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MBD00110623/Audit Program.pdf

Master Document – Audit Program

Activity Code 17740 Preaward Survey of Prospective Contractor Accounting System

Version 5.3, dated October 2006

B-1 Planning Considerations

Purpose and Scope

• The major objectives of this audit are to obtain an understanding of the accounting system to appropriately complete the Preaward Survey of Prospective Contractor Accounting System, SF 1408, and to opine as to whether the design of the contractor’s system is acceptable for the award of a prospective Government contract.

• If requested to perform a Preaward Survey of Prospective Contractor Accounting System Audit on a contractor that has an active Government contract, and a recent post contract award accounting system audit has not been performed, contact the requestor to ascertain if a post contract award accounting system audit report would be more useful. If a post contract award accounting system audit has been performed, consider providing a copy of the report to the requestor. Discuss with your supervisor.

References

1. CAM 5-200, “Pre-Award Surveys and Adequacy of Accounting System for Contractual Requirements”

2. FAR 9-105, “Procedures (for determining contractor qualifications)”

3. FAR 9.106, DFARS 209.106, PGI 209.106, “Preaward Surveys”

4. FAR 52.216-16, “Quarterly Limitation on Payments Statement” (FPI contracts); FAR 52.232-20 and FAR 52.232-21, “Limitation of Cost;” FAR 52.232-22(b), “Limitation of Funds.”

5. CAM 14-300, “Contractor Financial Capability Audits and Reporting”

B-1 Preliminary Steps WP Reference

1. Research and Planning

a. Review the audit request to ensure the audit scope addresses any customer concerns. If the contracting officer requests the company’s financial capability to be addressed during this audit, set up a separate Code 17600 – Financial Capability assignment to perform a financial capability risk assessment (CAM 14-300). If the audit request does not specifically ask for the financial capability to be audited as part of this audit, contact the contracting officer to determine if he/she wants a financial capability risk assessment performed. Notify the contracting officer of the commencement of the audit and the expected completion date

(CAM 4-103).

b. Obtain information on the proposed Government contract (e.g., type and amount of contract, special contract provisions, etc.).

c. If a previous preaward accounting system survey was completed, summarize any accounting system deficiencies found in the permanent file and the impact of these deficiencies on this audit.

If a perm file does not exist or is not current, provide a list of items (e.g., organizational charts, financial statements, policies and procedures, etc.) to be obtained during the field visit to the contractor in advance of the entrance conference, so the contractor has additional time to gather the information. Update the permanent file (See CAM 4-405.1).

d. If the evidential matter to be obtained during the audit is highly dependent on computerized information systems, document on working paper B (section 5) the type/brand of the accounting software used and your understanding of the design of the system.

Determine if the controls are adequately designed to ensure the reliability of the computer based data.

When sufficient work is not performed to determine reliability (i.e., reduce audit risk to an acceptable level), qualify the audit report in accordance with CAM 10-210.4a.

e. In planning and performing the examination, consider the fraud risk indicators specific to the audit. The principal sources for the applicable fraud risk indicators are:

• Handbook on Fraud Indicators for Contract Auditors, Section II. (IGDH 7600.3, APO March 31, 1993) located at www.dodig.osd.mil/PUBS/index.html, and

• CAM Figure 4-7-3.

Document in working paper B any identified fraud risk indicators and your response/actions to the identified risks (either individually, or in combination). This should be done at the planning stage of the audit as well as during the audit if risk indicators are disclosed (see CAM 4-702). If no risk indicators are http://www.dodig.osd.mil/PUBS/index.html identified, document this in working paper B.

2. Entrance Conference and Preparation

Arrange and conduct an entrance conference (see CAM 4-302).

Explain to the contractor's representatives that as issues are developed during the audit, they will be furnished to the contractor for fact-finding and timely resolution. This process should facilitate reduced audit cycle time and efforts to respond to and issue the audit report.

3. Initial Risk Assessment

Using the information obtained in steps 1 and 2, prepare an initial risk assessment to determine the scope of the examination (W/P B).

C-1 Preaward Survey (SF 1408) WP Reference

Prepare “Preaward Survey of Prospective Contractor Accounting System” (SF 1408) by completing the following audit steps:

1. Generally Accepted Accounting Principles. Through observation or discussion, verify that the contractor’s accounting system is in accordance with GAAP. Determine if the contractor has or intends to have an accrual basis accounting system. (SF 1408, Section I)

2. Proper segregation of costs. Verify that controls exist to preclude direct charging of indirect expense and indirect charging of direct contract costs. (SF 1408, Section II, 2a)

3. Direct costs by contract. Verify that the contractor has either a subsidiary job costs ledger or account receivable ledger which accumulates costs by contract at a level of detail consistent with that used by the prospective contractor in its proposal. (SF 1408, Section II, 2b)

4. Allocation of indirect costs. Verify that the indirect costs are accumulated in logical groupings and determine that the groupings are allocated based on benefits accrued to intermediate and final cost objectives. Is the cost accounting system formally documented, with a written description of the contents of bases and pools? (SF 1408, Section II, 2c)

5. Accumulation of costs under general ledger control. Verify that the contractor’s job cost ledger and other books of account are reconcilable and currently posted to the general ledger control accounts. (SF 1408, Section II, 2d)

6. Timekeeping system. Verify that labor is charged to intermediate and final cost objectives based on a timekeeping document (paper or electronic timecards) completed and certified by the employees and approved by the employees’ supervisors. (SF 1408, Section II, 2e)

7. Labor distribution. Verify that labor cost distribution records are reconcilable to payroll records and that labor distribution records trace to and from the cost accumulation records in labor subsidiary or general ledger accounts. (SF 1408, Section II, 2f)

8. Interim determination of costs. Determine that the contractor posts contract costs at least monthly to books of account. (SF 1408, Section II, 2g)

9. Exclusion of Unallowables. Evaluate the contractor’s plan to identify and exclude unallowable cost if the contract is awarded. (FAR 31.201-

6) (SF 1408, Section II, 2h).

10. Costs by Contract Line Item: Can the system be expanded to the requisite level of detail, and does the contractor have procedures to determine what this level might be? (SF 1408, Section II, 2i)

11. Preproduction Costs (Applies primarily to manufacturing contracts):

Are these costs routinely segregated to assist in repricing or follow-on contract pricing? (SF 1408, Section II, 2j)

12. Limitation of Costs: Can the interim indirect expense rates be readily calculated from the books of accounts, and are the interim rates routinely monitored?

Who is responsible for monitoring total contract expenditure against contract limitations on price or cost, and how frequently is this reviewed? Are controls in place to ensure compliance with the reporting requirements of FAR 52.216-16 or FAR 52.232-20, -21 and -22? (SF 1408, Section II, 3a)

13. Billings (e.g. progress payments, public vouchers): Does the contractor have controls or procedures that would provide that interim billings of direct cost are prepared directly from the books and records, excluding unallowable costs. Does the contractor have procedures to ensure that subcontractor and vendor costs are only included in billings if payment to the subcontractor or vendor will be made in accordance with the terms and conditions of the subcontract or invoice and ordinarily within 30 days of the contractor’s payment request to the Government? Can billings be reconciled to the cost accounts for both current and cumulative amounts claimed? (CAM 6-

1006) (SF 1408, Section II, 3b)

14. Adequate, Reliable Data: Is the contractor’s system capable of producing cost information at a sufficient level of detail for use in pricing follow-on contracts. (SF 1408, Section II, 4)

15. Accounting system in operation. Is the accounting system in full operation? If not, which portions are in operation and what is the status of implementing the full accounting system? (SF 1408, Section

II, 5)

A-1 Concluding Steps WP Reference

1. Summary Steps

a. If there are open or partially completed items, follow-up and resolve them at this time and summarize audit results.

b. Complete, index and cross reference working papers.

c. Discuss results of audit with your supervisory auditor. Hold and document an exit conference.

d. Take appropriate action to effect correction of noted deficiencies.

This may include additional evaluation under an assignment in another audit area, noncompliance or system deficiency reports, cost suspension or disapproval, etc.

e. Prepare draft report and SF 1408 to be furnished as part of the audit report.

f. Prepare or update ICQ, as appropriate, based on the results of this audit. Once complete, file document in Electronic Permanent File for future use.

g. Update the permanent file.

MBD00110624/FC Audit Program.pdf

Master Document – Audit Planning

Activity Code 17610 Financial Capability, Modified Financial Condition Risk Assessment

Version 3.1, dated July 2007 B-1 Planning Considerations

Purpose and Scope

The purpose of the modified financial condition risk assessment is to determine if there are any significant indicators of financial distress that would warrant performance of a detailed financial condition risk assessment or financial capability audit. A modified risk assessment consists of analyzing the trends of the contractor’s key financial statement elements and any significant events which would impact the contractor’s financial condition. FAOs will perform annually either a detailed or modified financial condition risk assessment for all contractors with Government sales over $15 million in accordance with CAM 14-303. FAOs will perform an annual modified financial condition risk assessment for contractors with Government sales between $1 million and $15 million, in conjunction with other field visits (CAM 14-303b).

References

1. FAR 9.104-1, General Standards

2. DFARS 232.072, Financial Responsibility of Contractors

3. SAS 59, The Entity's Ability to Continue as a Going Concern

4. CAM 14-304, Financial Condition Risk Assessment Procedures

B-1 Preliminary Steps

Version 3.1, dated July 2007 WP Reference

1. Research and Planning

a. Financial condition risk assessments/financial capability audits are generally performed at the parent company. If this is a risk assessment covering a contractor segment, ensure that an exception for performing the risk assessment at the segment level applies

(CAM 14-302).

b. Contact the contract administrative office to determine if there are any specific areas of concern. Request the details of any financial analyses already performed by their offices to avoid duplication

(i.e., financial ratio analyses, bond rating analyses, etc.).

c. Conduct an entrance conference. Ask the contractor if there are any significant events that have occurred (sale of a division, loss of a contract, large layoff, new contract, buying larger plant, etc.).

d. Document any significant or unfavorable events that would impact the contractor’s financial status (loss of a contract, major layoff, sale of a division, etc.). The existence of this type of information may be contained within the permanent files, audit lead sheets, ICAPS/ICQ, or local newspaper articles or obtained through discussions with the contractor, supervisor, or auditor that normally works at the contractor location.

2. Risk Assessment

a. Trend Analysis of Key Financial Statement Elements. Review the trends of the following financial statement elements for the most recently completed fiscal year and the previous two fiscal years.

(CAM 14-304f). If the financial statements are unaudited, the auditor should consider additional steps to verify the financial information prior to analyzing the trends, [e.g., compare key financial statement amounts (total assets, total liabilities, etc.) to the general ledger or tax returns to validate data in the unaudited financial statements]. If consistent unfavorable or adverse trends are noted, obtain and verify any explanation from the contractor and any actions being taken to improve the conditions.

(1) Analyze the trends of the following financial statement elements:

• Profit/loss

• Sales

• Cash Flow from:

o Operating activities o Investing activities o Financing activities

• Working Capital (Current assets minus current liabilities)

• Net Worth (Total assets minus total liabilities)

• Long-term Liabilities

(2) The notes to the financial statements and/or the SEC filings (10K and 10Q) should be reviewed for any conditions or statements that may indicate financial risk requiring further inquiry/review. Determine if there is a going concern comment in the most recent financial statements. If so, this is a high risk indicator that requires further analysis.

b. Timely Payment of Payroll Taxes. Determine if the contractor is paying its payroll taxes on a timely basis (CAM 14-304h). [Note:

Contractor delays or the nonpayment of payroll taxes may affect the allowability of claimed and billed costs and should be promptly discussed with the Supervisory Auditor.]

c. Document whether there are any (1) significant unfavorable or adverse trends or (2) issues relating to the payment of payroll taxes that would have a detrimental impact on the contractor’s financial condition that would require the performance of a detailed financial condition risk assessment.

A-1 Concluding Steps

Version 3.1, dated July 2007 WP Reference

1. Summarize the results of the modified risk assessment in a Memorandum for Record if no significant indicators of financial distress were disclosed. [If results of this assessment indicate that a detailed financial condition risk assessment needs to be performed, close this assignment and begin a new APPS Working Paper Assignment using a 17600 code for Financial Capability Audit.]

2. Coordinate the results of the modified risk assessment with the Supervisory Auditor.

3. Hold an exit conference with the contractor and disclose that we are closing our financial condition evaluation without performing any additional risk assessment procedures, and that a report will not be issued.

4. If the modified risk assessment is performed at a parent or a corporate office, distribute the memorandum to all cognizant DCAA offices.

Include a transmittal letter advising that the memorandum contains sensitive information and should not be released outside of DCAA.

5. Update permanent files.

B-1

Planning Considerations

MBD00110622/Sf1408.pdf

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