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Purchasing Cycle Audit Program

Audit ProgramMarch 2003Purpose1. Purchasing, receiving, and recording functions are clearly separated.2. Procedures for initiating purchases and purchase orders are adequate, including

leverage of buying power, selection of qualified vendors, competitive bidding,etc (authorization, efficiency).

3. Goods are inspected upon receipt (delivered in quantity and quality specified),and properly recorded via receiving reports (completeness, existence, accuracy).

4. Goods are safeguarded from damage and theft.5. Inventory, and liability to vendors, is properly recorded (completeness,

accuracy).6. Purchase Orders, Receiving Reports, and Invoices are properly reconciled

(completeness, existence, accuracy).7. The full process is efficient and effective.

Scope1. This audit is financial and operational in nature. Focus will be on, and other

entities operating and financial processes, specifically Purchasing/Requisition,Inventory Management, and limited Accounts Payable (focusing on P.O. Invoiceprocessing). The testing period will cover 10/1/02 to present.

AuditProcedures

1. Perform and document walkthroughs of the following functions:a. Requisition of Stock Itemsb. Transfers between Warehousesc. Stock Creditsd. Purchase Orders (for stock items, non-stock items, and X-

type items)e. Receivingf. Vendor Credits, Returns and Allowancesg. AP processing of PO and nonPO invoicesh. Process for resolving discrepancies between POs and

invoicesi. Payment of Drop Ship items, focusing on how receipt of

goods/service is ensured before payment

2. Through observation and interviews, determine the adequacy of warehouse andreceiving security from theft and damage.

3. Through observation of the receiving function, determine the adequacy of routines for ensuring accuracy of quality and quantities received. If receivingclerks use sampling techniques, ensure sample sizes are adequate and samplesare selected properly.

4. Obtain an understanding of methods used to determine PAR levels.

5. Determine what inventories exist outside of the Materials Management function(i.e. emergency or weekend OR inventory).

6. Understand what report are used to analyze and monitor:a. Purchasingb. Inventory

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Audit ProgramMarch 2003

7. Determine if cycle counts are performed. If yes:a. assess whether process is appropriate and consistent (results

compared with perpetual inventory records, variances investigated andresolved timely, etc);

b. ensure adjustments are booked appropriately;

8. Obtain and document an understanding of the methods and procedures forcosting inventory, and:a. perform audit procedures to ensure inventory costs are

appropriate (using ACL, identify price changes to POs and for a sample, traceto inventory master file to ensure product price was updated);

b. determine whether the method of inventory pricing isconsistent with the prior year.

9. Obtain an understanding of the Contract Management function and howPurchasing and Legal are involved.

10. Obtain from Lawson a list of $1 P.O.s during the test period. Test all or a sampleto determine:a. trends in users, vendors, or types of materials dont show a

pattern of inappropriate use.

11. Obtain data from Lawson, and identify (using ACL) product volume and price,and determine:a. % change in product volume. For significant increases,

determine if vendor contract exists or has been revised recently to obtainbest price.

b. % change in product price. For significant increases,determine if vendor contract exists and is appropriate.

12. Obtain data from Lawson (using reports created for the Clinical Value AnalysisCoordinator), and identify where the same item was purchased by a facility atdifferent prices during the test period. Identify any problem products and/orvendors.

13. From a sample of closed (non-Drop Ship, Capital, Directs, etc) POs, determine:a. appropriate levels of authorization were obtained prior to

receipt of goods;b. bids were obtained, if appropriate, and the lowest selected.

Ensure that all bids are for the same product and are based on the samespecifications. Determine if bid selected was last bid received, and if suchtrends exist with any particular product, vendor, or purchasing agent. If lowest bid is not selected, ensure adequate documentation existscorroborating the decision.

c. Trace capital invoices to quotations to ensure quote price =PO price = Invoice price

d. GL distribution is appropriatee. Receiving information is documented before payment was

made.

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Purchasing Cycle Audit Program

Audit ProgramMarch 2003

f. Using ACL, compare PO units to Receiving units to Invoiceunits, noting discrepancies.

g. Using ACL, compare PO unit price to Invoice unit price, notingany discrepancies.

h. Ensure purchase is from an approved vendor (contractexists).

14. Obtain the last Open Req Lines Report from the Materials ManagementInformation Analyst, and also run the report periodically throughout the auditfield work. Ensure the history of the warehouse to warehouse transfers ties tothe GL suspense account. Review for any long term outstanding items or unusualtrends.

15. Using ACL, obtain data from Lawson for POs that were subsequently changedduring the test period. For a sample, determine that reasons for changes areadequately documented.

16. Determine if any goods are held on consignment. If yes, ensure adequaterecords are maintained and good are adequately secured.

17. Using ACL, obtain data from Lawson for Drop Ship POs during the test period:a. Categorize by dollar value into POs less than $1000, $1000 to $5000, and

greater than $5000, denoting any unusual patterns in each category;b. For a sample, determine if documentation exists confirming receipt of the

good or service;c. Identify the Drop Ship PO percentage of total POs, per entity, denoting any

unusual trends.

18. Obtain a listing of all blanket, standing, and/or service agreement POs.Depending on the volume, determine reasonableness for the population or for asample.

19. Verify integrity of the vendor master file by identifying any duplicate vendors(using ACL).

20. Using ACL, obtain quantity received data from Lawson. Identify any negativereceipts and research for appropriateness.

21. Using ACL, run Benfords Law on PO amounts during the test period. Identify anyanomalies that may be indicative of signing authority or bidding work-arounds.

22. Compute financial and operational ratios during the test period, comparingresults with industry standards for:a. BMCs average rate of nonstandard surgical purchases.

Compare to the HFMA 2002 Supply Chain Survey of 26% (median 20%).b. Inventory Turnover ratio - cost of goods sold/average

inventoryc. Inventory balances prior to and subsequent to FYEd. Trends in inventory reserve balances (i.e. obsolete, slow

moving, damaged, etc)e. Compare other monthly statistics to industry standards.

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Purchasing Cycle Audit Program

Audit ProgramMarch 2003

23. Obtain account histories for any inventory adjustment GL accounts during thetest period. Review transactions for reasonableness.

24. Review records of returned goods/claims against suppliers, and credit memos todetermine appropriate posting and processing. Also, review for any unusualtrends in returns, claims, or credits.

25. Using ACL, obtain a listing of current year capital purchase orders, in dollar valueorder. As part of #13, determine that bids were appropriately obtained for asample of the top dollar value items.

26. Run and review obsolescence reports for each warehouse. Determinereasonableness of any significant items.

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