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COVERAGE OF INDEPENDENT AUDITS OF FOR-PROFIT FIRMS

By Ida Harper,2014-05-15 21:41
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COVERAGE OF INDEPENDENT AUDITS OF FOR-PROFIT FIRMS

COVERAGE OF INDEPENDENT AUDITS OF FOR-PROFIT FIRMS

    TABLE OF CONTENTS

Part 1. General Information

     What is the purpose of this document?

     Why does the Federal Government need an audit?

     Can the audit be integrated with the regular audit of

    a firm’s financial statements?

     What are the objectives of the audit?

     What is the source of the requirement for the audit?

     What should the IPA do if he or she finds that the

    Defense Contract Audit Agency is performing audits

    of the firm?

Part 2. Audit Objectives and Compliance Requirements

     A. Allowable Costs

     What is the objective of this portion of the audit?

     What standards or cost principles determine the costs

    that are allowable as charges to the award?

     What compliance requirements for the allowability of

    costs should the audit address?

     B. Cost Sharing

     What is the objective of this portion of the audit?

     What are the compliance requirements for cost sharing?

     C. Financial Reporting

     What are the objectives of this portion of the audit?

     What are the compliance requirements for financial

    reporting?

     D. Equipment and Real Property Management

     Is a review of a firm’s property management system

    usually required?

     What are the objectives of the review?

     What are the compliance requirements for Federally

    owned property and for equipment or real property

    purchased under DOE awards?

     E. Program Income

     Is an audit of program income usually required?

     What is program income?

     What is the objective of this portion of the audit?

     What are the applicable standards for program income?

    PART 1. GENERAL INFORMATION

What is the purpose of this document?

    This document provides guidance for an independent

    public accountant (IPA) who is asked by a for-profit

    firm to conduct an audit of its systems, due to the

    firm’s having received a technology investment

    agreement (TIA) from the Department of Energy (DOE).

Why does the Federal Government need an audit?

    Federal officials are accountable to the public for the

    resources provided to carry out Government programs.

    Financial auditing contributes to accountability by

    providing an independent assessment to assure that

    recipients are handling Government funds properly.

Can the audit be integrated with the regular audit of a

    firm’s financial statements?

    Yes, the intent is to cause the minimum possible

    disruption to the firm’s activities, so the IPA is

    encouraged to do the needed transaction sampling for

    DOE awards as part of the regularly scheduled audit of

    the firm’s financial statements. In some cases, it may

    be even more efficient and economical to separately

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audit the individual DOE awards, and the firm may elect

    to have the IPA do so.

    What are the objectives of the audit?

The auditor is to determine and report on whether:

    ? The firm has an internal control structure that

    provides reasonable assurance that it is managing

    DOE awards in compliance with the award terms and

    conditions, including applicable Federal laws and

    regulations.

    ? Based on a sampling of DOE award expenditures, the

    firm has complied with award terms and conditions,

    including applicable Federal laws and regulations,

    that may have a direct and material effect on DOE

    awards.

    What is the source of the requirement for the audit?

The source of the requirement stated in the award

    document stems from sections 603.640 through 603.660 of

    10 CFR part 603.

    What should the IPA do if he or she finds that the Defense

    Contract Audit Agency is performing audits of the firm?

The IPA should consult with officials of the firm to

    ensure that:

    ? DOE contracting officer was aware of the DCAA audit

    presence at the time they made awards; and

    ? The DOE agreement authorizes the IPA to perform the

    audit, rather than requiring that the DCAA do so.

    If the IPA is authorized to perform the audit, he

    or she must consider the nature, timing, and extent

    of his or her own auditing procedures, to avoid

    unnecessary duplication of the DCAA effort.

    PART 2. AUDIT OBJECTIVES AND COMPLIANCE

    REQUIREMENTS

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    A. ALLOWABLE COSTS

    What is the objective of this portion of the audit?

The objective is to determine, by testing a sample of

    transactions, whether the firm complied with the

    requirements concerning allowability of costs charged

    to DOE awards.

    What standards or cost principles determine the costs that

    are allowable as charges to the award?

Each technology investment agreement should specify the

    standards or cost principles that the for-profit firm

    is to use to determine the costs that it is allowed to

    charge to that award. While the TIA may specify use of

    the for-profit cost principles in the Federal

    Acquisition Regulation (FAR, at 48 CFR part 31), it

    could specify an alternative standard. The minimum

    standard in the latter case is that Federal funds and

    the firm’s cost sharing contributions will be used only

    for costs that a reasonable and prudent person would

    incur in carrying out the RD&D project contemplated by

    the agreement.

    What compliance requirements for allowability of costs

    should the audit address?

For a firm that is subject to the cost principles in

    the FAR, the IPA should determine and report on whether

    costs charged to DOE awards are in compliance with

    those cost principles and indirect cost rates are

    applied in accordance with approved rate agreements.

For a firm that is subject to alternative standards

    that may be used for a TIA, the IPA should determine

    and report on whether costs charged to the DOE awards

    are:

    ? Necessary and reasonable for the performance of the RD&D projects supported by the awards, or for related administration. Generally, elements of cost that appropriately are charged are those identified with RD&D and development activities under the Generally Accepted Accounting Principles (see Statement of Financial Accounting Standards Number 2, “Accounting for RD&D and Development Costs,” October 1974).

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    Allocable to the RD&D projects (i.e., costs are ? charged to DOE projects in a manner that is in

    accordance with the benefits the projects received).

    ? Given consistent treatment with costs allocated to

    the firm’s other RD&D and development activities

    (e.g., activities supported by the firm itself or by

    non-Federal sponsors).

    ? In conformance with any limitations in the award

    documents or regulations that they cite (e.g., any

    restrictions on types or amounts of costs, or

    requirements for prior approval of DOE contracting

    officer).

    ? Supported by appropriate documentation in the firm’s

    records. The documentation may be in electronic form.

    B. COST SHARING

    What is the objective of this portion of the audit?

The objective is to determine, by testing a sample of

    cost sharing contributions, whether the firm made the

    contributions that the agreements required.

    What are the compliance requirements for cost sharing?

     The provisions of the award documents will specify

    requirements for the firm’s cost sharing, which may be

    contributions of a specified amount or a percentage of

    total project costs. The cost sharing may be in the

    form of allowable costs incurred or in-kind

    contributions (including third-party in-kind

    contributions).

     The values of the firm’s contributions are determined in

    accordance with sections 603.530 through 603.555 of

    10 CFR part 603.

    C. FINANCIAL REPORTING

    What are the objectives of this portion of the audit?

The primary objective is to determine whether the

    firm’s financial reports for DOE awards:

    ? Fairly and completely represent the expenditures and

    status of resources for projects supported by those

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awards; and

    ? Are supported by applicable accounting records and the accounting basis used (e.g., cash or accrual).

    What are the compliance requirements for financial

    reporting?

The agreements will specify the frequency and content

    of business/financial reports. They may specify the

    use of standard financial forms or periodic reports

    that include information on both programmatic and

    business status.

Each financial report (and the business portion of any

    report that also has programmatic information) will

    contain at least summarized details on the status of

    resources (Federal funds and any non-Federal cost

    sharing that the agreements require), including an

    accounting of expenditures for the period covered by

    the report. The report should compare the resource

    status with any payment and expenditure schedules or

    plans provided in the original award; explain any major

    deviations from these schedules; and discuss actions

    that will be taken to address the deviations.

    D. EQUIPMENT AND REAL PROPERTY MANAGEMENT

    Is a review of a firm’s property management system usually

    required?

No, the IPA needs to review the property management

    system only if:

    ? There is Federally owned property associated with the award; or

    ? The firm charged the full purchase price of any equipment or real property as project costs (i.e., to Federal funds or the firm’s funds that are counted toward required cost sharing); and

    ? The award under which the property was purchased provides for a continuing Federal interest in the property.

Note that the IPA generally will not need to review the

    property management system because most DOE awards will

    not have Federally owned property associated with them

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    and will allow the firm to charge to the project only

    depreciation or use charges for real property or

    equipment.

What are the objectives of the review?

    The objectives are to determine whether the firm:

    ? Obtained the necessary prior approval for the

    equipment or real property purchase from the

    contracting officer.

    ? Keeps proper records for equipment and adequately

    safeguards and maintains equipment.

    ? Handles disposition or encumbrance of equipment or

    real property acquired under DOE awards in accordance

    with the applicable requirements.

What are the compliance requirements for Federally owned

    property and for equipment or real property purchased under

    DOE awards?

    To protect the Federal interest in property, the DOE

    Assistance Regulations include standards for the firm’s

    property management, use, and disposition, as shown in

    this table:

If the property is . . . Then the property management standards for the for-profit firm are in . . .

    Real property or Section 603.685 of 10 CFR part 603.

    equipment purchased

    under a TIA,

    Federally owned Section 603.690 of 10 CFR part 603.

    property,

    Note that a for-profit firm may include the full

    acquisition cost of real property or equipment as a

    charge to the project only with the prior approval of

    the contracting officer. The title to the real

    property or equipment vests conditionally in the for-

    profit firm upon acquisition, and there is a continuing

    Federal interest in the property unless a contracting

    office has statutory authority to do otherwise and

    elects to use that authority for a particular award.

    The Federal Government recovers its interest in the

    property through the disposition process at the

    project’s end.

    E. PROGRAM INCOME

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     Is an audit of program income usually required?

    No, most awards will not involve any program income.

What is program income?

    Program income is gross income earned by the recipient

    that is generated by a supported activity or earned as

    a result of the award. For example, if the purpose of

    an award is to support the firm’s delivery of services

    and the firm collects fees for doing so, those fees are

    program income. As another example, if samples of

    materials or biological specimens are generated as a

    result of a supported RD&D effort, and the firm sells

    samples to other RD&D organizations, the proceeds of

    those sales would be program income. If authorized by

    the terms and conditions of the award costs incident to

    the generation of program income may be deducted from

    gross income to determine program income, provided

    these costs have not been charged to the award.

What is the objective of this portion of the audit?

    The objective is to determine whether program income is

    correctly recorded and used in accordance with the

    award terms and applicable standards.

What are the applicable standards for program income?

    The standards for program income are in section 603.835

    of 10 CFR part 603.

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