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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.

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Risk assessment audit processes and sample sizes

Risk Assessment, Audit Processes and Sample Sizes

It’s Really Just Auditing…..But


Agenda
Agenda

  • 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)

Accrual

Profit = Revenue – Direct Costs – Overhead

Meter

Project Costs

Adjustments

WIP

Personnel

Write-offs

Invoice

Expenses

A/R

Cash Flow = Cash In – Cash Out

Collection

Pay to

Equipment Usage

$

Payroll

$

Cash in the Bank

Cash

$

Accounts Payable

Meter


What is overhead

Cost Element

Direct

OH

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?


Answer
Answer

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 Engineers

    • 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 Engineers

    • Deltek Vision

    • Deltek (Axium) Ajera

    • BST

    • Clearview InFocus

    • BillQuick

    • Oracle

    • QuickBooks

    • Peachtree

    • Other


    Audit processes and sample sizes

    Audit Processes and Sample Sizes Engineers

    Where it all Comes Together


    Labor

    Labor Engineers

    Largest Cost and Least Documented



    Key matrix points
    Key Matrix Points Engineers

    • 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 Engineers

    They are very important!


    Individuals Engineers

    Firm

    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… Engineers

    • 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 Engineers

    • 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



    Indirect costs

    Indirect Costs Engineers

    FAR Knowledge is Critical


    Guidelines
    Guidelines Engineers

    • 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)


    Conclusion

    Conclusion Engineers

    Quality is not in Quantity


    Audit quality
    Audit Quality Engineers

    • 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



    Built for a e c
    [ EngineersBuilt 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.


    Questions
    Questions Engineers

    T. Wayne Owens, CPA

    T. Wayne Owens & Associates, PC

    O: 678.325.1063

    C: 404.358.2390

    [email protected]

    www.twocpa.com

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


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