Introduction :
- Auditing procurement processes is crucial to ensure transparency, fairness, and compliance with established policies and regulations.
- Evaluating vendor selection and contract compliance is a key component of this process.
- A procurement process can have several potential vulnerabilities that may compromise its efficiency, effectiveness, and integrity. Some common ones include:
- Insufficient supplier selection and management
- Inadequate contract administration
- Let’s discuss the steps and considerations for auditing procurement processes in these areas
What is a Vendor Audit?
- Organizations use a vendor audit to evaluate a third-party hired by the organization. An audit can look at a number of different issues, such as the organization’s quality control, its costs vs benefits or other aspects.
- Third-party vendor risk management is becoming an area that businesses are enhancing. Organizations that are only looking at their own practices and are not evaluating their vendor data practices are missing a key area of concern.
How does PKC help in Vendor Audit?
PKC help with the identification of,
- Data analysis on transactions and records.
- Vendor questionnaires.
- Review of contracts, policies and other documents.
- Documentation of findings and any correction plans.
- Identifying and Implementing process improvement opportunities.
Key Stakeholders in a Vendor Audit :
Vendor audits require coordination between various stakeholders with varying interests and expectations.
- Purchase Managers
- Accounts Team
- Senior Management
- Audit Committee
Why to Evaluate Vendor?
To Reduce the risk of,
To Increase the Opportunities of,
Vendor Relationship Lifecycle
On-Boarding :
- Request for proposal
- Due Diligence/Risk Assessment
- Vendor Selection
- Contract Review
- Contract Negotiation
- Contract Execution
Off-Boarding :
- Contract Terms and conditions
- Auto-renewals
- Notice of Termination requirements
Vendor Selection
One of the primary goals of Vendor selection is to establish a mutually-beneficial business-to-business relationship with a reliable vendor that provides the most value for money.
Vendor Selection goes like,
- Define Requirements (What do you expect from the service/product).
- Request for Proposal (Ask potential vendors to respond to your requirements) and finally.
- Evaluate Responses and make your choice.
Criteria for Evaluation of Vendor Selection
Vendor Evaluation Criteria,
- Price, Quality & Delivery
- Financial Stability
- Long-term relationship Potential
- Quality Performance
PKC Audit Checklist for Vendor Selection
PKC plays a vital role in Verifying the following aspects and rating the same,
- Sourcing of Material
- Receiving Quotation
- Selection of Best Quotation
- Vendor Screening and verification
Sourcing of Material
- What is the normal procedure adopted by the company?
- Contact existing dealers first under new PO
- Contact existing dealers first under existing open PO
- Contact new local dealers – via advt., or telephonic conversation or tenders
- Contact new dealers – via advt., or telephonic conversation or tenders
- Whether existing dealers are always communicated first.
- Geographical area covered i.e., whether local or global declaration
- How many new vendors the company has approached during the audit period?
Receiving Quotation
- How quotations are received e.g. Sealed envelope, post, hand delivery etc.
- Is there a time limit fixed for submitting quotations?
- Minimum no. of quotations required.
- Who is authorized to receive quotations?
- What is the method adopted for quotations received after stipulated time, note down such cases?
- Whether any enquiries are entertained before opening of quotations from prospective vendors.
- Whether any preferential treatment is given to the bids submitted by existing vendors.
- Verify the procedure followed by the company for recent quotations and note down cases where formal procedure is not followed.
Selection of Best Quotation
- Whether the company has the system to call for quotations from the vendors
- How difference quotations received are compared.
- Are there any yard sticks prescribed with regard to rate, quality, quantity, discounts etc., for different products?
- What method is followed for quotations which are beyond the accepted levels as specified in terms and conditions
- Note down cases where the company has not received any valid quotation.
- Note down cases where the company has not received any quotation.
- Has the company rejected any valid quotation, verify the reasons.
- Who are those persons who are involved in comparison and selection of suitable vendors?
- Whether shortlisted vendors are asked to re-quote their prices or specifications.
- Who is authorized to make the final selection?
Vendor screening and Verification
- Whether any eligibility criteria is defined for vendors.
- Whether the following data is collected from all vendors –
- GSTIN, PAN, Address, return filing Status, Proprietor/Partner/Director Name, Contact No. Etc.,
- Before registering any vendor whether the following points are considered –
- Financial strength, business continuity (no of years in business), working capability etc.
- Whether the company is dealing with any non-registered vendor.
- Identify the cases of dummy vendors
- How is it checked whether new vendors will meet the quality standards as specified by the company?
- Whether vendor premises are visited by company officials for confirming the same.
- Is it checked that the vendor is having enough facility to fulfill the bulk qty. demands of the company within the delivery schedule.
- How is it verified that the vendor will meet the delivery schedules?
- Whether any samples or prototypes are demanded from vendors
- If such samples or prototypes do not meet the quality standards of the company, then what action is initiated.
- Identify such cases where a company has given orders to the vendors even if they do not meet the standards of quality or qty.
- Has the company suffered on account of the competency of vendors to fulfill the standards.
What is Contract Compliance?
It involves reviewing the contract creation and execution processes to,
- Identify Weakness
- Ensure that the company is achieving defined targets
- Determine whether vendors are complying with the contract clauses from a procurement and a legal viewpoint.
PKC Audit checklist for Vendor Contract Compliance
- Negotiation on PO terms
- Payment Terms
- Scheduling and timing of delivery
- Transportation
- Revision in Pricing
Negotiation on PO terms
- Who is carrying out these negotiations?
- What kind of negotiations are carried out by company – place of delivery, Freight, Qty etc.,
- Note down cases where company has accepted the terms of vendors without negotiation
- Whether negotiations are carried out in cases of urgent requirements
- What action is taken if the vendor does not agree with proposed terms.
Payment Terms
- What is the credit base – Security as Cheque or Letter of guarantee
- Credit period mentioned in contract
- Credit limit mentioned in contract
Scheduling and timing of delivery
- Whether such delivery schedule is incorporated in PO
- Identify the cases when a company’s production has suffered due to improper delivery schedule of Vendor.
- Whether company has stopped taking supplies from these suppliers
- Time gap between placing of PO and actual delivery.
Transportation
- Check whether the transportation clause is included in the contract and in all PO.
- Who are the current transporters of the company for stock inwards?
- Who is bearing the transportation cost?
Revision in Pricing
- What action company has taken in cases of request for price revision
- Whether any negotiations are carried out with vendors before allowing price revision
- In cases where a company has agreed to price increase, has the company asked for any concessions like relaxation in credit period, higher discounts, better delivery, higher quality, better packaging etc.
- Analysis whether there are any possibilities that the company could have saved on this additional cost.
Conclusion :
PKC as an auditor role in Vendor management concentrated on risk areas related to Fictitious vendors, inflated and/or duplicate invoices and consideration in ensuring consistent contracting process, executing right to audit clause, evaluate periodic vendor risk assessments and review of all possible metrics.
Author
Mohamad Zhakeer
Zhakeer is a semi-qualified chartered accountant with a keen interest in direct taxes, international taxation, and statutory matters. Known for attention to detail, client communication, and strategic ideas.
