Thursday, November 3, 2011

Mandatory Annual Audit Requirements (MAARs) - Part III

Mandatory Annual Audit Requirements (MAARs) are procedures that auditors apply when auditing contractor annual incurred cost proposals. These procedures are considered absolutely essential in order to comply with generally accepted government auditing standards when performing the audit. Contractors submitting incurred cost proposals can expect auditors to delve into these areas at some point before issuing an audit report on the results of their review. There are seventeen of them and beginning today, we will begin a discussion on the objectives and purpose of each MAARs. This will take several posts to cover them all.

MAAR #1 - Internal Control Audit Planning and/or Internal Control Questionnaire: The purpose of this requirement is to determine the extent of reliance that can be placed on the internal controls for contract costs and the need for and extent of substantive testing that may be required based on the observed strengths or weaknesses of contractor systems. Essentially, the better a contractors internal control systems, the less auditing will be required. If the auditor can relay on internal control systems to "catch" potentially unallowable costs, he/she can reduce audit testing.

MAAR #2 - Contract Cost Analysis and Reconciliation to Books: This provides the auditor (i) an overview and order-of-magnitude frame of reference for direction of audit effort and other audit planning/performance considerations, and (ii) to verify that the auditable costs claimed or to be claimed on Government contracts tie in to the amounts produced by the accounting system in the contractor's official books and records. Auditors will evaluate summaries of the contractor's total annual contract costs by major cost element (material, subcontracts, intra-company charges, and credits,etc), and verify that the auditable contract costs reconcile to contractor accounting records by cost element.

MAAR #3 - Permanent Files: Permanent files provide an efficient and effective repository of current audit information. Permanent file maintenance should help identify the need for further audit and analysis, and help in determining the accounting methods that influence the nature, level, and extent of further testing required in specific cost accounts, functions, operations, and departments. Permanent files are updated for new or changed contractor organizations, operations, policies, procedures, internal controls, software programs, and accounting methods that influence the nature, level, and accounting treatment of costs being charged to Government contracts.

MAAR #4 - Tax Returns and Financial Statements. The purpose of this step is to highlight possible areas to reduce the extent of audit effort that might otherwise be required. The evaluation of a contractor's financial statements, corporate minutes, tax returns, reports filed with regulatory bodies (e.g. SEC) and data available on the corporate web site will assist the auditor in planning the audit more effectively. Generally, greater weight is placed on corporate reports to regulatory bodies with reporting requirements.

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