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Government Resources The Importance of Internal Controls for a Cost-Reimbursement Contract Audit DFARS 242.7501 in defines Internal Controls as the policies and procedures established by contractor management to provide reasonable assurance that they are in compliance with applicable laws and regulations and that actual and estimated costs are equitably allocated within the accounting system. The importance of having up-to-date internal controls, also referred to as policies and procedures, during a government audit cannot be emphasized enough. The administrative contracting officer can close out a cost-reimbursement contract only after establishing the actual costs and indirect costs based on approved indirect cost rates. For this reason an auditor will not only review the actual costs in a cost-reimbursement contract, but to conclude how these were determined, the auditor must come up with reasons why the contractor arrived at the final indirect cost rates. Therefore, the auditor not only looks at the accounting system, but the internal controls used to manage the company. While large contractors are constantly scrutinized, smaller contractors may not merit such a high degree of focus by a government auditor. In either case, both the policies and procedures that support the costs and the actual cost accounting practices of the contractor, as compared with those specified in the contract, will be examined. One example of this is a case of timesheets. Accurate reporting of labor hours on a contract is essential to any accounting system. If a government auditor has some question as to whether timesheets are being filled out properly, he will look first to see that the policy is in place, is understood by the employees, and is being followed correctly. He may also look for evidence of regular training or timesheet instruction in the workplace. Several other Internal Controls that may be reviewed during a cost-reimbursement contract audit include:. Materials and Purchased Services
Labor
It is important to maintain documentation that supports your incurred costs and to maintain internal controls for accounting procedures. Also see: |
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