Audit of Purchase Department

AUDIT PLAN/TUTORIAL: Audit of Purchase Department of a Manufacturing Company

A manufacturing company is that where a raw materials are converted into final product by applying certain manufacturing process.

Thus, from the above definition, we can conclude that, in a manufacturing company the business process initiates with 'procurement of materials'.

It is the first and most basic nature of expenditure, that any manufacturing company is required to incur, which is in direct proportion to their manufacture / production activity.

The main idea / objectives behind audit of the Purchase and Stores (Inventory) Department is that:

a. Each Purchase made should be supported by a proper Requisition Note, which is duly authorised by the respective Departmental head/in-charge.

b. The Purchase department of the company, floats the requisition reasonably in the market and invites proper quotation from all the possible vendors.

c. The Requesting department / personnel gets the material / item as per its requirement, in terms of quality, quantity, specifications, features, etc.

d. There are sufficient controls to monitor the receipt, storage and issue of material in the stores department.

e. The Vendor has billed the company as per the the quotations / negotiated rates.

f. The payments for these purchases are made as per the authorisation and within due-dates.

g. All purchases, receipt & issue of material and payments are accounted for in the books of accounts properly under proper ledger accounts.

h. The controls in the purchase department must be capable of generating appropriate documents at each process level. Thereby documenting the complete purchase process.

The controls surrounding the whole Procurement and Inventory keeping & logistic controls, that needs to be taken care off, are listed below:

ORDERING PHASE:

1. Each Purchase Order (PO) created, must be supported with properlyauthorised Material Requisition Note (in case of non-recurring purchase items) and Periodic (Monthly) Approvals(in case of Regular purchase items).

2. Before issuing PO to a particular vendor, Purchase Department must float the enquiry for the required product to maximum possible vendors so that all the possible vendors are taken into consideration for making the said purchase.

3. There should be a proper and scientific or reasonable method of short-listing the vendors for a given purchase. Such method followed must be documented properly in terms of comparative statements/matrix.

4. All PO's issued by the purchase department, must be approved by the head/ in-charge of the department.

5. Wherever possible, PO's must be supported by a proper Vendor Quotation.

6. The PO must have required terms & conditions mentioned on it, such as:

i. Expected Delivery date.

ii. Payment due date.

iii. Advance to be given, if any.

All such terms, mentioned on PO must be strictly adhered to.

RECEIPT OF MATERIAL PHASE:

1.All receipts of goods must be recorded in two different stages:

a. At Unit/factory Gate (Goods Inward Register with the Gate-keeper)

b. Before entry in the Stores (Goods Receipt Note - GRN)

2. The above books must be properly reconciled and the entries in both the above mentioned records should be exactly the same, in terms of date, quantity, quality of items received and party names.

3. Special attention should be given to the dates of entries in Goods Inward Register & dates on the GRN. There should not be an unreasonably high delay (same day entries is a good business practice). Moreover, the cases where GRN is prepared before Gate Entry must be give some extra attention.

4. The items received (GRN) must be in line with the items ordered (PO).

5. The items must have been received within the time assigned in PO and must reach the requisite department as per the time period mentioned on MRN (requisition).

ACCOUNTING / PAYMENT STAGE:

1. Any advance payment to any vendor before the actual purchase must be properly authorised. It should be properly credited (accounted for) to the Vendor account.

2. The Vendor has invoiced the company with the amount as per the PO. Any discrepancy must be given special attention and reason for such deviations must be analysed properly.

3. The payment to the Vendors must be made as per the terms of PO or in case there are no terms mentioned in PO, with regards to payment, then as per the due date mentioned/given on the Vendor's Invoice. Any late payment must be considered and analysed properly.

4. Advance payments given to vendors must be adjusted properly in the books of accounts before making the final payment.

5. In case of running accounts or very regular vendors, balance confirmation must be obtained from the said vendors.

STOCK MANAGEMENT

1. As mentioned above, the receipt of material must be supported by a GRN.

2. The issue of material must be supported by MRN, approved by the respective departmental head.

3. Proper Stock levels must be maintained.

4. Stock must remain insured at all time.