What’s in This Article:
Ensure Your Accounting Practices Are Ready for a Contract Audit
Government Contract Audits Defined
Stages of a Government Contract Audit
DCAA Information for Contractors
How an Audit Can Help Demonstrate Financial Readiness
Ensure Your Accounting Practices Are Ready for a Contract Audit
With the U.S. Government spending billions of dollars on contracted goods and services, audits of government contractors play an important role in evaluating compliance with contract requirements. It is important to know what to expect and where to get help when your business is audited.
The Defense Contract Audit Agency (DCAA) conducts audits of contractor costs, accounting systems, and other financial information related to government contracts. Read on for some helpful resources and practical considerations for preparing for a government contract audit.
Government Contract Audits Defined
Government contract audits are examinations of contractor financial information, accounting practices, or other submissions to determine whether they comply with applicable contract requirements and federal regulations.
DCAA conducts several types of audits, including preaward accounting system surveys, incurred cost audits, and certain business system audits. The type of audit depends on the contract and the government’s requirements.
These examinations are different from Single Audits, which generally apply to qualifying recipients of federal financial assistance rather than ordinary procurement contracts.
Stages of a Government Contract Audit
The exact audit process varies depending on the type and scope of the examination. However, government contractors can generally expect several stages:
- Audit selection and notification
- Preliminary survey and requests for information
- Development of the audit scope and procedures
- Review of accounting records, supporting documents, and internal controls
- Discussion of preliminary findings
- Preparation and issuance of the audit report
- Review of findings and any required corrective actions
The process may include meetings with company personnel, requests for additional documentation, and opportunities to clarify accounting practices.
To prepare, contractors should maintain accurate records, understand applicable contract clauses, and be ready to explain their accounting procedures.
DCAA Information for Contractors
Along with its website, DCAA provides resources to help contractors better understand the audit process.
The agency’s Information for Contractors guidance and audit services overview explain common audit areas, including accounting systems, incurred costs, and contract pricing.
For example, certain contracts containing FAR 52.216-7, Allowable Cost and Payment, require contractors to submit an adequate final indirect cost rate proposal within six months after the end of their fiscal year, unless an extension is approved.
Contractors should also review the specific terms of their contracts to understand which accounting and reporting requirements apply.
How an Audit Can Help Demonstrate Financial Readiness
While a government contract audit may be daunting, preparing for one can help a company identify weaknesses in its accounting practices before they become larger problems.
A contractor may benefit from an internal compliance review or mock audit to evaluate its accounting system, supporting documentation, cost allocations, and policies before an official government examination.
A successful review does not guarantee a contract award or a favorable government audit outcome. However, maintaining an accounting system that meets applicable requirements can help demonstrate financial readiness for certain government contracts.
If you would like to know more or are considering outside assistance to ensure your accounting practices are in order, or if you have received an audit request, CJA can help.
Visit our Government Contract Consulting page or contact CJA to get started.
Frequently Asked Questions
What types of government contract audits does DCAA perform?
DCAA performs various examinations, including preaward accounting system surveys, incurred cost audits, and certain business system audits.
How can a small business prepare for a DCAA audit?
Maintain accurate accounting records, document policies and procedures, track labor and costs properly, and review applicable contract requirements.
Does every government contractor need an incurred cost submission?
No. The requirement depends on the contract terms and applicable FAR clauses, including FAR 52.216-7.
