Thursday, April 12, 2012

Multi-Year Auditing

The Defense Contract Audit Agency (DCAA) is carrying a tremendous backlog of incurred cost proposals that require auditing. It has prioritized these audits in fiscal year 2012. Now that fiscal year 2012 is half way over and DCAA has not made significant progress in reducing the backlog, it will no doubt become a priority for next fiscal year as well.

One of the techniques that DCAA will be using to help reduce the backlog is to conduct multi-year audits. Under the multi-year audit concept, auditors can review from two to five years simultaneously. Savings are achieved by having to prepare a single set of working papers and issue a single audit report. They hope to gain other efficiencies as well but the Agency admits that it is not sure whether additional efficiencies and effectiveness are achievable.

Although multi-year auditing is not new to DCAA, it is now being aggressively encouraged. DCAA introduced new procedures for conducting the audits in guidance issued last month. For starters, multi-year auditing does not apply to contractors with more than $250 million charged to flexibly priced contracts. Second, before entertaining the idea, auditors need to determine and document that the contractor's business and organization structure for the years being audited has been relatively stable and consistent.

Transaction testing must cover all years. The auditor cannot look at transactions in one year and apply the results to other years. However, the auditor can choose to use random sampling, judgmental sampling or a combination as long as they can document that the selection results in adequate audit coverage.

If you company is chosen for a multi-year audit, we would like to hear of your experiences.

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