FAR Overhead Audits – “The Good, the Bad, and the Ugly” Presented by: G. Antonio (Tony) Kenon,...

FAR Overhead Audits –“The Good, the Bad, and the Ugly”

Presented by:

G. Antonio (Tony) Kenon, CPA, CGMA

Auditors

Controllers/CFO’s, CEO’s or management of a Company

Contracting officers, procurement officers, other Government Officials

Of the auditors in the room (Government and private) how many of you assist the audited contractor with at least preparing certain aspects of their OH schedule?

Poll Audience

2

Enhance your understanding of the applicable authoritative guidance

Enhance knowledge of the fundamentals in performing an overhead rate audit

• Understanding of some common types of findings and disallowances

Learning Objectives

3

1. Overview of Authoritative Guidance – “Conceptual Framework”

a. Accounting and Allowability Standards

b. Auditing Standards

2. Fundamentals of an OH Audit – From Planning to Reporting

3. Common Issues and Findings Noted When Performing OH Audits

4. Q & A

In the interest of time, general overview of many topics versus an in-depth on one or two topics

Agenda

4

Polling Question:

Phoenix was originally known as:

A. Stonewall

B. Pumpkinville

C. Hohokam

D. Salina

5

Answer:

It was first called Pumpkinville, due to the large pumpkins that

flourished in fields along the canals. Finally, Lord Darrell Duppa

suggested the name “Phoenix”, as it described a city born from

the ruins of a former civilization.

6

Two Worlds:

Accounting and Allowability

Auditing

Authoritative Guidance

7

Polling Question:

Which of the following is considered authoritative guidance for private, for-profit contractors when preparing their overhead rate schedule?

A. IRS Tax Rules for Cost Deductibility

B. Governmental Accounting Standards

C. Federal Travel Regulations

D. Federal Acquisition Regulations

Authoritative Guidance - Accounting

8

Generally Accepted Accounting Principles “GAAP” – codified in the Accounting Standards Codification (ASC) by Topic

Federal Acquisition Regulations “FAR”

Cost Accounting Standards “CAS”

We will look at each one in more depth

Authoritative Guidance - Accounting

9

Authoritative Guidance - Auditing

10

Polling Question:

Which of the following is considered authoritative guidance for auditors when auditing an overhead rate schedule?

A. DCAA (Defense Contract Audit Agency) Audit Manual

B. ASCE (American Society of Civil Engineers) Audit Manual

C. Government Auditing Standards

D. International Standards on Auditing

Generally Accepted Auditing Standards “GAAS”

Generally Accepted Government Auditing Standards “GAGAS” (also know as the “Yellow Book”) December 2011 Revision

AICPA Attest Standards

Authoritative Guidance - Auditing

11

Non-authoritative practice aid brings together accounting and auditing concepts found in authoritative guidance into a convenient format

Tool that consolidates relevant FAR and CAS principles as well as auditing standards

AASHTOAudit & Accounting Guide

12

GAAP and the Codification

13

Brief Overview of the Codification

14

Polling Question:

Have you heard of the Accounting Standards Codification (“ASC”)?

What is the Codification?

The source of authoritative US GAAP recognized by FASB

An effort to reduce the complexity of accounting standards and to facilitate international convergence:

- The effort resulted in a major restructuring of accounting and reporting standards

Topically organized format (approximately 90 topics)


15

What is the Codification (continued)?

It is NOT intended to change U.S. GAAP

It superseded existing sources of U.S. GAAP, and any prior sources of U.S. GAAP not included in the Codification or grandfathered are not authoritative

It is the authoritative source for U.S. GAAP in addition to guidance issued by the SEC

If it is not in the Codification, it is not U.S. GAAP for Non-Governmental Entities


16

Codification Structure

17

How is the Codification Structured?


Areas

Topics

Subtopics

Sections

Subsections

18

How is the Codification Structured? (continued)

Topics:

- Broadest categorization of related content (for example, FASB ASC 405, Liabilities)

- Correlate with IFRS / IAS standards

Subtopics:

- Represent subsets of a topic (for example, FASB ASC 405-20, which discusses the extinguishment of liabilities)

- Generally distinguished by type or scope


19


Sections:

- Represent the nature of the content in a subtopic

- Examples are recognition, disclosure, and subsequent measurement


20


Subsections:

- Allow further segregation and navigation of content

- Occur in a limited number of cases

- Unlike sections, subsections are not numbered


21


Old Referencing General FASB Codification (New)

FAS 5 ASC 450 Contingencies

FAS 13 ASC 840 Leases – Operating and Capital

FAS 109/ FIN 48 ASC 740 Income Taxes

FAS 141(R) ASC 805 Business Combinations

Note: There is a proposal to amend the FAR to update references to GAAP due to the

codification

22

Brief Overview of FAR/CASWhat is the FAR?

23

Polling Question:

1. What is the FAR?

2. What is the purpose of the FAR?

The Federal Acquisition Regulation (FAR), which had its beginnings in the Armed Services Procurement Regulation established in 1947 governing the federal government’s purchasing process

The FAR was codified in Title 48 of the Code of Federal Regulations (CFR) in 1984 to create a uniform structure for many federal agencies

Its purpose is to ensure purchasing procedures are standard, consistent, and conducted in a fair and impartial manner

Brief Overview of FAR/CAS

FAR: Background

24


FAR: Cost Principles Contracts

25

Polling Question:

What three elements must a cost have to be recoverable?

The FAR Cost Principles:

- Before a contractor may recover a particular cost, it must be:

1. Allowable (per FAR Part 31 and Contract)

2. Allocable

3. Reasonable

- FAR Part 31 defines when and to what extent costs can be recovered under a government contract

- The government can recover costs found not allowable, reasonable, or allocable to the contract



26

FAR Part 31.205 Contains about 50 selected costs

Expressly Allowable

Expressly Unallowable:

- Costs specifically classified as unallowable:

• Government won’t pay under any condition


FAR Cost Principles (continued)

27

What Are Some Examples of Expressly Unallowable Costs

alcoholic beverages

entertainment - games, shows

contributions / donations

legislative lobbying

fines & penalties

bad debts

club dues - social or health

flowers (any reason)

golf, tennis, fishing

dinner tickets

over per diem expenses

traffic tickets

non business subscriptions



28



29

Polling Question:

True or False: If a cost is not mentioned in FAR Part 31.205, it is automatically allowable

FAR Part 31.205 does not cover every element of cost

If a cost is not mentioned it does not imply that it is either allowable or unallowable

Determination of allowability is analogously based

Use cost principle that most specifically addresses or best captures the essential nature of the cost at issue



30


What is the CAS?

31

Polling Question:

1. What is the CAS?

2. What is the fundamental objective of the CAS?

The CASB (“Cost Accounting Standards Board”) was established as an agency of Congress in 1970, dissolved in 1980, reinstated in 1988

Authorized to develop cost accounting standards

The CASB has issued 19 costing accounting standards (“CAS”) that have the full effect of law


CAS: History

32

Uniformity and consistency in cost accounting


CAS: Objective

33

CAS: CAS is concerned with three areas in cost accounting:

1. Measurement of cost

2. Assignment of cost to cost accounting periods

3. Allocation of cost to cost objectives


34

CASB Standards

35

401 Consistency in Estimating, Accumulating and Reporting Costs

411 Accounting for Acquisition Costs of Material

402 Consistency in Allocating Costs Incurred for the Same Purpose

412 Composition and Measurement of Pension Costs

403 Allocation of Home Office Expenses to Segments

413 Adjustment and Allocation of Pension Cost

404 Capitalization of Tangible Assets 414 Cost of Money as an Element of the Cost of Facilities Capital

405 Accounting for Unallowable Costs

415 Accounting for the Cost of Deferred Compensation

406 Cost Accounting Period 416 Accounting for Insurance Cost

407 Use of Standard Costs for Direct Material and Direct Labor

417 Cost of Money as an Element of the Cost of Capital Assets Under Construction

408 Accounting for Costs of Compensated Personal Absence

418 Allocation of Direct and Indirect Costs

409 Depreciation of Tangible Capital Assets

419 Unused

410 Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives

420 Accounting for Independent Research and Development Costs and Bid and Proposal Costs (IR&D and B&P)

CASB Standards

36

Polling Question:

True or False: All Contractors must follow all 19 Cost Accounting Standards?

CASB Standards

37

Answer: False

Full CAS Coverage:

All 19 Standards apply only to Contracts subject to “Full” CAS Coverage ($50 million award or net CAS covered awards of $50 million or more in the preceding cost accounting period)

“Modified” CAS Coverage

The following 4 Standards apply “Modified” CAS Coverage ($7.5 million federal award):

401 - Consistency in Estimating, Accumulating and Reporting Costs 402 - Consistency in Allocating Costs Incurred for the Same Purpose (FAR 31.202)405 - Accounting for Unallowable Costs 406 - Cost Accounting Period

CASB Standards

38

Exempt from CAS Coverage:

48 CFR 9903.201-1 summarizes those contracts and contractors that are exempt from all CAS Standards For example: Contracts and subcontracts with small businesses. FAR Subpart 19.3 addresses determination of status as a small business Contracts or subcontracts less than $7.5 million

CAS addresses cost accounting on government contracts (“cost allocability”)

The cost principles “FAR” - address cost allowability

Cost allowability is a procurement matter and is a function of law, regulation, or contract

Question: Can an unallowable cost be allocable?

Answer: Yes, costs may be allocable but unallowable


CAS: CAS and Cost Principles Are Not One and the Same

39

What’s the difference?

FAR = Cost Allowability/Procurement

CAS = Cost Allocability


FAR V. CAS

40

Auditing World

41

Generally Accepted Auditing Standards (AICPA)

Attestation Standards (AICPA)

Government Auditing Standards (GAO – “Government Accountability Office”)

We will look at each one in more depth

Authoritative Guidance – Auditing

42

Auditing World –Generally Accepted Auditing Standards

43

General standards:

- Audits are to be performed by a trained and proficient auditor

- All matters relating to the assignment should be addressed with an independence in mental attitude

- Due professional care is to be exercised

Brief Overview of Generally Accepted Auditing Standards

44

Standards of field work:

- Work is to be adequately planned and properly supervised

- To assess the risk of material misstatements, a sufficient understanding of the entity is necessary

- Appropriate audit evidence is to be obtained through auditing procedures performed to afford a reasonable basis for an opinion


45

Standards of reporting:

- Report whether the financial statements are presented in accordance with generally accepted accounting principles

- Report the circumstances in which principles have not been consistently observed in the current period

- Informative disclosures in the financial statements are to be reasonably adequate


46

Auditing World –AICPA Attestation Standards

47

Three levels of service:

Examination

Review

Agreed-Upon-Procedures

AICPA ATTEST STANDARDS

48

There are currently 13 Attestation Standards

Attest Engagements AT sec. 101

Establishes a framework for attest engagements and outlines general attestation standards, including examples of examination reports and review reports

Note: The Examination Standards (AT sec. 101) are incorporated in GAGAS Chapter 5, “Standards for Attestation Engagements”. Nice bridge back to AICPA Standards.


49

SSAE No. 10 (as amended by SSAE No. 11) AT sec. 201Agreed-Upon Procedures EngagementsOutlines attestation standards and guidance applicable to practitioners performing and reporting on most types of agreed-upon procedures engagements

Compliance Attestation AT sec. 601Provides guidance applicable to practitioners performing engagements related to an entity's compliance with requirements of specified laws, regulations, rules, contracts, or grants or engagements related to the effectiveness of an entity's internal control over compliance with specified requirements


50

Auditing World – GAGASAlso Known as “Yellow Book”

51

Under Government Auditing Standards, auditors follow the general standards included in Chapter 3 of the Yellow Book

Independence

Professional Judgment

Competence

Quality Control and Assurance

Brief Overview of GAGAS

52

For financial statement audits – GAGAS currently incorporate the fieldwork and reporting standards of generally accepted auditing standards (GAAS) and the related SASs issued by the AICPA

Under GAGAS, auditors also have fieldwork and reporting responsibilities that go beyond the AICPA standards, and are in addition to the AICPA standards

Brief Overview of GAGAS

53

Maintain independence when performing non-audit services (non-audit involvement)

If you prepare or help Contractor to prepare the OH schedule, need to build-in independence safeguards to comply with the revised Yellow Book Standards

Also, significant FAR-type audit adjustments might impair independence under the new Yellow Book Standards

Non-audit service practice aid available at AICPA Website:

http://www.aicpa.org/InterestAreas/GovernmentalAuditQuality/Resources/AuditPracticeToolsAids/Pages/YellowBookAuditToolsandAids.aspx

Brief Overview ofYellow Book Revision

54



Brief Overview of an Overhead Audit

55

Three Major Components:

Planning and Risk Assessment Procedures

Further Audit Procedures (Internal Control Testing and “Substantive Audit Procedures”)

Reporting

Materiality:

Used to Frame Audit Scope, Planning and Preliminary Analytical Review

All Disallowances are Reported as Adjustments Regardless of Materiality – GAGAS Public Accountability Concept (GAGAS 4.26)

Overview of How Our Firm Executes Overhead Audits for an A&E Company

56

Audit Planning and Risk Assessment

57

In the engagement letter:

Clarify granting access of audit working papers to Government officials and their representatives

Chapter 4.16 Yellow Book:

When performing GAGAS financial audits and subject to applicable provisions of laws and regulations, auditors should make appropriate individuals, as well as audit documentation, available upon request and in a timely manner to other auditors or reviewers. Underlying GAGAS audits is the premise that audit organizations in federal, state, and local governments and public accounting firms engaged to perform a financial audit in accordance with GAGAS cooperate in auditing programs of common interest so that auditors may use others’ work and avoid duplication of efforts. The use of auditors’ work by other auditors may be facilitated by contractual arrangements for GAGAS audits that provide for full and timely access to appropriate individuals, as well as audit documentation

Planning –Engagement Arrangements

58

GAGAS requires that the audit be properly planned

GAGAS requires auditors to document understanding of internal controls (accounting and compliance)

- Accomplished through ICQ, walk-throughs and flowcharts (AASHTO Audit Guide Appendix B). Would be a good practice aid

GAGAS requires that proper audit risk assessment be performed


59

Polling Question:

What is Audit Risk?

Planning and RiskAssessment Procedures

Audit Risk Formula

60

AR = IR x CR x DR

AR = Audit risk

IR = Inherent risk

CR = Control risk

DR = Detection risk


Audit Risk Formula

61

Answer:

Risk that an inappropriate opinion is rendered due to a material misstatement in the overhead rate schedule

Contractor’s fundamental assertions in a FAR based overhead rate schedule:

1. Occurrence

2. Accuracy

3. Allowability

4. Allocability

5. Reasonableness


62

The risk of a material misstatement occurring in an assertion assuming no related internal controls

Related to:

Nature of the Consultant or industry

Nature of the financial statement account

Complexity of the Consultant (e.g., Decentralized Operations)


Inherent Risk

63

Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the Consultant’s internal controls


Control Risk

64

Risk that the auditors’ procedures will conclude that no material errors are present when in fact there are


Detection Risk

65


Illustration of Audit Risk

66


Audit Risk

67

Polling Question:

Which risk can auditor directly control?


Audit Risk

Risk of Material Risk that the Auditors Audit Risk = Misstatement * Fail to Detect the Misstatement

= Inherent Control Detection Risk * Risk * Risk

Audit Risk: Risk that an inappropriate opinion is rendered on the Schedule of Overhead due to a material misstatement

It is a function of risk of material misstatement and detection risk

68

Typical “higher inherent risk” areas:

Bonuses Compensation reasonableness Depreciation Rent Indirect labor Marketing, bid and proposal costs Legal and professional costs Vehicle costs Corporate or segment allocation costs Cost pools for internally generated costs (remember CAS 402) Travel, entertainment, meetings


69

Test of internal controls common cycles:

Control Environment

Payroll and job costing – detailed payroll cycle audit (minimum sample 26 time sheets per AASHTO audit guide)

Direct costs – none in overhead cost pool

Expense approval, expense coding (general ledger account and if applicable to discipline)

FAR Allowability screening

Subcontractor monitoring

IT controls

Spreadsheet controls


70

Additional Items to Consider - Evaluate and test controls over:

Consistency in allocating costs for the same purpose CAS 402:

- Should not charge a cost direct if those same kinds of costs have been charged indirect

Accounting for unallowable costs CAS 405:

- Must have a process to identify unallowable costs and segregate those costs


71

Control Risk to be assessed as low – need to audit key controls

Controls need to be:

Suitably designed, and

In operation

Sample size needs to be sufficient to support a “Low” Risk Assessment

Question: What if control risk is assessed at high? What should the auditor do?


72


73

Polling Question:

1. Are auditors required to specifically address the risk of fraud?

2. What are some types of fraud risk in an overhead audit?

Don’t forget about fraud

Address fraud risk – SAS 99 and GAGAS 4.10-4.13 requirement

Internal fraud brain storming


74

Pulling it all together:

Detailed analytical review of overhead schedule line items

Utilize the results of our internal control work and results of our detailed analytical review

Assess Risk of Material Misstatement by account for each relevant assertion

Based on this risk assessment, further audit procedures are developed


75

So that detection risk can be at an appropriately low enough level

Goal: Audit risk at an appropriate level to render an opinion


76

Example 1: Professional Fee Expense AccountsRelevant Assertion: Allowability

AR = IR x CR x DR

Low = High x High x Should be Low

Question: What further substantive audit procedures should beperformed? Would analytics alone be sufficient?


77

Example 2: Professional Fee Expense AccountsRelevant Assertion: Allowability

AR = IR x CR x DR

Low = High x Low x Could be moderate or Low

Question: What further substantive audit procedures should beperformed?


78

SAS 110 Guidance

The greater the risk of material misstatement, the less detection risk that can be accepted; consequently, the greater the extent of substantive procedures

Because the risk of material misstatement includes consideration of the effectiveness of internal control, the extent of substantive procedures may be reduced by satisfactory results from tests of the operating effectiveness of controls

Tests of details are ordinarily more appropriate to obtain audit evidence regarding certain relevant assertions about account balances, including existence and valuation


79

Further Audit Procedures

80

Audit account balance detail for those accounts that have a high risk of material misstatement (high inherent and control risk)

Normally employ a combination of high dollar value items and monetary unit or statistical sampling

We obtain support (audit evidence) to validate that cost occurred, allocable and allowable

Remember: GAGAS and GAAS third fieldwork standard requires that audit evidence obtained be sufficient and appropriate

Further Audit Procedures

81

Polling Questions (What is sufficient and appropriate audit evidence?):

Are the following audit evidence sufficient and appropriate to support claimed costs?:

1. Credit card statement only to support office supplies

2. Hand-written receipt for a catered dinner to discuss strategic planning on Hotel Stationery

3. Employee Expense Report to support inter-office travel

4. Visa/Master Card receipt, no notation on receipt with charge coded to B&P account in overhead

Audit Evidence

82

Appropriateness of Audit Evidence:

To be appropriate audit evidence must be:

Relevant

Reliable

Audit Evidence

83

Travel Costs:

FAR 31.205-46(a)(7) states that costs are allowable only if the contractor maintains specific documentation to support claimed travel costs

For claimed costs to be allowable, the following information must be documented:

(1) date and place (city, town, or other similar designation) of the expenses,

(2) purpose of the trip; and

(3) name of person on trip and that person’s title or relationship to the contractor

Per DCAA Contract Audit Manual Section 7-1002.2:

This information must be maintained in a book, diary, account book, or similar records. Documentation such as cancelled checks, credit card receipts, and hotel bills are to be maintained as corroboration for expenses, but without the diary or similar records, they may not be sufficient support for deductibility

Audit Evidence

84

Reporting

85

The Auditor’s Risk Assessment Procedures and Substantive Further Audit Procedures performed in conformity with GAAS/GAGAS should be sufficient to do the following:

Reduce Audit Risk to an appropriate level to allow for the Issuance of an opinion on the schedule of overhead costs

Issue a combined report on internal controls over financial reporting and on compliance with applicable provisions of laws, regulations, and provisions of contracts or grant agreements including Part 31 of the FAR and other matters

Reporting

86

Auditor is required to report deficiencies in internal controls and any instances of noncompliance with applicable provisions of laws, regulations, and provisions of contracts and grant agreements including Part 31 of the FAR. This includes the following:

1) Significant deficiencies and material weaknesses in internal control

2) Instances of fraud and noncompliance with provisions of laws or regulations that have a material effect on the audit and any other instances that warrant the attention of those charged with governance

3) Noncompliance with provisions of contracts or grant agreements that has a material effect on the audit

4) Abuse that has a material effect on the audit

Reporting

87

Management’s response:

If there is internal control or other findings reported, should obtain and report the views of responsible officials of the audited entity

Reporting

88

Internal control reporting is governed under SAS No. 115 and GAGAS Paragraph 4.23 – 4.27

Three categories of internal control deficiencies:

Control deficiency

Significant deficiency

Material weakness

Reporting

89

SAS No. 115 Definition of a Control Deficiency

“A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis”

Remember Two Key Requirements for a Control:

• Must be suitably designed – robust enough to meet its objective

• AND in operation – you have to do it

Reporting

90

SAS No. 115 Definition of a Material Weakness

“A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Contractor’s overhead schedule will not be prevented, or detected and corrected on a timely basis”

SAS No. 115 Definition of a Significant Deficiency

“A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance”

Reporting

91

SAS No. 115 provides evaluation criteria to assist auditors in categorizing internal control findings:

Control deficiencies

Significant deficiencies

Material weaknesses

There is an element of judgment:

Practical consideration: If there are significant FAR audit adjustments but no significant deficiencies and/or material weaknesses reported, auditors should consider documenting why

Reporting

92

“Slight Detour”

93

Business Systems Definition of Accounting Systems

94

Polling Question:

Does FAR have a definition of an accounting system?

FAR Supplement 252.242-7006 Accounting System Administration

“Accounting system” means the Contractor’s system or systems for accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations, and management decisions, and may include subsystems for specific areas such as indirect and other direct costs, compensation, billing, labor, and general information technology


95

FAR 252.242-7006 Accounting System Administration

Acceptable accounting system” means a system that complies with the system criteria in paragraph (c) of this clause to provide reasonable assurance that:

- Applicable laws and regulations are complied with

- The accounting system and cost data are reliable

- Risk of misallocations and mischarges are minimized, and

- Contract allocations and charges are consistent with billing procedures


96

There are 18-criteria in FAR 252.242-7006 paragraph (c) as follows:

(c) System criteria. The Contractor’s accounting system shall provide for:

1) A sound internal control environment, accounting framework, and organizational structure

2) Proper segregation of direct costs from indirect costs

3) Identification and accumulation of direct costs by contract

4) A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives

Business Systems – Accounting Systems Criteria

97

5) Accumulation of costs under general ledger control

6) Reconciliation of subsidiary cost ledgers and cost objectives to general ledger

7) Approval and documentation of adjusting entries

8) Management reviews or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices


98

9) A timekeeping system that identifies employees’ labor by intermediate or final cost objectives

10) A labor distribution system that charges direct and indirect labor to the appropriate cost objectives

11) Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account

12) Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and Procedures, and other contract provisions


99

13) Identification of costs by contract line item and by units (as if each unit or line item were a separate contract), if required by the contract

14) Segregation of preproduction costs from production costs, as applicable

15) Cost accounting information, as required:

- By contract clauses concerning limitation of cost (FAR 52.232-20), limitation of funds (FAR 52.232-22), or allowable cost and payment (FAR 52.216-7); and

- To readily calculate indirect cost rates from the books of accounts


100

16) Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms

17) Adequate, reliable data for use in pricing follow-on acquisitions, and

18) Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles

Note: Tax rules do not apply


101

Question:

Does your company appropriately address the 18 items?

Points to consider:

Strong internal controls are essential

Auditors – Should document and audit key controls


102

FAR Contracting implications:

Since accounting/financial reporting is one of the six “business systems”, a significant deficiency related to the business system for a CAS covered contract might have ramifications to the Contractor under a DOD Final Rule issued February 24, 2012 amendment to the FAR Supplemental regarding contractor business systems

Six business systems: 1) Accounting, 2) Estimating, 3) Materials Management and Accounting, 4) Government Property, 5) Purchasing, 6) Earned Value Management

Reporting – FAR Contracting Implication

103

A significant deficiency in a business system might result in payment withholds

Final Rule defines significant deficiencies: “shortcoming in the system that materially affects the ability of officials of the DOD to rely upon information produced by the system that is needed for management purposes”

This is a business systems definition and not an internal control definition (SAS No. 115)

Entire System issue

Reporting – FAR Contracting Implication

104

Some practical considerations:

DOD’s Final Rule and the SAS No. 115 definition of a “significant deficiency” are different

SAS No. 115 is at the Individual Control level the FAR Supplement is at the Systems level

Auditor should follow SAS No. 115 for internal control deficiencies identified

Question – at what point do significant deficiencies and/or material weaknesses in internal controls render a business system to have a “Significant Deficiency”? Final rule does not provide specific guidance

Reporting –FAR Contracting Implications

105

This has ratcheted up the importance of internal controls for Company Management

And for auditors it is critical to identify and report significant deficiencies and material weaknesses in internal controls

Reporting –FAR Contracting Implications

106

Common Issues and Findings

107

Internal control related:

Not identifying and properly accounting for unallowable costs

Inadequate job costing system

Inadequate system for tracking allowable versus unallowable marketing

Inadequate/noncompliant system for tracking vehicle costs: direct, indirect and unallowable

Internally generated costs:

Using the offset method instead of cost pooling

When using standard rates not properly disposing of significant variances

Common Issues –Deficiencies Encountered

108

Lack of receipt documentation:

Travel related

Office meetings

Recruiting

Common Issues –Deficiencies Encountered

109

Common disallowances noted:

Vehicle costs Public relations and advertising costs No support Entertainment Excess compensation Direct costs in overhead Reasonableness Travel costs over maximum per diem Bonuses and incentive compensation Acquisition costs Insufficient documentation for travel costs Costs related to legal and other proceedings Compensation incidental to business acquisitions Amortization of acquired intangibles Idle facilities Related party rental costs

Matrix of Findings

110

As Contractors you should follow relevant “Accounting Standards” and have adequate internal controls

As Auditors we must follow relevant “Auditing Standards” – see Appendix A of AASHTO Audit Guide

Important for all Stakeholders to have a comprehensive understanding of these requirements

As Auditors we are required to be Independent: “We just want it right”

Wrap-Up

111

Q & A

112

Thank you for your time

To find out more about KLK, please visit us at www.klkcpa.com, or call (520) 884-0176

http://www.klkcpa.com/

Date post:	18-Dec-2015
Category:	Documents
Upload:	dorthy-white
View:	220 times
Download:	1 times

FAR Overhead Audits – “The Good, the Bad, and the Ugly” Presented by: G. Antonio (Tony) Kenon,...

Documents