1. Risk Assessment, Audit Processes and Sample Sizes
It’s Really Just Auditing…..But

2. Agenda What is Really Necessary? Risk Assessment
Audit Processes and Sample Size
Labor
Indirect Costs
Guidelines
Conclusion

3. What is Really Necessary?
It’s Not Just About Auditing

4. 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

5. 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.

6. Two Sets of Books? Profit = Revenue – Direct Costs – Overhead
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
Equipment Usage
Pay to $
Payroll
Value Added (Pricing) $
Cash
Cash in the Bank $
Meter
Accounts Payable 6

7. What is “Overhead”?
Which of these cost elements should legitimately be charged directly to jobs and which to overhead?
Use of CAD equipment on a project
Use of a pencil to write the final report
Personal vehicle used on project
Company vehicle used on project
Time spent by accounting to prepare an invoice
Use of equipment on a project
Time spent preparing a proposal
Overtime premium on a project OH
Direct
Cost Element

8. Answer
It Depends

9. 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

10. 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

11. 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)

12. The Golden Rules of Accounting Policies
Accumulate costs according to policy
Bill according to contract

13. 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

14. Risk Assessment
The First Step

15. 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

16. 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

17. Accounting System Deltek Vision Deltek (Axium) Ajera BST
Clearview InFocus
BillQuick
Oracle
QuickBooks
Peachtree
Other

18. Audit Processes and Sample Sizes
Where it all Comes Together

19. Largest Cost and Least Documented
Labor
Largest Cost and Least Documented

20. Executive Compensation

21. 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

22. They are very important!
The Word on Timesheets
They are very important!

23. Time sheets must be approved by employee and supervisor
Individuals
Firm
EVERYONE must prepare a time sheet
Total hours MUST be reported
Time sheets must be approved by employee and supervisor
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

24. 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

25. 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

26. Do We have a Problem?

27. FAR Knowledge is Critical
Indirect Costs
FAR Knowledge is Critical

28. Guidelines Materiality (Only for planning purposes) Use of sampling
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)

29. Quality is not in Quantity
Conclusion
Quality is not in Quantity

30. 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

31. T. Wayne Owens & Associates, PC

32. [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.

33. Questions
T. Wayne Owens, CPA T. Wayne Owens & Associates, PC O: C: Sign up for the semi-regular newsletter on A/E firm management and government contracting at