Strategic Consulting Solutions, Inc.

Preparing for a DCAA Audit

Financial AuditWe’re often asked by government contractors how they can prepare for a DCAA audit or any type of government audit.  Our first response is that you start preparing once you decide that you are going to perform on government contracts.  It may sound silly, but good planning and preparation starts at the beginning.  But let’s look at some areas to start preparing for a government audit at any stage of the game.

Compliant Accounting System

A compliant accounting system is probably the primary key element in being prepared for a DCAA audit.  While not all audit programs involve a review of the accounting system, DCAA does determine if internal controls are adequate during any type of audit.  An inadequate accounting system could lead to a breakdown in internal controls.  To understand more about a compliant accounting system, see our blog Key Elements of a Compliant Accounting System.

Policies & Procedures

Make sure that you have policies and procedures that cover the key areas.  While these may vary depending on the type of organization, some of the key policies/procedures to have available are Accounting, Timekeeping, Travel, Bonus, and Purchasing.  Also, the employee handbook will address other areas such as employee benefits.  A periodic review of these documents is a good idea to verify that the company is still following these policies/procedures as written.  The documents may need an occasional make-over.

Knowledgeable Accounting Department

Auditors will want to know that the accounting is handled by people that know the industry.  A good accountant can still be a good accountant even if they don’t have the expertise in government contracting.  Making sure that the accounting team is well-versed in the rules and regulations of government contracting will go a long way in preparing for an audit.  An auditor will know right away if the accounting team is experienced in the industry or not.

Contract/Subcontract Briefs

For contractors with existing contracts, a good system to brief each contract and modification will go a long way in an audit.  This may also include making sure that any agreements with your subcontractors are well documented and executed.

Clearly Definitive Indirect Rate Structure

While each proposal may cause a contractor to take another look at their indirect rate structure, it is critical to have a foundation for your indirect cost pools.   Additionally, this rate structure must be communicated throughout the organization to ensure that all parties are working in sync as it relates to the cost pools.  For example, the people that are pricing the proposal must be pricing in a manner that is consistent with how you currently collect and bills costs. 

Record Keeping

Record keeping can be looked at from different angles.  A good document retention process that allows you to easily retrieve records during an audit is very important.  It is also important to have proper documentation and approvals with each transaction.  Many times the nature of the transaction is well-understood at the time of making the entry.  But as time passes, the background on that entry may not be remembered so solid documentation is helpful when an auditor pulls that transaction for review. 

While it is hard to list all of the areas in which you can prepare for a DCAA audit, getting the basics down is a good start.  If this is not your area of expertise, find someone who can do an assessment of your overall system to determine how you might stack up in an audit.  As we’ve been told our entire lives, preparation is the key to success.

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