Internal Audit Checklist: Performance Management

Performance Management

In general, the objective of an internal audit is to assess the risk of material misstatement in financial reporting. Material misstatements can arise from inadequacies in internal controls and from inaccurate management assertions. As such, testing the validity of various implicit managerial assertions is a key objective of an internal auditor.

While this applies to all financial cycles, this article is the first in a series focusing on the General Control Activities for the Purchasing cycle. The most important general control areas for Purchasing include:

  • Organization
  • Performance Management
  • Supplier Selection
  • Ordering
  • Purchase Commissions
  • Goods and Services Received
  • Invoice Verification
  • Master Data Purchasing

In this post, we’ll focus on the General Control Activities for Performance Management.

Goal and Target Setting

The objective of goal and target setting is to ensure that management sets a formal functional direction, establishes clear performance goals and targets, and establish procedures to measure goals and targets against specific monthly, quarterly, and/or annual Key Performance Indicators (KPIs).

When conducting the audit, evaluate the following controls/best practices:

  • Ensure that there is a charter defining mission, role and responsibility of purchasing department
  • Verify that adequate Purchasing KPIs are identified and set up
  • Validate that clear performance targets set by business
  • Make sure that overall targets are translated into specific individual targets
  • Ensure that relevant staff is aware of individual targets
  • Verify that remuneration is linked to individual and/or department targets
  • Make sure that risk analysis has been completed to determine the needs, resources and expectations of the Purchasing department and to set realistic targets
  • Validate that a balanced or functional scorecard is used to highlight critical success factors

Performance Monitoring and Remedial Actions

Businesses should have a Performance Monitoring and Remedial Actions activity in place. The objective is to ensure that performance is regularly measured and evaluated against targets.

When conducting the audit, evaluate the following controls/best practices:

  • Make sure that KPIs are regularly monitored in management meetings and purchasing team meetings
  • Verify that Actual to Budget reviews are completed and accurate, in addition to having documented and valid explanations for any large deviations
  • Validate that management regularly inspects performance against targets
  • Ensure that a oot cause analysis completed and documented
  • Make sure that the KPI and performance against targets assessment is reported periodically
  • Verify that external learning and benchmarking is undertaken and appropriate

In conclusion, auditing standards require that auditors test basic underlying management assertions implicit in the financial statements. Key objectives to these assertions are; Existence and Completeness, Rights and Obligations, Valuation or Allocation, and Presentation and Disclosure.