Home » Accounting » Significance of Internal Audit of Purchases

Internal Audit of PurchasesPurchases are amongst the key areas in any well managed and successful businesses and given the significance of the area to the success of entire business internal auditor devote significant amount of time and energy of himself and his team to this segment. Here this article discusses not only purchase per-se but other interrelated areas such as accounts payable, inventory etc. Among other things the internal auditors need to focus on below mentioned areas which are not intended to be exhaustive but illustrative.

  • There is a system of obtaining competitive bids from suppliers of quality products.
  • The rate variations should be properly authorised. If there are significant variations in rates than the justification for the same should be checked and also it should also be ensured that the company has obtained competitive bids from the various vendors.
  • The purchases made should be traced to inventory and also freight expenses.
  • The purchase requisition systems should be checked to ensure proper link to inventory position. If there is already significant quantity of any particular item and yet requisition is made for that item than there should be proper justification such as increased customer demand for a particular product backed by firm sales orders.
  • In case of rejections by quality control the purchase team must promptly coordinate with the vendors and the auditor must check that the company receives appropriate credit from vendors as well as stock out movement.
  • The auditor must also ensure appropriate proper link of raw material purchase to production and sales process so that unnecessary funds are not blocked in raw material inventory.
  • It should also be ensured that the organisation has claimed proper input credit for the purchases made.
  • The auditor must ensure that the accounting is done against the correct vendor code and product code.
  • The auditor should check that the vendor records are updated frequently and there is periodical cleaning up of vendor list to remove redundant names from the list.
  • The auditor should check for the vendors where proper names and addresses are not given, or address is only post box no. or the address of the employee and the vendor are the same. These are potential red flags for frauds.
  • The auditor should ensure that the vendor payments are properly processed and balances are reconciled at frequent intervals. The auditor may have system of randomly selecting few vendors for confirmation during every visit of his. If there are significant mismatches than he should increase the sample size and these are potential red flags for either fictitious purchases or processing frauds.

The above the list is only illustrative. In today’s world given the various tools and techniques and computerisation of data it is virtually possible to complete 100 per cent audit within limited time. The auditor should always look for potential red flags and give extra focus to those areas.

ca rishabhkumarThe author is a fellow member of the Institute of Chartered Accountants of India and also a qualified Company Secretary. The author has also done DISA(ICAI), certificate on IFRS (ICAI),  Certificate on Forex and Treasury Management (ICAI), Certificate on Forensic Accounting and Fraud Prevention (ICAI). The author practises as a Chartered Accountant under the name and style of Rishabh Kumar Barmecha and Associates and is an expert in auditing, financial investigation, direct and indirect taxation. The author can be reached at rishabhkumarbarmecha@gmail.com or 91 9007909221.
CA Rishabh Kumar Barmecha

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