Learn How to Prepare and Survive
a DCAA Audit
By James Scott, Jr., CPA
PENAN & SCOTT, P.C.
Rockville, MD
1. Who is DCAA “The Auditor”
•  DCAA was established in 1965 by
transferring the existing contract audit
functions from each of the military services
into a single contract audit agency.
•  It was established to perform contract
audits for all DOD Components.
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2. DCAA Mission
•  The DCAA Charter (DOD Directive
5105.36) states –
–  To serve the public interest as its primary
customer,
–  To perform all necessary contract audits for
Department of Defense
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–  To provide accounting and financial advisory
services regarding contracts and subcontracts
to all DOD components responsible for
procurements and contract administration
–  To ensure taxpayer dollars are spent on fair
and reasonable contract prices.
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3. Typical Audits by DCAA
Before contract award
•  Preaward accounting system survey
•  Financial capability determination
•  Evaluate contractor’s estimating system
•  Evaluate contractor’s initial price proposal
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After contract award
•  Audit postaward accounting system
•  Audit contractor’s incurred cost (our focus)
•  Annual submission of actual cost on
contracts
•  Process Contractor’s public vouchers and
conduct payment reviews
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Other duties of DCAA
•  Review contractor’s compliance with Cost
Accounting Standards (applies to large
contractors)
•  Audit Claims
•  Perform Defective pricing reviews under
Truth-In Negotiations Act
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4. What is a incurred cost submission
•  Incurred Cost Submissions are required
for all cost reimbursements and flexibly
priced contracts. Timely submittals are
required to stay on direct billing. Use
DCAA ICE model (www.dcaa.mil)
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•  FAR 52.216-7 states the contractor shall
submit a final Indirect Cost Rate Proposal/
Incurred Cost Submission to the
contracting officer (or cognizant federal
agency) within six months of each fiscal
year.
•  Timely submittals are required to stay on
direct billing
•  Use DCAA ICE Model (www.dcaa.ml)
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5. Audit
•  The audit of the Incurred Cost Submission
is normally initiated by the government
without a request from a contract officer.
•  This is different than a price proposal audit
which is normally initiated by a contracting
officer.
•  The audits are normally scheduled based
on the receipt or expected receipt of a
contractors Incurred Cost Submission.
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•  At any time before payment, the
Contracting Officer may have the
Contractor's invoices, or vouchers and
statements of cost, audited. Any payment
may be reduced by amounts found not to
constitute allowable cost, or adjusted for
prior overpayments.
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•  DCAA management policies and
procedures require the Audit Offices to
account for audits not completed and not
started.
•  DCAA generally has one year after receipt
of a complete submission to complete the
audit. (Does not always happen and
sometimes takes longer.)
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•  The model Incurred Cost Submission suggested by
DCAA includes 32 schedules. It can be found at DCAA's
website (www.dcaa.mil). Click on "Incurred Cost
Electronically (ICE)". You will be able to access the ICE
model and Chapter 6 of the DCAA Publication
"Information for Contractors". Chapter 6 will provide the
latest list of information DCAA is looking for as part of
this submission. If a schedule is not applicable, add it
and mark it "Not Applicable". This will avoid a letter
requesting the missing information.
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Schedules typically requested are:
•  Schedule A ~ Summary of Claimed Indirect Rates
•  Schedule B ~ Schedule of General & Administrative
Expenses (Final Indirect Cost Pool)
•  Schedule C ~ Schedule of Overhead Expenses (Final
Indirect Cost Pool)
•  Schedule D ~ Intermediate Cost Indirect Expense Pool
(s)
•  Schedule E ~ Schedule of Bases Used to Allocate
Indirect Expenses (Claimed Allocation Bases)
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•  Schedule F ~ Computation of Facilities Capital Cost of
Money Factors
•  Schedule G ~ Reconciliation of Cost Booked to Cost
Claimed (Direct)
•  Schedule H ~ Schedule of Direct Costs by Contract/
Subcontract and
•  Indirect Expenses Applied at Claimed Rate
•  Schedule H1 ~ Schedule of Government Participation in
Indirect Expense Pools
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•  Schedule I ~ Reconciliation of Cumulative Direct &
Indirect Cost Claimed and Billed
•  Schedule J ~ Subcontract Information
•  Schedule K ~ Summary of Hours and Amounts on T&M/
Labor Hour Contracts by Task Order
•  Schedule L ~ Reconciliation of Total Payroll Included in
the Overhead Submission to Quarterly Form 941's to
Total Labor Distribution
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•  Schedule M ~ Schedule of Decisions/Agreements/
Approvals and Description of Accounting Changes and
Organizational Changes
•  Schedule N ~ Certificate of Final Indirect Costs
•  Schedule O ~ Contract Closing Information for
Contracts Completed in this Fiscal Year. (Include all
contracts.)
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Additional schedules and attachments
required:
•  Attachment 1 ~ Comparative Analysis of Indirect
Expenses by Account with the Prior Year
•  Attachment 2 ~ Executive Compensation for Five
Top Executives
•  Attachment 3 ~ List of ACO's and PCO's for Each
Flexibly Priced Contract
•  Attachment 4 ~ Information on Prime Contracts Under
Which Effort is Performed as a Subcontractor
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• 
Attachment 5 ~ List of Work Sites and Number of
Employees Assigned to Each Site (Floor check performed.)
•  Attachment 6 ~ Description of the Accounting System
•  Attachment 7 ~ Procedures for Identifying and
Recording Unallowable Costs
•  Attachment 8 ~ Copies of Certified or Other Financial
Statements (Do not need an audited F/S.)
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• 
Attachment 9 ~ Management Letter from Outside
CPA's Concerning Internal Control Weaknesses (If no
audit, then N/A.)
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Attachment 10 ~ Corrective Actions Implemented or To
Be Implemented to Correct Internal Control Weaknesses
•  Attachment 11 ~ Listing of Internal Audit Reports
Issued During the Year
•  Attachment 12 ~ Listing of Scheduled Internal Audits
for the Year
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• 
Attachment 13 ~ Copies of Federal and State Income
Tax Returns
•  Attachment 14 ~ SEC 10-K Report (Public Companies)
•  Attachment 15 ~ Minutes of Board of Directors Meeting
(Protected information could include date of meetings - upon
request only)
• 
Attachment 16 ~ List of Delay, Disruption and
Termination Claims Which Contain Costs Relating to this
Year
•  Attachment 17 ~ Contract Briefs
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6. Accounting for Unallowable Cost
(FAR 31.205)
•  Unallowable cost must be separately
accounted for, excluded from billings,
claims and proposals.
•  Unallowable cost also include any cost
generated solely as a result of incurring
another cost which would not have been
incurred had the cost not been incurred.
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Example:
a)  Entertainment and travel to entertainment, meals at
event
b)  Advertising and public relations, promotional materials,
souvenirs
c)  Bad debts, collections fees and associated costs
d)  Contingencies – indeterminable future events
e)  Contributions or donations regardless of the recipient or
form of donation
f)  Entertainment
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g)  Fines and penalties resulting from violations of Federal,
state, local or foreign laws
h)  Interest – all is unallowable
i)  Lobbying and political activity cost
j)  Losses on other contracts
k)  Organization cost – includes initial organization cost,
reorganization, merger acquisition (includes attorney,
accountant and brokers cost)
l)  Goodwill
m)  Alcoholic beverages
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•  Failure to exclude unallowable cost will
result in penalties based on the amount of
cost. The penalty can be as high as 300%
of the amount of unallowable cost.
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•  Once the contractor is notified of the
beginning of the audit, the submission is
subject to penalties. After that any
changes to the submission to remove
previously submitted unallowable cost will
be subject to penalties. Prior to the
beginning of the audit process, contractor
can adjust to remove unallowable cost and
avoid the penalties.
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7. Items to have ready for the audit:
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General Ledger
Chart of Accounts
Income Tax Returns
Detail General Ledger
including labor distribution
records, time sheets, etc.
•  Original Source Documents
for all transactions such as
vendor invoices
•  Job Cost Records, Ledgers
and Cost Reports
•  Payroll Records
•  Billing records by contract
•  Company Policy and
Procedures Manual
•  Any other documents to be
considered during the audit
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Questions and Discussions…
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