control, and governance
How do I ... Understand Procurement Activities?
Procurement — also called "buying" or "purchasing" — involves the acquisition of goods and services for an organization's direct benefit or use. In most instances, much of the organization's monetary focus centers on procurement activities, typically comprising one of the top two sources of expenditure. Most auditors therefore encounter procurement-related issues frequently during their careers and should develop an understanding of its core principles to gain a solid grasp of this important area.
Internal auditors should be aware of circumstances in which competition related to procurement actions can be reduced severely, or even eliminated. In the most obvious cases, a competitive market for specific goods or services may not exist, leaving no appropriate substitutes. However, valid reasons may exist for management to diminish the role of competition voluntarily in some of their procurement actions.
Competitive procurement, however, remains a best practice in the acquisition of goods and services. Organizations commonly establish cost thresholds that trigger intensity levels for individual transactions along three levels of competition — low, medium, and high.
When considering potential vendors, internal auditors should be aware of the risks arising from the exclusion of specific vendors, through carelessness or intent, which can materially impact the outcome of procurement activities. Before including vendors in a database of potential vendors, a procurement function should screen them for their technical capabilities and financial stability, and any amendments to the database should be subjected to strict control and authorization procedures.
For sealed-bid tenders, technical and economic evaluations underpin competitive integrity, representing crucial steps in the procurement process. Technical evaluations involve an assessment of whether the specifications of a good or service offered by a potential vendor meet the organization's requirements. Only submissions from potential vendors that pass the hurdle of technical acceptability should proceed to an economic evaluation. Vendor selection therefore is normally made on the basis of the economic evaluation of the best value for money offered by technically acceptable offers.
Although procurement processes comprise a range of fundamental procedures and internal controls beyond the scope covered here, the fundamental idea that good competition tends to encourage good procurement remains key to this important activity. Internal auditors must be sensitive to procedures and controls designed to encourage transparency and fairness and thereby safeguard the competitive elements of procurement.
Adapted from "Understanding Procurement Activities," by David O'Regan (Internal Auditor, "Back to Basics," April 2008).
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