What are "Audit Leads"?

We've warned on a number of occasions that contractors should never assume that when auditors arrive at their facilities, they are focused exclusively on the particular audit that they've been assigned. The good auditors are ever-alert for conditions that, while not within the scope of their particular audit, are nevertheless situations that might somehow or somewhere along the line, result in increased costs to the Government.

When those situations or conditions are observed, and they are outside the scope of the audit at hand, the auditor will write up "audit leads" to be followed up at a later date. For example, while performing a labor floorcheck, the auditor might observe idle capacity or idle facilities. While that observation has nothing to do with timesheets, it may affect indirect costs charged to Government contracts. The audit lead simply alerts the incurred cost auditor of a potential cost issue to follow up during an incurred cost audit.

The specific procedure preparing audit lead sheets goes something like this:

• Auditors will prepare audit lead sheets when an issue arises that an auditor believes needs to be addressed, but is not an area within the scope of the current audit. Auditors will provide a brief description of the audit lead, identify areas potentially impacted, and suggest audit steps, if appropriate.
• Supervisors will review draft lead sheets and provide guidance for appropriate action/follow up. 
• If a lead is part of the scope of the current assignment, the supervisor will assist the auditor in designing tailored audit steps to adequately cover the area of concern. 
• If a lead is not part of the scope of the current assignment, appropriate follow up may include
• (1) documenting specifically where the lead will be addressed in a future assignment(s) or 
• (2) immediately establishing a new assignment to review the lead. 
• Supervisors are responsible for ensuring that audit leads are addressed and dispositioned appropriately and well documented.
• Final approved audit lead sheets are to be maintained in the originating assignment working papers, as well as in a central file.

Historically, the preparation of audit leads have been infrequent. However there is renewed emphasis by contract auditors to be alert for audit leads and prepare the associated lead sheets. There is also a new policy that requires management to review audit leads from time to time to ensure they have been appropriately considered and dispositioned.