Vendor and Supplier Audit
What is a Vendor Audit?
A vendor audit is the process of reviewing the commercial relationship between a company and its suppliers, contractors, and consultants. The audit may be limited to confirming vendor billings, but the relationship between a company and its vendors is more than generating and paying invoices. The relationship is affected by the ability to perform, the need to comply with safety and other policy metrics, the imposition of business processes affecting the efficiency of either party, and the expectation of maintaining ethical business relationships.
An audit can be focused externally or internally. External audits focus on the supplier’s compliance and business practices whereas internally focused audits generally evaluate internal processes and controls related to vendor qualification, on-boarding, and oversight, commercial terms and conditions governing the business activity, payment authorization, business ethics review, and incident investigation.
An audit can be designed to evaluate and document the effectiveness of these and any other component of the commercial relationship. The objective of a supplier audit program is to assess compliance with the contractual obligations and business practices, and to ensure controls are working as intended.
Vendor and supplier audits will mitigate contract leakage and the loss of corporate profits. They are an effective tool in a company’s risk management program.
Why Conduct a Vendor Audit?
There are many reasons why companies conduct supplier audits. The four
- Financial recoveries
- Control evaluation
- Process improvement.
Vendors rarely invoice with 100% accuracy and those responsible for authorizing payment often do not have sufficient information, time, or expertise to examine invoices in detail to ensure they are accurate. Billing errors often result from data capture errors, processing mistakes or the misinterpretation of complex contractual provisions. Conducting an audit may be the only way to obtain the transactional detail needed to provide assurance that billings are correct. Typical issues identified in supplier audits include:
- Pricing errors, particularly when rates change
- Discounts not applied or computed correctly
- Mark-up computation errors
- Staff qualification for rate billed
- Labor and equipment hours billed
- Duplicate billings
- Expense pass through
- Sales tax
- Returned goods and material credits not processed
- Deviations from agreed terms and conditions
- Credits on account not taken
The data obtained during the audit process and the analysis performed will help identify these and other potential billing errors.
Supplier audits are also conducted specifically to evaluate a supplier’s internal control environment such as controls related to its ability to perform, material management, safety training, hiring practices, and invoicing accuracy. These evaluations test the business relationship and importantly the supplier’s ability to continue to meet its contractual obligations. These types of evaluations may also identify business process changes that will improve the business relationship and transactional efficiency.
Vendor and supplier audits are not a by-product of AMS-PAR’s other compliance audit work. This type of contract compliance audit work is a core component of our service offering and a core competency. We understand the importance of strong relationships with vendors and suppliers and work hard to maintain and improve those relationships. Survey results consistently show AMS-PAR performs better than other service providers.
We can help develop your vendor compliance program or help execute your existing plan. When developing a program, we will evaluate your corporate expenditures, review contracts and rate schedules, and talk with key stakeholders to better understand the commercial relationship and perceived challenges. This information is then used to develop a vendor risk management program.
When conducting individual compliance reviews, our project methodology delivers consistent results and ensures client objectives are met. These reviews are conducted with minimal disruption to or additional burden on your staff. Leveraging institutional knowledge and analytical tools allow us to interrogate data differently so that high-risk transactions can be identified. We will examine the transaction details to assess compliance with the underlying agreements. Our processes provide clients with a higher level of assurance that their vendor relationships are properly evaluated.
Our reports will detail discrepancies, explain the root cause of the underlying issue, and recommend solutions and process improvements to minimize future concern.