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.

Unlike a general review, a contract audit involves an in-depth assessment of financial transactions, regulatory compliance, performance metrics, and adherence to specific contractual clauses. This ensures that organizations not only mitigate risks but also improve operational efficiency. Think of it as a health check for your contracts, ensuring they are working for you, not against you.

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:

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. For example, a compliance audit might check whether contracts include required clauses or comply with data privacy regulations.

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.

Step-by-Step contract audit process

Conducting a contract audit involves several key steps:

1. Planning & scope definition

• Identify the objectives of the audit (compliance, financial accuracy, performance evaluation, etc.).
• Determine which contracts require auditing based on risk assessment and business priorities.
• Assemble an audit team with expertise in contract management’s legal, financial, and operational aspects.

2. Data collection & documentation

• Gather all relevant documents, including contract agreements, amendments, invoices, performance reports, and correspondence.
• Use contract management software to extract key clauses and obligations automatically.
• Ensure that all stakeholders provide necessary documentation for audit verification.

3. Analysis & risk assessment

• Review contract terms and conditions for discrepancies or risks.
• Conduct financial reconciliation by comparing contract pricing with actual payments and invoices.
• Analyze compliance with regulatory and internal policies.

4. Performance evaluation

• Assess whether contract deliverables are being met as per agreed terms.
• Use key performance indicators (KPIs) such as service-level agreements (SLAs), delivery timelines, and quality benchmarks.
• Engage stakeholders for feedback on contract execution.

5. Reporting & recommendations

• Document findings in a detailed audit report.
• Highlight any contract breaches, financial discrepancies, or operational inefficiencies.
• Provide actionable recommendations for risk mitigation and process improvement.

6. Follow-up & implementation

• Work with contract managers, legal teams, and finance departments to implement corrective actions.
• Schedule periodic contract audits to ensure continuous improvement.
• Leverage automation tools for real-time contract performance monitoring.

Best practices for effective contract audits

• Leverage contract management software: Use AI-driven tools to automate contract tracking, risk detection, and performance analysis.
• Maintain a centralized contract repository: Ensure all contracts and supporting documents are stored in a structured, searchable database.
• Standardize audit procedures: Develop a standardized checklist to ensure consistency across all contract evaluations.
• Engage key stakeholders: Collaborate with legal, finance, and operations teams to gain comprehensive insights.
• Monitor regulatory changes: Stay updated on industry regulations and compliance requirements to align contract audits accordingly.

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.