days, your supplier offers a 5% discount.

During a review of the previous 12 months of transactions, you discover that your organization never met the discount conditions because payments always arrived outside the 7-day window. Through transaction analysis, you identify this missed cost-savings opportunity and make changes to access the 5% discount. This is one of many ways procurement audits can help save you money.

6. Report findings and improve your procurement management plan

Compile your audit findings into a detailed report. Then, meet with key stakeholders and review the outcome. Focus on what the company is doing well, what it can do better, and how to fix shortcomings through targeted improvements.

Work with key stakeholders to tweak your procurement management plan to resolve any significant issues you discovered during your audit. If you alter too much at a time, you could place too much stress on your procurement team and inadvertently create new challenges. Focus on addressing the biggest challenges in your AP workflows and give those changes time to impact your accounts payable processes. During your next audit, you'll see what worked and what didn't.

Ready to leverage automation in your procurement process?

Automation holds the key to streamlined procurement processes and enhanced auditing capabilities. BILL Accounts Payable can help you pay invoices on time every time. Ensuring timely payments allows you to unlock vendor discounts, spread out your expenses to avoid overburdening your cash flow, and keep trade partners happy.

BILL Accounts Payable also helps prevent billing errors via our three-way matching feature. It compares invoices to delivery receipts and purchase orders to ensure you received (and are paying for) precisely what you ordered.

Pave the way for smoother audits and fewer AP headaches. Sign up for a risk-free trial today and modernize how you manage AP and procurement.

Procurement audit FAQ

What is the main purpose of a procurement audit?

A procurement audit ensures that your activities comply with internal controls and external regulations. It also enables you to identify opportunities for saving money and improving overall efficiency.

Procurement audit best practices

Procurement audits are most effective when you adhere to established best practices. Here are a few tips to get the most out of your audits:

• Conduct audits regularly
• Use a standardized checklist
• Involve stakeholders
• Leverage technology to automate as much as possible
• Follow up on recommendations

Additionally, make sure you clearly define each audit's purpose and scope. This way, your team can focus on core objectives and provide relevant feedback in their final report.