Types and Timings of Procurement Audits and Reviews

Types and Timings of Procurement Audits and Reviews

Audits can be classified into three broadways:

• According to the basis of Degree of Independence: –
• According to terms of engagement i.e. nature of work
• According to the approach to the work to be done/

a) According to the basis of Degree of Independence
Internal Audit refers to unbiased and systematic appraisal function, performed within the business organization, with the purpose of reviewing the day to day activities of the business and providing necessary suggestions for the improvement.

Internal audit performs a wide spectrum of activities such as:

• Evaluating the procurement, procurement and internal control system.
• Examining the routine operational activities.
• Physical verification of inventory at regular intervals.
• Analyzing financial and non-financial information of the organisation.
• Detection of frauds and errors.

The main aim of the internal audit is to increase the value of an organisation’s operation  and  to  monitor  the  internal   control,   internal   check   and risk management system of the entity. An Internal audit is conducted by the internal auditors who are the employees of the organisation.




External Audit
The periodic, systematic and independent examination of the procurement records of the company conducted by a third party for specific purposes, as required by statute is known as External Audit. The main aim of external audit to publicly express an opinion on:

• The truthfulness and fairness of the financial statement of the company.
• The procurement records are complete in all respects and prepared as per the policies outlined by GAAP (Generally Accepted Procurement Principles) or not.
• All material facts are disclosed in the annual accounts.

For carrying out an external audit, the auditor is appointed by the members of the company. He should be independent, i.e. he should not be connected to the organization in any way so that he can work in an impartial way without any influence. The auditor has the right to access books of accounts to obtain necessary information and provide his opinion to the members by way of the audit report

Advantages of external audit

• Identifies Weaknesses in Internal Control
• Lends credibility to the accounts
• Unbiased Expert Recommendation

Role of an Independent Third Party Auditor

• Investigating the systems of internal controls operating both within the organisation and across its supply chain.
• Expressing an opinion on whether financial statements give a true and fair view of the financial position of the business operating in the organization.
• Designing audit procedures so as to have a reasonable expectation of detecting miss-statements due to fraud or error within the business and its supply chain.
• Documentation of any findings which may indicate that fraud or error may exist and report them to senior officers of the affected organisation or the relevant authorities.

Disadvantages of an Independent Third Party Auditor

• Such auditors are only human and may be subject to intimidation by directors or be fearful of the consequences of processing concerns forcefully.
• Audit firms invariably perform other non-audit work for their audit clients therefore are they truly independent?
• External auditors have to plan their work entirely on a sampling basis as it would be impractical to check all transactions etc.
• Some audits are corrupted in that suppliers across the chain are given a clean bill of health at a snapshot in time – however shortly after the auditors leave – the organization quickly reverts back to unethical practices.
• The potential cost of the third party audit.
• Potential resistance from the supply chain to the third party audit.

Key differences between internal audit and external audit

Basic comparison	Internal Audit	External Audit
Meaning	Internal Audit refers to an ongoing audit function performed within an organization by a separate internal auditing department.	External Audit is an audit function performed by the independent body which is not a part of the organization.
Objective	To review the routine activities and provide suggestion for the improvement.	To analyze and verify the financial statement of the company.
Conducted by	Employees	Third Party
Auditor is appointed by	Management	Members
Users of Report	Management	Stakeholders
Opinion	Opinion is provided on the effectiveness of the operational activities of the organization.	Opinion is provided on the truthfulness and fairness of the financial statement of the company.
Scope	Decided by  the management of the entity.	Decided by the statute.
Obligation	No, it is voluntary	Yes, according to Kenya Companies Act
Period	Continuous Process	Once in a year
Checks	Operational Efficiency	Accuracy and Validity of Financial Statement

 




Importance, Objectives and Advantages of Internal Audit Function

• Proper Control: The purpose of internal Audit is to keep proper control over business activities. When there is proper control there is maximum efficiency. The internal control can determine the degree of control over work.
• Accounting System: The purpose of internal audit is to evaluate the accounting system. It is concerned with checking proper authority for transactions like purchase, retirement and disposal of fixed assets. The voucher can be compared with entries in order to determine that figures and facts.
• Help Management: The purpose of internal audit is to help the management. Internal auditor can point out the weaknesses. The internal audit can be used as a tool to correct the situation. The management functions can be performed properly.
• Working Review: The purpose of internal audit is to review the working of The working of current year can be reviewed in detail. There is a need to locate the weak points. The corrective measures can be taken for proper working.
• Asset Protection: The purpose of internal audit is to protect the assets. The proper records of assets must be Internal auditor can examine the valuation, verification and possession. The purchase and sale of assets must be made under proper authority.
• Internal Check: The purpose of internal audit is to evaluate the internal check There is division of duties among the employees. When all staff members are working properly it means there is effective internal check system. The work of an auditor is reduced. He can apply test checks to complete audit duty.
• Fair Statements: The purpose of internal audit is to detect the error in the accounting records. The work of internal audit can help the management to see that accounting record is in order.
• Check Error: The purpose of internal audit is to detect the errors in the accounting records. If the work of internal auditor goes side by side therefore there are minimum, chances of The accounting staff can rectify mistake to prepare accounts at the end of year in order to help the external auditor.
• Detect Fraud: The purpose of internal audit is to detect frauds in the books of accounting. When the work of accounting staff is over the internal audit is started. Accounting staff remains alert because there is no time gap between recording and checking. Thus detection of fraud is possible with it.
• Helps External Auditing: The work performed by internal auditor can help external auditor in carrying out the audit. The audit procedure of internal and external audit is almost the The auditor can go through the internal audit report at the time of starting audit work. Anyhow external auditor is responsible for external audit.

Similarities between internal and external audits

• Both functions require the auditors to adhere to the international standards on auditing.
• Both are carried out by competent auditors.
• Both are interested in evaluating and testing the effective operations of the internal control system.
• Both functions give recommendations to management on ways of improving the internal control system. The external auditor achieves this through the management letter, which is addressed to management.

b) According to nature of work done

i) Statutory audits

These are carried out as per the requirements of various statutes e.g. PPADA 2015 and PPDR 2006 and Companies Act. The procurement law and company act require that all public limited companies to have their procurement records subjected to an independent audit. The objective of the audit is to enable the auditor express an opinion whether the procurement records have a true and fair view of the company’s state of affairs. The rights and duties of the auditor are laid down in the relevant statute. The powers of appointment of the auditors are vested on the shoulders.

Advantages of statutory audits

An external audit provides the following benefits:

• It increases the credibility of procurement records.
• It confirms to management that they have performed their statutory duties correctly.
• It provides assurance to management that they have complied with non-statutory requirements, such as corporate governance requirements (where these are subject to audit or review).
• It provides feedback on the effectiveness of internal controls. Where internal controls are weak or inadequate, the auditor will give recommendations for improvement. This will assist management in reducing risk and improving the performance of the company.

Limitations of statutory audits

The main limitations of an audit are as follows:

• Its cost. The cost of an audit can be very high. However, if the audit firm is already hired to carry out non-audit work such as accounts preparation or advisory work, the additional cost of an audit may be fairly small.
• The disruption caused to a company’s staff during the audit. The company’s staff may be required to assist the auditors by answering questions, providing documents and other information.
• Some items in the subject matter might be estimates whose truth and fairness will not be known with certainty until some point in the future. This means the assurance opinion is ultimately subjective and judgmental.
• Most fraud will include an attempt to deliberately conceal the truth or misrepresent information.
• In order to balance cost and efficiency the auditor routinely uses sampling rather than tests every item.
• Irrespective of how robust a client’s systems are they will always incorporate some degree of inherent limitation.
• Audit evidence is persuasive rather than conclusive.

ii) Private audits
These are not governed by statutes. They are performed by independent auditors because the owners, members or interested parties require them carried out. Private audits are carried out for organizations such as non- governmental organizations, partnerships and clubs and among others. Appointment of auditors is carried out as a private contract between the auditor and the relevant shareholder. The scope and objective of the work as well as rights and duties of the auditor are determined by the agreed terms between the auditor and the client. The auditor is not liable to third parties.

c) According to approach of the work to be done and timing

 i) Continuous audits
This is an approach whereby an audit is carried out throughout the financial period usually at predetermined intervals normally one, two or three months. This approach is ideal for large organizations with tight reporting deadlines e.g. multinational procurement entities. The approach ensures procurement records are kept up to date, errors and frauds are discovered in early stages and better audit reports are developed since more time is taken.

Advantages

• They facilitate interim audits.
• Procurement records are usually kept up to date.
• Procurement Errors and frauds are discovered at an early stage.
• Procurement auditor   gathers   sufficient   knowledge   of   the business as a result of his frequent visits.
• Saves time during final audits.
• Better report is developed as time spent is more.

Disadvantages

• It is expensive to have a continuous audit system.
• Frequent disruptions of the clients work during the audit.
• Tendency to over depend on auditing staff to solve procurement problems.
• Consumes a lot of time.
• Interference of work which has already been audited by the client’s staff.

ii) Interim audits

This is an audit carried out mid-way through the financial period. It usually precedes the final audit and is a preparation for the final audit. It is ideal for dynamic businesses, cheaper compared to continuous audits and enhances keeping of up to date records.

Advantages

• It is ideal for dynamic businesses.
• Compared to continuous audits it is cheaper.
• It facilitates final audits.
• Up to date procurement records are kept.
• Errors and procurement frauds are prevented and detected at an early stage compared to final audits.

Disadvantages

• Cost-The audit process is made expensive especially for small firms, hence it may only be suitable for large companies with many transactions.
• Disruption-Interim audit may disrupt client operations since the auditor has to be attended to by client staff for information.
• Alteration of entries-Client staff may alter already audited figures before the year end.
• Unanswered questions-Questions posed at the interim audit stage may remain unanswered and this may distort final opinion as answers obtained later may not be of substance.
• Inadequate diligence-Due to the fact that final audit will be performed anyway, the interim audit may not be done with the seriousness it deserves.
• Note-taking-Interim audits entail a lot of note-taking e.g. of interim balance carried forward or even budgeted performance figures to be used to facilitate final audit.
• Dependency Problem-Client staff may be dependent upon the interim auditing to solve their accounting problems which may compromise the objectivity of audit staff.

iii)Final audits

These are usually done at the end of the year as either a continuation of the interim audit for large and medium size companies or as a single audit for small companies at end of financial period.

Advantages

• Eliminates note taking during theprocess.
• It is flexible.
• Ideal for small businesses.
• It does not disrupt work.
• Plan used can be recycled as in every year the same details are checked.

Disadvantages

• Errors and frauds are discovered too late.
• The auditor has to schedule many companies at around the same time.
• Takes a long time.

Other types of audits

1. Procedural audits. These require examination of procedures or records for reliability and accuracy. They usually relate to company’s internal control systems, laid down guidelines and procedures and records of the company.
2. Management audits. These involve investigation of the company’s entire management to ascertain whether the directors are running the company in the most optimal way for the benefit of the shareholders. It improves quality and efficiency of management in addition to checking the budgetary system.
3. Balance sheet audits. This tests the strength of internal control system by working backwards to get the initial transactions using assertion methodology.