Preaward and Post Award
Accounting System Audits
November 17, 2011
Pikes Peak NCMA
Roland Wick
OVERVIEW
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This presentation will provide:
1.
2.
The basic criteria for the Preaward and Post
Award accounting system audits performed by
DCAA, and
Overview on how to support these DCAA Audits
to achieve an adequate system.
What is a Preaward Audit?
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A preaward survey of a contractor’s accounting
system is an examination of the accounting system
at either a major or a non-major contractor before
contract award.
To determine if the accounting system is acceptable
for accumulating costs under a prospective
government contract
Limited to obtaining an understanding of the design
of the system to complete the SF 1408
Federal Acquisition Regulation (FAR)
Preaward Review-Why Performed?
Is requested by contracting officers to meet requirements of FAR Part 9.

9.103 Policy. (a) Purchases shall be made from, and contracts shall be
awarded to, responsible prospective contractors

9.105-1 Obtaining information.
Before making a determination of responsibility, the contracting officer shall
possess or obtain information sufficient to be satisfied that a prospective
contractor currently meets the applicable standards in 9.104.
(a)
(b)(1) Generally, the contracting officer shall obtain information regarding the
responsibility of prospective contractors, including requesting preaward surveys
when necessary (see 9.106), promptly after a bid opening or receipt of offers.
However, in negotiated contracting, especially when research and development
is involved, the contracting officer may obtain this information before issuing the
request for proposals.
What is a Post Award Accounting
System Audit?
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An examination of a non-major accounting
system after contract award. The objective is
to determine if the system is adequate for
accumulating and billing costs on
Government contracts.
Post Award
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Generally, is for a follow-up on the preaward
or no preaward completed.
Normally this is a DCAA initiated audit (not
requested)
More comprehensive steps to test billings,
trace costs to source documents, assess
internal control activities. (See MAAR 1 and
MAAR 3). However, this is not an internal
control audit. (CAM 5-203)
What is the Audit Criteria?
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The basic criteria for both audits rests in the
Standard Form (SF)1408 in FAR Part 53.
There is added criteria in the Post Award
Audit but all requirements generally link to
the 1408 criteria. Main emphasis for added
effort in Post Award is billing reviews related
to limitation of payments.
Added Criteria for Post Award

Verify that the contractor is up to date on its submission of incurred cost
proposals in accordance with contract terms. (FAR 52.216-7(d)(2)).
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Verify indirect costs are billed at approved rates (or rates specified in the
contract) by evaluating a sample of current invoices (public vouchers and
progress payment requests) and evaluating a current contractor billing.
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Verify that the contractor adjusts billing rates to reflect actual year end
allowable rates.
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Verify/test that interim billings are either prepared directly from the cost
accounting records or from other records which are reconciled to the
cost accounting records by cost element for all cost-reimbursable work.
Added Criteria Post Award
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Determine that billings are based on current contract provisions. The
total amount billed should not exceed any contract, work order, funding
limitation, or any other contract ceiling amount. Identify controls which
provide for review of contract billing provisions.
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For time and material and labor hour contracts, total labor costs billed
will not reconcile to the contractor’s cost accounting records.
Consequently, verify that (a) direct labor hours billed reconcile to the
cost accounting records and (b) direct labor has been billed at
appropriate contract rates.)
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Verify that billings can be reconciled to the cost accounts for both
current and cumulative amounts claimed.
Added Criteria

Verify that the contractor has 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
condition of the subcontract or invoice and ordinarily within 30 days of
the contractor’s payment request to the Government.

Verify that the contractor has procedures in place to ensure that interim
vouchers include fixed fee and cost withholds in accordance with FAR
52.216-8 and 52.232-7, when appropriate.

Test the contractor’s reconciliation of booked to billed costs.
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If the contractor is authorized to direct bill, perform additional steps, if
applicable, to test the contractor’s continued eligibility for direct billing as
part of this audit.
Is this Similar to new DFARS Business
System Accounting System
Requirements 252.242-7006? YES!
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;
(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) Periodic monitoring of the system;
(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;
New DFARS Requirements
(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;
(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;
New DFARS Requirements
(15) Cost accounting information, as required—
(i) By contract clauses concerning limitation of cost (FAR 52.23220), limitation of funds (FAR 52.232-22), or allowable cost and payment
(FAR 52.216-7); and
(ii) To readily calculate indirect cost rates from the books
of accounts;
(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.
DCAA Audit of Non-Major Contractors
Could/Will Change as DCAA Develops
new Non Major Audit Programs
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DCAA is currently working on this plan.
How To Support The Audit?
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Take each line item on the 1408 and audit program
and separately document that process.
Put the documentation in a folder by each criteria.
Pre Award—Must demonstrate design is acceptable.
Post Award ---Must show system is working as
designed.
Fill out the ICQ (Internal Control Questionnaire)
What to Provide for Support?
Generally Accepted Accounting Principles.
Pre Award and Post Award
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ICQ, flowcharts, audited or reviewed financial
statements (if available), written accounting
policies, organization charts, chart of accounts.
Show the overall system process and flow of
the recording processes.
Proper segregation of costs.
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Both Pre and Post Award.
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Provide chart of accounts and written
accounting policies. How does the contractor
define direct and indirect costs? Provide
written policies which state contractor
procedures.
Direct costs by contract
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Both Pre and Post. Provide policies on how contract
numbers are established, provide job cost numbers
in the system, show the cost element breakout at the
job cost level, show current and cumulative costs,
provide job cost reports.
DCAA will select billing/invoice, if possible, in the pre
award, to trace direct costs downward into records to
job cost record and then for (i) labor to the time
cards and labor distribution verification and (ii)
materials and ODC to invoices/checks
receipts/source documents. This will occur in detail
for Post Award review.
Allocation of indirect costs.
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Both pre and post. Provide cost accounts
that record indirect costs by pool. Provide
written policies on pools and bases, to
include description of pool/base elements,
and the methodology for calculating indirect
rates. Provide current rates and pools and
bases that tie directly to the accounting
records. Provide interim indirect rates and
final year-end actual indirect rates.
Accumulation of costs under general
ledger control
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Both pre and post. Pick specific job cost
report, trace it to the higher level of total job
cost report summary, trace that top level job
cost summary to the income statement
COGS. Assure the income statement for that
period ties to the balance sheet (retained
earnings).
Timekeeping system. Time cards and
labor distribution.
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Both audits.
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Provide the total labor distribution report for all jobs.
Select the same job cost report from above and trace labor
to that section of the distribution report.
From the specific labor distribution report for that job cost
report trace selected labor to time cards. Assure time cards
support hours in the labor distribution.
Provide selected payroll records to assure effective labor
rates are applied for all hours worked.
Assure that costs computed in labor distribution are correct
(all hours worked and rates applied correctly).
Interim determination of costs.
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Both audits.
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Provide bank to cash reconciliation for the
balance sheet selected for the job cost to
income statement to balance sheet trace. This
should show the accounting system is
currently posted. (Also verified in trace of
current vouchers to source records).
Exclusion of Unallowables.
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Both audits.
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Provide written policies on FAR 31 exclusion.
Provide the accounts in the chart of accounts
that accumulate unallowable costs.
Demonstrate indirect pools have no unallowable
accounts and that bases include appropriate
unallowables as required under FAR 31.
Costs by Contract Line Item
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Demonstrate the numbering system to allow
lower level codes to contract charges.
Demonstrate all cost elements, down to the
lowest level, are incurred and recorded by
line item, for each specific contract in the
detailed job cost ledgers.
Limitation of Costs/Billings:
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Preaward–
Demonstrate you have policies, contract briefing forms, and show
indirect rates are readily calculated from records. Explain and
document who monitors these rates, who will monitor limitation of
billings, who will review costs vs billings?
–
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?
Limitation of Costs/Billings:
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Post Award–
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Same but expanded steps to show these limitation activities are
occurring. Briefing of contracts, current reviews of rates, current
review of costs vs. billings.
indirect costs are billed at approved rates
Costs on selected vouchers (CPFF/CPAF/CPIF) must trace directly
from voucher to the costs in the job cost records.
Vouchers will be selected to trace directly to job cost, then down to
labor distribution, then to time cards, with verification of labor rate
applied. Materials and ODC will be tested downward to assure source
records support costs billed.
Is math correct?
T&M. T&M rates must trace to contract, hours must trace to job cost,
ODC elements must trace. Fee and profit must meet contract and
FAR limits.
Cost and Fee limitations correct?
Adequate, Reliable Data:

If the costs are properly recorded and
accumulated this will be accepted. If the
costs do not reconcile or are not in detail to
allow cost element bid support per FAR part
15 then this criteria will fail.
Common Failures
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Software is not open or started.
Indirect rate structure is not developed.
Vouchers do not trace directly to job cost report.
No time cards for officers and owners.
All time is not reported. (Total Time)
Cash to bank does not reconcile.
Total of job cost reports does not reconcile to income
statement.
Funding and cost limitations are not correct.
No billing to cost reconciliation is performed.
No contract briefing cards.
Summary/Questions
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The Pre award and Post award audits are based on the
same FAR 1408 criteria.
Organization of data by specific criteria in the audit
programs is the best way to approach the audit.
Limitation of cost analysis is significantly expanded in
Post award steps.
Discuss all issues with DCAA. Make sure you fully
understand what DCAA is reporting and saying. Errors and
misunderstandings happen, so you need to assure all
issues are fully explained and understood.