In this article, we have made an attempt to disclose all the necessary purchase control checklist procedures that must be undertaken by the auditor to identify any misstatements in purchase process. This blog is divided into three major blocks that are mostly prevalent in any manufacturing concern.
Before commencing any audit of any department first understand the process of the company. How company operates? What are the security measures? Who are sanctioning authorities? The more knowledge you possess regarding client business, the easier audit becomes.
Purchase control checklist and Vendor Selection Procedure
Vendor Selection is the most important process in any manufacturing concern. The inputs used by the entity will ultimately produce the output. The quality of output will depend upon the materials used in manufacturing. Companies should always prefer good quality vendors or suppliers. Below table illustrates the sample purchase process explanation of companies and the checkpoints associated.
|Steps||Internal Process||Auditor checkpoints|
|1||The first step in any company is to select the vendor. Most of the manufacturing concerns follow a similar process of selecting a vendor. For this purpose “Supplier Registration Form” is used by the companies.||-Check whether Supplier registration form(SRF) is obtained for all the suppliers. |
-Examine whether all the details are properly filled.
-Verify whether the SRF is approved by the proper authority.
|2||The second step is to visit the supplier and prepare a Visit Report or call it as Supplier Evaluation Form (SEF). |
Supplier Evaluation report should evaluate financial performance, technical capability.
|-Check the availability of Visit report or SEF with the company. |
-Ascertain whether Company has a policy to re visit the vendors in periodic intervals like in 2 years.
-Check whether proper documents are obtained by the company to evaluate financial performance for example: Balance Sheet, Income tax returns, Stock Statements.
-Some companies often use ancillary industries to produce a specific part which is required by them. Verify whether the vendor is capable of producing the part as and when required.
–Ascertain whether SEF and SER are properly authorized.
|3||The third step is the addition of Vendor in approved vendors list.||-Auditors can also verify that all the purchases are made through only approved vendor list. |
-All the vendors added in Approved list should not have connection with the employess of the company.
Other audit check points at the vendor selection process
1) Auditors should verify the declaration form signed by the departments like HR, Engineering, Stores that the vendor added in approved vendor list has any previous connection with employees of the company.
2) Most of the multinationals are using various indicators like Delivery rating, Quality rating to determine the effectiveness of the vendor. If a company has this policy, Auditors should definitely analyze whether the policy is implemented and actions are taken against the defaulters.
3) Auditors should check whether any court case or litigation is pending against the supplier.
Purchase control checklist regarding receipt of material
Auditors should first understand what types of documents are prepared regarding ordering of materials and receiving materials at the gate.
Documents involved in the process
1)Purchase Order request
2)Communication with respect to Purchase order request
5)Material/Goods Receipt Note
6)Store issue slips
8)Lorry receipts/E-way bill
The list is not exhaustive. Documents can vary from client to client.
|Steps||Internal process||Auditor Checkpoints|
|1||The first step is to make a Purchase order or requisition and the demand for ordering of goods should come from respective department in writing. GST/VAT /PAN number should always be mentioned upon the order.||-Auditors should understand the means of communication between the departments. It should always been written. |
-Check whether Purchase order was made by the assigned persons and approved by the authorized person.
-Check whether all the terms and conditions mentioned on the Purchase order are satisfied by the vendor.
-Examine the payment terms mentioned on the purchase order and whether those are fulfilled by the client.
|2||The communication between the company and vendor should always be through mail. If there is any change in price, that must be reflected in the purchase order.||-Auditors should pay specific attention towards any change in prices. “Price Sensitivity analysis” can be performed to check whether the same material in the same month was brought at two different prices.|
|3||Receipt of material at the company. Stores personnel will match the quantity mentioned in order and as per invoice. Also, physical verification will be done at the gate. Guard will enter the details of goods received in the register while Store personnel will generate a challan/other document to get the goods cleared.||-Check whether quantity and price mentioned in order is similar to that of invoice/Challan/Guard register. |
-Check whether an authorized personnel has performed the process of gate clearance.
|4||Goods will be finally transferred to Store and Material receipt Note will be generated in the ERP software. |
|-Auditors should ascertain the differences between the MRN and other documents. |
-Check whether goods are located at a proper place and security measures regarding fire, theft have been adopted.
|5||The last step would involve transfer of goods from Stores to other respective departments. Proper documents like Issue slip and material requirement note should be made.||-Auditors should understand how stores department is issuing goods to other departments. |
-Examine all the documents and their appropriateness involved in this process.
Other audit checkpoints at the receipt of material
1)Auditors should ascertain who is going to bear the cost of transportation of goods. Check whether the transportation cost seems normal or abnormal.
2) Auditors should check the date of Purchase order; it should not be after delivery date.
Inspection of goods received
Gone are the days when goods were accepted by physical verification. When the goods are received in store department, goods are first transferred to Quality/Inspection department, where the quality and size of goods is checked.
The tolerance limits are set and goods exceeding those tolerance limits are rejected by the quality department.
-Goods exceeding those specified limits shall never be accepted by the company. Auditors should thoroughly examine the Quality and Inspection reports and pay attention towards remarks.
Purchase control checklist regarding accounting
In some ERP’s software when the material receipt note is created, automatically purchases are recorded and the vendor account is credited. In the cases, where creation of material receipt note does not lead to a accounting voucher. A purchase accounting voucher is passed by the accounting personnel.
|Steps||Internal Process||Auditors Checkpoints|
|1||After creation of MRN, accounting voucher will be created by the accounting personnel in which respective purchase account will be debited along with tax and vendor account will be credited.||-Auditors should verify the accounting head in which entry is getting passed. |
-Check whether respective VAT/GST accounts have been debited.
-Check whether correct vendor is credited.
-Examine whether the entry passed is further checked by the senior accounting personnel.
|2||The second and last step in accounting of purchases is the payment to the vendor. Proper checks must be adopted by the company regarding payment to vendors.||-Check whether the payment is made within time limit. |
-Ascertain the closing balances of vendors and reconcile them.
-Examine whether vendor balances are reconciled by the management periodically and external confirmations are obtained.
-Ascertain the reasons for creation of “Debit Notes” and “Credit Notes”.
–Payment to vendors should be authorized and in case of disputes or litigations. The communications should be made to the senior management of the company.