Before we discuss "internal control objectives", we need to first identify the internal control systems that the Government (primarily DCAA) is interested in. Contractors have many systems that are not particularly important to the Government. For example, internal controls over cash is important for the independent auditor rendering an opinion of the financial statements but does not significantly affect costs charged to Government contract.. The internal control systems that are most relevant to Government contractors include:
- Overall accounting
- Information technology
- Budget and planning
- Material management and accounting system
- Indirect and other direct costs
- Integrity and ethical values - management must convey the message that integrity and ethical values cannot be compromised, and employees must receive and understand that message through continuous demonstration of words, actions and commitment to high ethical standards.
- External audit reports - management should take timely corrective action on any deficiencies note by the external auditor.
- Board of directors/audit committee - basically dealing with independence and setting the tone at the top
- Basic organizational structure - clear lines of authority
- Assignment of authority and responsibility - appropriate for risk and accountability
- Financial capability - adequate financial resources to perform the contract(s)
- Accounting system and controls - well-designed and operating effectively to provide reliable accounting data and prevent misstatements that would otherwise occur
- Cost allocations - costs are assigned based on rules, regulations, and standards for proper distribution of direct cost and allocation of indirect costs.
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