DCAA auditors are not just looking to see if a contractor’s accounting system meets a checklist. The DCAA auditor takes under consideration the Generally Accepted Accounting Principles, or GAAP, and will perform various tests to make sure that the accounting system is in accordance. Here are the areas that a DCAA auditor will be looking at:
Controls
It is crucial that a contractor have full control to direct charging of all indirect expenses and vice versa. It is very helpful if the contractor can show, via flowchart or other diagram, how the expense flows from the order to the actual purchase requisition. With service expenses, a contract or letter of engagement is very helpful to show whether the costs are direct or indirect.
Job Cost Ledger
The contractor is required by DCAA to have a subsidiary job-cost or accounts receivable ledger. This ledger must accumulate costs by the contract at the level that was in the contractor’s DCAA proposal.
Pools
All indirect contract costs must be grouped logically together. Further, these groups, or pools, must be assigned based on the benefits to other pools or to other contracts.
General Ledger
All costs must be accumulated under the control of a general ledger. This general ledger must be in agreement with the general ledger.
Timekeeping System
Even though the requirement of a timekeeping system seems simple, this is usually a problem for contractors. DCAA regulations require that all employees prepare timesheets and the timesheets must be signed by the employee and his/her supervisor.
Labor Distribution System
DCAA requires that a labor distribution system allocate direct and indirect labor costs to objectives and to the employee. The labor distribution must also adhere to a payroll system and the general ledger.
Monthly Posting
Contractors are required by DCAA auditors to post costs at least on a monthly basis. This includes all costs including direct and indirect.
Exclusion of Unallowable Costs
Not all costs are allowable by DCAA and the contractor must exclude them using a system. It is not enough simply to not list these costs. FAR Part 31 defines which costs are allowable and which are unallowable.
Segregation of Costs
Some DCAA contracts require that the contract’s costs can be identifiable by item and unit as though each item were part of a separate contract. For example, manufacturing contracts may be required to segregate costs by preproduction.
Interim Billing
According to DCAA, interim billing must be prepared by contractors of direct costs, other than unallowable costs.
Full Operational Capacity
The DCAA auditor will determine whether the accounting system is in full operational capacity. In some cases, the contractor may not be using the accounting system proposed for the contract and the DCAA auditor will report this. The auditor will then determine whether the proposed accounting system is acceptable and may recommend that a follow-up DCAA accounting audit be performed.