What is Contract Audit
What is a contract audit?
A contract audit is a systematic review of contract terms, conditions, and performance to ensure compliance, identify contract management challenges, contract risks, and verify financial accuracy in a company’s portfolio. This thorough assessment may vary in scope and detail. It is typically done for quality assurance, and depending on the nature of the audit, different aspects of the contracts can be measured against gold standards and regulatory norms.
What are the objectives of contract audits?
Audits on contracts search for legal, financial, and reputational risks. The following are the specific goals of performing contract audits:
Identify areas of non-compliance and risks early on, like delayed deliveries, over-payments, or subpar quality.
Accurately evaluate costs, manage them, and forecast them better.
Ensure billing accuracy and spot misalignments between invoice amounts and payments.
Know your rights, obligations, and options around litigation and arbitration, like venue, choice of governing laws, filing deadlines, and provisions for damage.
Understand controls and access to contract and contract data across internal stakeholder teams.
Improve contract management processes guided by data and optimize them.
Cement trust with customers with transparent and consistent reviews.
What are the different types of contract audits?
Organizational strategic priorities determine the objectives, nature, scope, and detail of contract audits. Here are some common types of contract audits:
1. Compliance audit
Assesses whether all parties adhere to the terms, conditions, and regulatory requirements within a contract. This includes reviewing contract compliance with legal standards, industry regulations, and internal policies.
2. Financial audit
Focuses on the financial aspects of a contract, such as contract terms, conditions, pricing, payment terms, cost accuracy, and legal requirements. This audit verifies billing accuracy and detects overcharges to identify any deviations or non-compliance issues.
3. Performance audit
Evaluates the performance of contract deliverables and milestones of both parties against the contract’s KPIs. It measures contract objectives and identifies any gaps in quality and areas for optimization and improvement.
4. Operational audit
Analyzes the operational aspects of contract execution, including workflows, processes, and resource allocation. This audit helps optimize contract processes and improve efficiency.
5. Risk audit
Identifies potential risks associated with the contract, such as liabilities, penalties, or compliance risks. This audit assesses areas that could lead to financial or reputational damage if not properly managed. This audit aims to develop strategies to mitigate identified risks.
6. IT/Systems audit
This audit specifically reviews the security and technology-related elements of contracts, especially in contracts involving data privacy, cybersecurity, and IT services. This audit ensures the integrity and security of systems used in contract management.
7. Exit audit
Conducted at the end of a contract, this audit ensures all obligations are fulfilled and that there are no outstanding issues. It also evaluates contract closure procedures and past trends.
How to perform a contract audit
1. Plan and prepare
This involves outlining the purpose, scope, procedures, and timelines of the audit. This will determine the resources required to conduct them and influence how they have to be organized to make them accessible and searchable.
2. Collect data and analyze
Gather relevant documentation, such as contracts, invoices, and contract performance reports. The collected data is analyzed to identify potential issues and trends.
3. Contract review
The reviewing of contract terms and conditions is beprst done with the relevant parties involved. For instance, if you are reviewing for cost overruns and revenue leaks, the finance department is your go-to. This makes sure your data is accurate and well-informed.
4. Performance evaluation
At this stage, there’s a thorough assessment of the performance of both parties against the agreed-upon metrics. This helps identify any performance gaps or deviations from the contract terms.
5. Financial and risk analysis
Here you review invoices, payment schedules, and other financial documents to verify the accuracy of billing and payments. You can guage and plan against potential risks, such as legal, financial, or operational risks.
6. Report preparation
The findings of the audit are captured in a comprehensive report with recommendations for improvement and corrective actions.
7. Follow-up and implementation
This stage seeks to close the loop and implement the recommended actions to address identified issues. It also aims to monitor the effectiveness of the implemented changes.
Periodic contract audits are tedious, and doing them manually at scale across the organization for large volumes of contracts is painful. It may be worth considering a contract lifecycle management system. HyperStart automates contract TAT analysis and optimization with metrics like the number of turns taken, time taken for review, contract status, and so on. Book a demo and see how it works.
