Concept of Procurement Function

The Procurement Department is the office responsible for the

acquisition of supplies, services, and construction in support of the
Authoritys business. It issues purchase orders, develops term
contracts, and acquires supplies and services. The Procurement
Department also disposes of all surplus property and equipment.

Procurement and Finance

Prompt payment to suppliers is a key contributor to good
supplier relations. During material shortage periods, an
organisation with a preferred customer status has a much
better chance of avoiding shortage problems experienced by
most others. Hence, a cooperative relationship between
Procurement and Finance clearly can impact the development
of good supplier relations.

Organizational Chart

Process flow of Procurement Process

Procurement Cycle

Relations with other business functions

Purchasing Flowchart

Procurement and Production

Procurement - Production relationship begins when the
Production function transmits its manufacturing schedule or
materials requisitions to the Procurement function.
Procurement subsequently translates these documents into a
procurement schedule.
Procurement and Design Engineering
Engineering usually has the initial responsibility for preparing
the technical specifications for an organisations products and
the materials that go into them. To exercise this responsibility
effectively, Engineering must have the constant help of
Procurement and Production.
Procurement and Sales
Changes in the production schedules should be communicated
immediately to sales. This action permits sales to alter its
distribution schedule in a manner that will not alienate
customers. Procurement must immediately transmit to Sales, as
well as to other management groups, information concerning
increases in materials prices.

Procurement Function

Stages in the Procurement Process

Step 1: Need Recognition A business owner (or procurement
department) must recognize a product is needed in order to purchase it.

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Step 2: Specific Need Does your industry have specific requirements

for various products. If that is the case in your industry, be sure you are
up-to-date on those requirements and order accordingly.

employees and should include the specific conditions and terms under
which authorizations are to be made.
Best practices:
Comply with ethical buying practices and policy.
Review and update signature authorizations periodically.
Obtain pre-approval of consultant agreements by Purchasing.
Verify receipt of goods and services against contract/ purchase
order and invoice information.
Reconcile ledgers for accuracy of recorded transactions.
Monitor to ensure that invoices are paid in a timely manner.
Potential consequences if accountability does not exist:
Unauthorized, unnecessary, or fraudulent purchases
Unauthorized work performed by suppliers
Lost supplier discounts due to late payments
Improper charges to incorrect account/ funds resulting in a
misappropriation of funds
Conflict of interest when paying UCSD employee for
unauthorized outside work

Step 3: Source/Examine Supplier Options Every business needs to

determine where to get their goods. Once a supplier is chosen,
companies should stick with that relationship and try to establish
preferred pricing.
Step 4: Price and Terms Once a supplier is chosen, companies should
stick with that relationship and try to establish preferred pricing and
specific terms (i.e. delivery).
Step 5: Purchase Order The purchase order is used the formal contract
used to buy the product. The purchase order outlines the price,
specifications and terms and conditions of the product or service and
any other additional obligations.
Step 6: Delivery The transfer of the purchase order via email, mail or
fax (email is highly recommended).

Security of assets
Once you have received your purchased goods, secure the materials in
a safe location. To ensure that your resources are accounted for,
periodically count your inventory and compare the results with
amounts shown on control records.

Step 7: Expediting This stage addresses the timeliness of the service or

materials delivered.
Step 8: Receipt and inspection Once delivered, the receiving
company inspect and, subsequently, accepts or rejects the product.
Rejection is almost always due to a damaged product.

Best practices:
Secure goods received in a restricted area.
Restrict inventory access to appropriate staff.
Lock goods and materials, and provide key or combination to as
few people as possible.
Keep inventory records and periodically calculate beginning and
ending inventory amounts.
Potential consequences if your assets have not been secured:
Theft of goods
Inventory shortages
Additional costs incurred for replacement of goods

Step 9: Invoice Approval and Payment At this stage, three documents

must match when the seller wants payment the invoice, the receiving
document (attached to the product) and the original purchase order.
Step 10: Record Keeping The receiving (buying) company must keep
good records.

Internal Controls in Procurement

Separation of duties
To ensure proper separation of duties, assign related buying
functions to different people. With proper segregation, no single
person has complete control over all buying activities. Department
heads and employees have no direct, apparent or implied authority to
contract with vendors for the delivery of goods and services.

Review and reconciliation

Practice timely review of suppliers invoice, packing slips, and
purchase orders. Check accuracy of the information for prior payment,
correct quantity ordered, and price charged. Monthly ledger
reconciliation enables you to find improper charges and validate
appropriate financial transactions.

Purchase Order/Contract Amendments/Modifications:

Only the Purchasing Director or designee, in consultation with the
originating department, is authorized to amend or modify in any way
or form (price, additional services, quantities, etc.) an existing purchase
order or contract that was duly executed to a vendor.

Best practices:
Review supplier invoices for accuracy by comparing charges to
purchase orders.
Verify that the goods and services purchased have been
received.
Perform monthly reconciliations of operating ledgers to ensure
accuracy and timeliness of expenses.
Potential consequences if review and reconciliation is not
performed:
Improper charges to your department budgets
Disallowances resulting from costs charged to incorrect
accounts/funds
Payments made for items or services not provided

Best practice is to have different people:

Approve purchases
Receive ordered materials
Approve invoices for payment
Review and reconcile financial records
Perform inventory counts
Potential consequences if duties are not separated:
Unauthorized or unnecessary purchases made
Improper charges made to department budgets
Excessive costs incurred
Goods purchased for personal use

Types of transactions and financial statement accounts

affected
Accounting for Purchases
As purchase results in increase in the expense and decrease in assets of
the entity, expense must be debited while assets must be credited. A
purchase may be made on Cash or on Credit.

Accountability, authorization, and approval

You maintain accountability when you authorize, review, and approve
purchases based on signed agreements, contract terms, and purchase
orders. All purchase requisitions are to be authorized, approved and
signed only by persons acting within the scope of that authority.
Authorization should be clearly communicated to managers and

Procurement Function

Cash Purchase
When a cash purchase is made, the following double entry is recorded:

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Debit

Components of Procurement Function

Procurement planning deciding what to buy and from
what source.
Requisition internal processes for requesting for a need to
be procured.
Sourcing the processes aimed at identifying, evaluating,
and engaging suppliers/vendors of goods and services.
Purchase Order Processing to formally commit the
organization to purchase transaction.
Receiving of Goods receiving orders that are placed with
suppliers.
Payment Processing processing payments for items
purchased or services contracted.
Contract Management executing contracts/agreements in
line with agreed terms.
Vendor Performance Management a framework to
effectively track and measure supplier performance.

Purchases (Income Statement)

Cash (Statement of financial
position)

Credit

Purchase is debited to account for the increase in expense.

Cash is credited to account for the decrease in cash of the entity.
Credit Purchase
In case of a credit purchase, the following double entry is recorded:
Debit

Purchases(Income Statement)
Credit

Payable (Statement of financial

position)

The double entry is same as in the case of a cash purchase, except that
the credit entry is made in the payable ledger rather than the cash
ledger.
When the payable is paid, the payable balance will be reduced to nil.
The following double entry is recorded:
Payable (Statement
position)

Debit
Credit

Cash

of

Procurement Audit Report - Communicating findings

financial

Procurement Audit Report

Findings from procurement audit are formally communicated
timely to relevant authorities in a report.

(Statement of financial
position)

Analyze the Audience:

Who should be the most important readers of the report?

How much do they know about the subject matter?

How do they plan on using the report?

How interested are they in the report?

How are they expected to react to the report?

Accounting Treatment for Discounts on Purchases

Trade Discount
Trade discounts are generally ignored for accounting purposes in that
they are omitted from accounting records.
Therefore, purchases, along with any payables in the case of a credit
purchase, are recorded net of any trade discounts offered.

Characteristics of a good procurement audit report:

Accurate

Objective

Clear

Concise

Constructive

Complete

Timely

Cash Discount
Cash discounts result in the reduction of purchase costs during the
period. However, not all purchases may qualify for the cash discount.
It is therefore necessary to record the initial purchase at the gross
amount (after deducting any trade discounts) and subsequently
decreasing purchases by the amount of discount that is actually
received.
Following double entry is required to record the cash discount:
Debit
Credit

Procurement Audit Report-Stages

Document Findings in a Draft Report

Distribute the Final Report

Follow Up Recommendations

Initiate Tracking

Validate and Close Actions Taken

Conduct Audit Effectiveness Survey

Payable (Statement of financial position)

Purchase Discount (Income statement)

Crediting purchase discount has the effect of reducing gross purchases

by the amount of cash discount received. Consequently, payables are
debited to reduce their balance to the amount that is expected to be paid
to them, i.e. net of cash discount.

Significant Components of Procurement Audit Report

Executive Summary

Scope, Critical Objectives & Approach to Audit

Ranking Criteria of Findings

Detailed Findings & Recommendations

Appendices

Illustrative Procurement Process

Executive Summary
Cover the following:

Background to the assignment

Brief approach

High level summary of significant findings with appropriate

ranking

Recommendations
Scope, Critical Objectives and Approach to Audit
A good procurement audit report should communicate the following
details:
1. A good coverage of the scope
2. Critical objectives of work performed and thus verified:

Procurement Life Cycle

Procurement Function

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 the organization is achieving value of its spend

there are adequate controls to mitigate procurement fraud
risk
compliance with applicable regulations
3. Approach to audit communicating the following among others:
Sources of data used
Procedures performed, including spend analysis
Sample sizes tested
Interviews conducted, etc.
Ranking Criteria for Findings
A good procurement audit should communicate an
appropriate criteria for classifying findings. The
classification should be based on perceived severity of the
findings on the organizations operations if not corrected.
Categorization of Findings
Risk
Nature of Issue
High

Significant issue

Moderate

Reportable issue

Low

Observation

Action Priority Rating

Immediate. Corrective action to begin
within one month.
Necessary. Corrective action to begin
within three months.
Recommended. Corrective action to
be considered for implementation
within six to twelve months.

Sample Ranking Criteria

Detailed Findings and Recommendations
This section of the audit report communicates the nature and severity
of the audit report. It also contains the auditors recommendations and
sometimes, managements responses to audit findings.
Appendices
This section of the audit report will communicate any additional
information that the auditor deems finds appropriate to bring to the
attention of readers.

Common weaknesses and deficiencies of Procurement

function
Procurement planning
Failure to consider financial viability of supplier in
assessment criteria.
Failure to request adequate information in Request for
Proposal (RFP) or failure to leave scope for further requests.
Failure to adequately detail the assessment process and
ongoing requirements for supplier in the RFP contract
Failure to consider the probity process.
Lack of controls being ineffective that increase the likelihood
of project failure or inefficiencies
Supplier selection and contracting (tender assessment)
Not understanding the complexities of the supplier and how
to interpret information the suppliers business.
Unable to form conclusions on the risk profiles of the
supplier.
Contract performance and supplier monitoring (supply period
Inability to determine if the supplier remains financially able
to deliver under the agreement.
Not having visibility of any significant events with the
supplier that may impact either the supply or the supply
relationship.

Procurement Function

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