Procure to Pay : Vendor Selection Process – Audit Checklist

Vendor Selection is one of the most critical processes in the Procure to pay function. Quite often the vendors selected may not be able to satisfy the requirements of the company. Usually, a new vendor for production is selected after testing the product in the production process to ensure that the desired output is achieved. Equipment (capital purchase) usually comes with the OEM (original equipment manufacturer) vendor, so the selection includes the factor of after-sale service from the vendor to be assessed prior to selection. When it comes to procuring materials, lower spending is usually decided by the procurement manager with lesser selection criteria in place to avoid choking the resource bandwidth. This process changes the organization to organization, there are spend limits, approval limits, minimum quotations to be obtained for assessment etc. We shall look at the general vendor selection process and explore the checkpoints that need to be kept in mind before doing an Internal audit.

General (Ideal) Process:

Key Risks that can be identified in the process:

It is important to understand the process and accordingly jot down the key risks in the area. Some of the key risks that can be perceived from this process are:

• Absence of a detailed sourcing strategy (such as an analysis of current market dynamics, vendor strengths and weaknesses)
• Vendor identification and selection procedures have not been documented
• Adequate requests for quotations (RFQs) are not issued before selecting a vendor for a particular item
• RFQs sent to different vendors are not identical
• Quotations are not considered while doing a comparative evaluation
• Selection of vendor is done on basis of an inadequate number of quotations
• Blacklisted and financially unstable vendors are selected
• Sole sourcing of items may lead to business disruption in case of any issue with the supplier.

Audit Checklist:

If the number of new vendors on-boarded is high, make a top-down vendor and make sure the sample selected for verification is adequate & sufficient. It is usually preferable to make this selection after having a detailed discussion with the purchase manager about their plans and selection strategies. It is not just the process, but the person handling the process as well.

Thanks for reading. Until next time!