Risk Assessment, Audit Processes and Sample Sizes - PowerPoint PPT Presentation

Risk assessment audit processes and sample sizes
1 / 33

  • Uploaded on
  • Presentation posted in: General

Risk Assessment, Audit Processes and Sample Sizes. It’s Really Just Auditing…..But. Agenda. What is Really Necessary? Risk Assessment Audit Processes and Sample Size Labor Indirect Costs Guidelines Conclusion. What is Really Necessary?. It’s Not Just About Auditing.

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

Download Presentation

Risk Assessment, Audit Processes and Sample Sizes

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript

Risk assessment audit processes and sample sizes

Risk Assessment, Audit Processes and Sample Sizes

It’s Really Just Auditing…..But



  • What is Really Necessary?

  • Risk Assessment

  • Audit Processes and Sample Size

    • Labor

    • Indirect Costs

  • Guidelines

  • Conclusion

What is really necessary

What is Really Necessary?

It’s Not Just About Auditing

Cpa firm responsibilities

CPA Firm Responsibilities

  • Comply with professional standards

    Generally Accepted Government Auditing Standards –GAGAS (Yellowbook)

    Generally Accepted Auditing Standards (GAAS)

    UNDERSTAND terms of engagement

    Realistic self-assessment

    Establish quality control standards unique to overhead audits

  • Communicate with state DOT

  • Allow cognizant agency full access to workpapers

Basic accounting alignment

Basic Accounting Alignment

  • Accrual based (GAAP) Accounting required.

  • Labor cost must be reconcilable to individual payroll records.

  • Project costs (labor and ODCs) must reconcile to General Ledger Direct Costs.

  • Overhead must reconcile to General Ledger.

  • Total labor per General Ledger must reconcile to annual payroll records.

  • Overhead must correspond to firm fiscal year.

  • Job Cost system under General Ledger control.

Two sets of books

Two Sets of Books?

Value Added(Pricing)


Profit = Revenue – Direct Costs – Overhead


Project Costs








Cash Flow = Cash In – Cash Out


Pay to

Equipment Usage




Cash in the Bank



Accounts Payable


What is overhead

Cost Element



Overtime premium on a project

Time spent preparing a proposal

Use of equipment on a project

Time spent by accounting to prepare an invoice

Company vehicle used on project

Personal vehicle used on project

Use of CAD equipment on a project

Use of a pencil to write the final report

What is “Overhead”?

Which of these cost elements should legitimately be charged directly to jobs and which to overhead?



It Depends

Internally allocated costs

Internally Allocated Costs

  • Typically known as “in-house” costs

  • Allocates costs to projects based on an estimated unit rate using a “contra” account

  • Typically used for:

    • Company owned vehicles

    • Printing

    • Equipment

  • Can be used for CADD costs but not typical

  • Debits and credits

    Debits and Credits

    • Contra accounts should be set up to “relieve” overhead of allocated costs

    • These accounts can be anywhere in the overhead section of the chart of accounts but we prefer them to be at the bottom of the chart of accounts before other income/expense

    • Separate contra accounts should be set up for each category of cost. Eg: vehicles, equipment, unit pricing

    • Unit costs ALWAYS are charged to projects

    Labor costing options

    Labor Costing Options

    Standard cost (preferred) – Standard hourly rate based on hours employee is expected to work during year (usually 2,080). Any differences (uncompensated overtime, premium overtime) allocated to overhead. (Labor rate stays fixed)

    Average cost – Divide paycheck by actual hours worked during pay period. (Labor rate can change each pay period)

    The golden rules of accounting policies

    The Golden Rules of Accounting Policies

    Bill according to contract

    Accumulate costs according to policy

    The big breakdown

    The BIG Breakdown

    • Anything FAR is an accounting issue thus the responsibility of the financial/accounting department

    • FAR compliance is NOT just about accounting for unallowable costs or even accounting procedures

    • FAR compliance issues typically occur when principals or project managers propose and negotiate contracts that DO NOT reflect current firm policies

    • Firm policies MUST be communicated to the entire organization

    Risk assessment

    Risk Assessment

    The First Step

    Internal control questionnaire icq for consulting engineers

    Internal Control Questionnaire (ICQ) for Consulting Engineers

    • Great starting point for audit planning

    • Covers major areas of cost accumulation POLICY!

    • Identifies firm size

    • Identifies officers

    • Identifies owners

    • Identifies related parties

    • Information on financial management system

    • Labor costing method

    • Premium overtime

    • Contract labor

    Formal risk assessment

    Formal Risk Assessment

    • Fraud

    • Evaluate the controls over cash disbursements

    • Evaluate the controls over payroll (including time reporting)

    • Evaluate the controls over the computer systems

    • Consider fraud risk factors

    • Control environment (management attitude)

    • Control methods (policies and procedures)

    • Communications

    • Monitoring

    Accounting system

    Accounting System

    • Deltek Vision

    • Deltek (Axium) Ajera

    • BST

    • Clearview InFocus

    • BillQuick

    • Oracle

    • QuickBooks

    • Peachtree

    • Other

    Audit processes and sample sizes

    Audit Processes and Sample Sizes

    Where it all Comes Together



    Largest Cost and Least Documented

    Executive compensation

    Executive Compensation

    Key matrix points

    Key Matrix Points

    • Match executive job description and duties to position description in Matrix

    • Only one each Chairman, CEO and Executive Vice President are allowed

    • Multiple Senior Vice Presidents and Vice Presidents are allowed

    • Small firms must pay close attention to “duties” as opposed to title

    • Related parties must be evaluated

    The word on timesheets

    The Word on Timesheets

    They are very important!

    Risk assessment audit processes and sample sizes



    Must have a timekeeping system that identifies employees’ labor by intermediate and final cost objective

    System must charge direct and indirect labor to the appropriate cost objectives

    At least monthly posting to financial management system

    • EVERYONE must prepare a time sheet

    • Total hours MUST be reported

    • Time sheets must be approved by employee and supervisor

    This means

    This Means…

    • Firm must maintain a comprehensive accounting system.

    • Firm must prepare time (total hours).

    • Time sheets must be posted to job cost records.

    • Job cost records must be posted to the general ledger.

    • Time sheet changes must be approved by employee and supervisor

    What is really necessary1

    What is Really Necessary

    • A timesheet from each pay period

    • Selections MUST be traced from the timesheet to:

      • Payroll register (actual pay)

      • Personnel file (approved pay rate)

      • Job cost system

      • General ledger

    • Is every item on the timesheet necessary?

      • It depends on RISK ASSESSMENT

      • Over 60 individual time entries

    Do we have a problem

    Do We have a Problem?

    Indirect costs

    Indirect Costs

    FAR Knowledge is Critical



    • Materiality (Only for planning purposes)

      • Cost Certification

    • Use of sampling

    • Minimum sample size of 2 to 20 items

    • High risk accounts

    • Evil alcohol

    • No fun

    • Marketing (now we are talking about some dollars)



    Quality is not in Quantity

    Audit quality

    Audit Quality

    • Art not science

    • The CPAs understanding of industry accounting best practices is critical

    • Understanding of the accounting system set-up is critical

    • Understanding of the firm’s accounting policies is critical

    • Sample size……not so much

    T wayne owens associates pc

    T. Wayne Owens & Associates, PC

    Built for a e c

    [Built for A/E/C]

    We are a CPA firm that provides a full range of accounting and financial management solutions, including audits, FAR audits and tax services tailored for the design industry. Our services are specifically geared toward boosting the effectiveness, well-being and profitability of your A/E/C firm. Our relationship with you is the driver; consider us a partner on your success team, providing experienced guidance and advice for your situation and spotting opportunities to position your company for the future.



    T. Wayne Owens, CPA

    T. Wayne Owens & Associates, PC

    O: 678.325.1063

    C: 404.358.2390



    Sign up for the semi-regular newsletter on A/E firm management and government contracting at www.twocpa.com

  • Login