Documenting the Accounting System

When contract auditors perform a review of an accounting system, it is absolutely necessary for them to understand the system before they plan and perform the audit, They will ask you to demonstrate your accounting system in order to understand the internal control structure related to compliance with the 18 accounting system attributes listed in DFARS (DoD FAR Supplement) 252.242-7006, Accounting System Administration.

It is important to for contractors to understand that such understandings will typically go far beyond mere inquiry. In fact, audit guidance warns auditors in bold lettering: "Note - Inquiry alone is not sufficient to obtain an understanding of the contractor's internal control systems."

What audit techniques besides "inquiry" might a contractor expect. Here are a few:

• Observing the application of specific controls
• Inspecting documents and reports
• Performing walk-throughs of the system. Walk-throughs typically include tracing transactions trough the various processing steps.

If, for example, an internal control requires supervisors to review and approve weekly timesheets for subordinate employees (and it should), the auditor might request that you show them in the system how such approval is captured and for documentation to show the actual process used to comply with that particular internal control.

At this stage of the audit (pre-risk assessment stage), these inquiries, observations, inspections and walk-throughs will not be detailed or comprehensive. Those steps will come later. The auditor is also going to be assessing the level of segregation of duties for each of the key accounting processes/functions. Depending upon the size of the company, the lack of segregation of duties could be a fraud indicator which simply means that the audit risks are increased and the level of testing will increase correspondingly.