Organisations in all industries should be familiar with contract audits. They are necessary to ensure that any parties involved in the contract are meeting the terms of agreement, but they can also provide a host of other benefits.
What is a contract audit?
A contract audit is a review of an organisation’s terms of agreement. A team of specialists conducts a thorough examination of relevant documents and provisions, including controls, policies and systems.
Where relevant, account books, transaction records and operation logs will also be reviewed.
Contract audits can serve many purposes. For example, they can ensure that both parties are complying with the terms of the contract, or the terms within the contract are relevant and up to date.
Unlike compliance audits, there is no legal or regulatory requirement to conduct a contractual audit. However, it is almost always a mutually beneficial process, because it protects both the customer and supplier from financial losses and other irregularities.
As a result, the requirement to conduct a contract audit is usually stipulated within the contract itself.
What are contract audits used for?
Contract audits should be conducted whenever an organisation enters into a written agreement and wishes to verify and evaluate policies, controls and systems to ensure that they are up to date and accurate.
The process is particularly useful to control costs and promote quality. For example, if the contract states that one party is to be reimbursed for costs related to parts or labour, it’s a good idea to audit relevant financial records to ensure that the organisation is not overcharging.
Types of contract audit
There are different contract audits depending on types of sector or industry, as well as the areas of business that are prioritised in the assessment.
Some of the most common contract audits are:
Scheme audits, which review the services provided by a particular scheme, such as workplace pension or investment plans.
Contract compliance audits, whichreview whether parties are complying with the terms outlined in the contract.
Defective pricing audits, which are used to determine the accuracy of costs or pricing, and whether the organisation is overpaying for products or services.
Clause audits, which identify incorrect terms and clauses resulting from changes to the organisation’s policies or the economic environment.
Contract management audits, which assess an organisation’s contract portfolio and the ability to handle them at each stage of the contract lifecycle.
Contract audits can also be defined as ‘reactive’ or ‘proactive’. A proactive audit is a scheduled assessment, usually every three to six months, whereas a reactive audit is an emergency procedure conducted when an organisation suspects fraudulent or non-compliant behaviour.
Additionally, audits can be defined on a micro- or macro-level. Micro audits relate to specific contracts, while macro audits look at the organisation’s entire portfolio.
How to perform a contract audit
There are several factors you must consider when conducting a contract audit. Here are six such measures you can take to ensure that your assessment is a success.
1. Identify your objectives
As we’ve mentioned, there are different types of contract audit that apply to specific circumstances. You should consider what you hope to achieve, whether that’s reviewing the terms for accuracy and compliance, identifying fraudulent activity, and so on.
You are not necessarily limited to one objective. There will often be times when you wish to look at several different issues, which will result in a more extensive contract audit.
2. Determine the scope
The next step is to determine whether there are multiple contracts that need to be reviewed or specific ones. Likewise, do you need to review every part of the contract, or can you specify particular areas?
Correctly identifying the scope of the assessment is crucial to your project’s success. If you can minimise the amount of work, you reduce the time and resources spent on the audit and ensure that priorities are focused.
However, if the scope is too narrow, you risk missing crucial details from the audit that will undermine your work.
3. Create your team
The next step is to decide who will perform the contract audit and to give each person a defined role.
Some organisations create their team by gathering internal personnel from relevant departments. However, this approach creates potential conflicts of interest, which is why most organisations hire a third party to complete the process.
4. Collate relevant documents
The contract audit team should collect all the documents and other supporting information that’s within the scope of the assessment.
Depending on the type of audit, this could include financial records, information regarding organisational controls, invoices, etc.
5. Analyse the information
Now it’s time for the team to perform the audit itself. The tasks they complete will again depend on the type of audit, but it will always begin by reading the contract thoroughly and identifying any potential issues.
These will relate to specific requirements or outcomes stipulated in the contract, whether they relate to controls that must be implemented, tasks that must be completed or minimum thresholds that must be met.
Once those issues have been documented, the team should use any supporting information at their disposal to verify whether there are any nonconformities that must be addressed. In other words, are the parties meeting their requirements? Is anyone being overcharged? Is there any fraudulent behaviour? And so on.
6. Report your findings
The final stage of the contract audit is to document your findings and provide a summary report to the parties involved.
This report will highlight any potential non-compliances and suggest opportunities for improvement.
Manage contractual compliance with DQM GRC
Although it’s possible for organisations to perform contract audits with in-house staff, there are many benefits of leaving this task to the professionals.
You’ll avoid conflicts of interest, you’ll enable your team to do what it does best without being interrupted by other tasks and you can guarantee that you have experts on the case.
At DQM GRC, we have a team of experienced auditors who specialise in contract audits and who can help you through the entire process, from identifying areas of risk to creating an action plan for improvement.
We specialise in data protection and data privacy compliance audits, and can help you review agreements related to data licencing, data suppliers and Article 32 of the GDPR, which relates to the implementation of appropriate technical and organisational measures to prevent security incidents.
Plus, our bespoke auditing services enable you to create an audit plan around your data protection, process assurance or data capability needs.
We’ll work with you to scope, define, design and deliver the project, turning any policy, contract schedule or internal guidance into an audit plan and check for compliance.
When you entrust DQM GRC to handle your auditing requirements, you can be assured that the process will be accurate, efficient and cost-effective.