We're continuing our discussion on Mandatory Annual Audit Requirements (MAARs): minimum audit procedures before completing reviews of contractor incurred cost proposals. If you're jumping into this discussion for the first time, you might want to go back and read the first three posts in this series:
Today we will be discussing MAARs 5 through 8.
MAARs #5 - General ledger, trial balance, income and/or credit adjustments. The purpose of this procedure is to help identify any income and credits which the Government may be entitled to obtain or share, and to evaluate the exclusion of any adjustments not reflected by the contractor in Government contract costs. It is not uncommon nor is it contrary to generally accepted accounting principles (GAAS) to book miscellaneous income "below the line" to an income statement section reserved for non-operating income and expenses. However, sometimes the Government is entitled to share in these non-operating transactions (e.g. rebates). Additionally, contractors have been known to hide expenses in these sections in order to reduce their indirect expense rate allocation bases thereby increasing their indirect rates (hint: don't do that).
MAARs #6 - Labor floorchecks or interviews - We've covered this area extensively in our blog. The purpose of this procedure is to test the reliability of employee time records, that employees are actually at work (difficult for "work-at-home" employees), that they are performing in assigned job classifications, and that time is charged to the proper cost objective. This is one of the two MAARs that must be performed in the year the costs are incurred (the other is MAAR #13). After the fact, there is no way to determine that time charges correspond to the work actually being performed.
MAARs #7 - Changes in charging direct/indirect costs. The purpose of this procedure is to verify that changes in charging direct/indirect cost do not have the effect of improperly shifting costs among cost objectives or circumventing costs targets or ceilings of certain contracts or other significant cost categories. The auditor will evaluate changes in procedures and practices for charging direct/indirect cost for consistency with generally accepted accounting principles, the applicable cost principles per contracts, and any applicable CAS requirements.
MAARs #8 - Comparative analysis -sensitive labor accounts. The purpose of this procedure is to identify for further examination any sensitive labor charges (for example, indirect charging by direct labor employees) that vary significantly from the prior period and/or budgetary estimates. Lately, DCAA has been requesting contractors to prepare two or three year comparisons of costs by account. It saves time for the auditor however there is no contractual requirement that contractors do so.