Wednesday, July 24, 2019

Contract Auditors to Work Under New Professional Practice Guide

Government contractors (and subcontractors) should become familiar with DoD's 'Professional Practice Guide for Audits and Oversight of Defense Contractor Costs and Internal Controls (First Edition - January 2019). We've covered this guide previously (see for example Section 809 Panel - Recommendation to Adopt an Audit Professional Practice Guide). This guide is intended to provide consistency in the way DCAA and Independent Professional Accounting (IPAs) firms consider risk and materiality in the conduct of their audits and other oversight activities. The PPG is included in the Panel's Third Report beginning on Page 79).

How does DCAA intend to use the Guide? DCAA provides that answer in its latest Annual Report to Congress. DCAA states:
This guide will provide consistency in the way DCAA and Independent Professional Accounting Firms consider risk and materiality. The guide will be important to IPAs when they perform select incurred cost audits for contractors previously audited by DCAA. Internal to DCAA, we plan to use the PPG to meet Congressional requirements to establish, codify, and implement these new materiality thresholds.
What are these new materiality standards that DCAA, and by extension IPAs, must adhere to? The new materiality standards are addressed in the PPG and include 'materiality' in audits of incurred costs and 'materiality in audits of internal controls. This is where the quantification of materiality becomes complex and formulaic driven. But since they are formula driven, contractors (and subcontractors) should be able to replicate materiality thresholds calculated by contract auditors.

The PPG however cautions that the application of quantified materiality is not limited to certain thresholds as "auditor judgment  with consideration of qualitative factors, risk, and variability have an impact".

You can learn more about quantifiable risk or materiality factors in Chapters 2 and 3 of the PPG.

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