Contributed March 7, 2001 by Jim Valerine <jim.valerine@wepco.com>

Coal Procurement

Audit Program


The objectives of this audit are to determine whether the procurement system for coal has adequate policies and procedures which are being complied with; whether coal is acquired at the minimum price, recognizing the need for particular quantity, quality, transportation mode, etc. and that the process is adequately monitored and fully documented; whether there exists sufficient documentation supporting the decisions to accept or reject sellers' offers; whether the quantity, quality and pricing of coal complied with contractual and regulatory requirements; and whether claims (billings) against the company for coal purchases are valid.


											Work Paper No.	
											On Which Work
											Was Performed 


I. Preliminary Survey
A. Review prior audit reports and working papers, if any, noting weaknesses in internal controls, procedures that were not being complied with and any other significant discrepancies that had not been corrected by the end of the audit or upon follow-up.
B. Gain an understanding and document the coal procurement system.
1. Review the organizational structure and update the latest organization chart.
a) Determine whether responsibilities regarding coal purchases are appropriate as to assignment of responsibilities, the avoidance of duplication of effort, etc.
2. Obtain and examine coal procurement policies and procedures.
3. Interview key personnel to further learn about the coal procurement system.
C. Review purchase agreements/orders and contracts to obtain a general knowledge of terms and conditions associated with coal purchases.
II. Internal Control Evaluation
A. Procurement process segregation of duties.
B. Accounts payable controls - three way matching of invoice/purchase order/receipt.
C. Business Ethics
1. Code of Business Conduct signoff.
2. Annual letter to suppliers advising them of ethics policy.
D. Coal specification.
E. Coal receiving/receipt reporting process.
F. Coal data reporting system.
G. Determination of quantity.
H. Supplier qualification.
I. Competitive bidding process.
J. Management approval of contracts.
III. Fuel Requirements and Purchase Decisions
A. Identify the conditions necessary to initiate a coal purchase.
B. Determine whether the need for the specific coal purchases existed.
C. Determine whether adequate documentation exists to support the level of coal purchases.
D. Determine whether coal purchase decisions are approved at the appropriate level of management.
E. Compare actual purchases with planned.  Investigate significant differences.
F. Determine whether the costs of transportation were included in the decision to purchase coal.
IV. Coal Purchases
A. Determine the total amount of contract and spot coal purchases for the period from January 1, 1997 through December 31, 1997.
1. Perform a reasonableness test/reconciliation to ensure that all purchases of coal purchased agrees with coal received.
B. Select a sample of coal purchased for detailed testing.  (Note: The desired level of testing should be based on the adequacy of the procedures and internal controls and the extent of discrepancies noted in prior audits.  It also may be necessary to expand the sample if numerous discrepancies are encountered during the audit.)
C. Document the sampling method used and the basis for the method selected.
D. For coal purchases subject to testing, obtain supporting documentation, including purchase requisitions, purchase agreements/orders and contracts, receiving reports, invoices, fuel accounting/general ledger postings, etc.
E. For each sample item:
1. Determine that the purchase satisfied the conditions necessary to purchase coal.  Documentation should exist to substantiate the purchase decision.
2. Determine whether the purchase was competitively bid.
a) Obtain the bid request (Request for Proposal - RFP) pertaining to the specific sample item.
b) Check to see if the bid request (RFP) contained authorization for purchase of additional tonnage.
c) Verify that the bid request contained sufficient requirements and evaluate those requirements:
(1) Price per ton.
(2) Quality specifications (moisture, ash, sulfur, BTU, etc.).
(3) Mode of transportation and specifics of transportation (who will pay at what point).
(4) Provisions for minimum and maximum tonnage requirements.
(5) Provisions if contract is not met as to tonnage and quality requirements.
(6) Producer of coal if different from bidder (and that a Letter of Authorization from producer is obtained)
(7) Independent inspection provisions.
(8) Approval of the offer.
(9) Insurance coverage.
(10) Method of payment.
(11) Any other requirements that are necessary.
d) Determine the number of bid invitations sent to prospective suppliers ensuring that the market was adequately searched.
e) Ensure only qualified vendors were allowed to bid on the purchase and document the requirements for vendor qualifications.
f) Determine whether a deadline for the receipt of the bid proposals was established and that all bids considered met the deadline.
g) Determine whether the bid proposals were adequately evaluated and compared on an equivalent basis (i.e., factoring in for quality).
(1) Determine if the lowest bidder was selected.
(2) If not, determine if the reasons for not selecting the low bidder was adequately explained and reasonably justified.
h) Ensure written documentation and approvals exist which support the bid solicitation, analysis and award process.
i) Obtain oral confirmation from a sample of unsuccessful bidders to verify that solicitations were indeed received inviting them to bid.
3. Agree the selected bids to the corresponding RFPs.
4. Agree the RFPs to the purchase orders, noting proper approvals.
5. Agree the receiving reports to the independent inspection reports to the RFPs noting quality, quantity, proper approvals, etc.
6. Agree the vendors' invoices to the receiving reports to the purchase agreement/order/contract and ascertain the invoices are accurate in terms of quantity and quality received, properly approved and classified, etc.
a) If suppliers' scales are used for billing purposes, perform the necessary audit steps to ensure the accuracy of the scales.
7. Verify the mathematical calculations on the invoices.
8. Determine whether payments were made on a timely basis and to the proper payee for the correct amount and that no duplicate payments were made.
9. Verify the accuracy of the account distribution.
10. Trace postings to the accounts in the appropriate ledgers.
11. Determine whether contract purchase would have been more favorable than spot purchase; if so, document the reasons for the spot purchase.
12. Verify whether all of the terms of the agreement/RFP have been properly and fully executed (i.e., tonnage requirements fulfilled).





Prepared by _______________________________________________  Date ____________
						Principal Auditor

March 20, 1998


File: 2042clpr\program.doc