Problem
The Tyronco Foundation operates worldwide to provide food and medicine to needy individuals in third world countries. The purchasing function is decentralized with a purchasing agent located in each of the 13 countries that qualify for food and non-prescription medicine. The V.P of Purchasing at headquarters has requested that the 13 purchasing agents purchase 50% of all items from vendors located in the same country as the recipients. The agents operate somewhat autonomously and can sole-source or utilize competitive bids. Local purchases are typically 20-30% higher than obtained through a competitive bid process. The CEO supports this approach since he feels that it establishes good relations with local government officials and business people.
Purchasing agents are provided with a quarterly budget generally based on demographics of the recipients. Adjustments are made to the budget based on actual contributions received from countries, organizations, foundations, and personal sponsors. The overall increase in purchases has been approximately 13% per year but varied from a low of +7% to a high of +21% between countries.
What are the two most significant areas of concern as an internal auditor as well as a control action to mitigate risk and one COSO principle?