Federal Government Contractor Guidance

Preparing for a DCAA Audit

Contracting with the Federal Government makes your accounting records subject to audit. 

There are numerous types of audits that the Defense Contract Audit Agency (DCAA) perform but the majority of audits can be divided between the period before the contract award and the period after the award.

Before a contract award, the DCAA may be tasked with:

• Determining the adequacy of your accounting system;
• Examining your Contract Price Proposal for fairness prior to contract negotiations;
• Examining your Forward Pricing Rate Proposal.

After a contract award, the DCAA may be tasked with:

• Examining your historical costs to determine annual indirect cost rates (Incurred Cost Audit);
• Examining Provisional Billing Rate Proposals;
• Examining your claims in the event of contract terminations, Government caused delays or disruptions.

The very large contractors are subject to further audits such as:

• Business System Audits such as the Accounting System, Billing System, Material Management, and Estimating Systems;
• Compliance with the Cost Accounting Standards (CAS).

Adequate preparation for a DCAA Audit will help to produce beneficial results for a Contractor and for all company personnel involved in this process.

The audit process will be less stressful if your company has its "house in order". Hopefully, adequate controls and procedures are in place to catch most errors. Being prepared for the audit will greatly increase the likelihood of a successful audit outcome.

The following bullets will help prepare you for the audit:

• Review the auditor notification that an audit will be performed;
• Ensure you have an understanding of what the auditor will accomplish (subject of the audit) and their request for books, records, reports, operations data, and management assertions;
• Ask for clarification where you have questions;
• If the contractor has no prior audit history with the DCAA, the auditor will have increased preliminary documentation requirements (for the auditor to assess the level of audit risk);
• Try to meet the auditor's schedule for the entrance conference and/or initiation of the audit (at small contractors, the entrance conference and initiation of the audit may be on the same day);
• Do not agree to an onsite visit date when you cannot effectively support the needs of the auditor (contractor personnel with knowledge of the subject under audit must be available);
• Make arrangements for necessary work space; and
• Depending on the audit purpose you may need the following data: Company Financial Statements, historical incurred cost from the general ledger, data related to Cost Proposals such as estimates or indirect rate calculations, employee handbooks and Accounting Policy and Procedure.

Kline & Company is available to represent you at the DCAA audit or help you prepare for your
audit experience.

This article was authored by Mac Young of Kline & Company for the purpose of providing guidance to our existing and potential clients.

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