Wednesday, July 11, 2012

Internal Controls - Where to Find Guidance

Yesterday we defined internal controls and discussed five interrelated components that make up effective internal controls. This information came from COSO (Committee of Sponsoring Organizations of the Treadway Commission) whose mission is to
... provide thought leadership through the development of comprehensive frameworks and guidance on ... internal control ... designed to improve organizational performance and guidance...
The sponsoring organizations include the AICPA, the American Accounting Association, Financial Executives International, The Institute of Internal Auditors, and the Institute of Management Accountants.

DCAA considers the COSO guidance to be authorative and has relied upon it for establishing guidance for performing audits of internal control systems that are pertinent to Government contracting (See CAM Chapter 5).

Funny things happen however between the audit guidance and the actual application of audit procedures. Although COSO and CAM clearly state that internal controls must be tailored for each individual contractor/company, and considering size, organizational characteristics, the nature of the business, complexity of operations, applicable regulatory requirements, etc., we could share many examples where auditors have disregarded the contractor's assessment of its own control environment and corresponding control activities and have used published "control activity examples" as a checklist - "you don't do this, you fail" mentality.

Its easy to know what internal control systems are important to DCAA. The Agency's Contract Audit Manual as well as published audit programs and internal control matrices identify those areas considered most important to the Government contracting environment. These include accounting system, estimating system, billing system, labor system, and six others. DCAA is in the process of realigning its coverage so that it ties in closer with the new DoD Business System rules but the core elements will still be there.

Tomorrow, we will look at some of the specific internal controls related to accounting systems.

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