DoD Defense Contract Audit Agency
“DCAA Audits; Types and Purposes”
EXCERPTS – DCAA Contract Audit Manual
NISH East NCWC Conference
EXCERPTS – DCAA Contract Audit Manual
Website Access: http://www.dcaa.mil/cam.htm
1-000 Introduction To Contract Audit
1-001 Scope of Chapter
This chapter introduces the chapters and appendixes which follow. It provides
information on the contract audit mission; responsibilities of DCAA and the contract
auditor; and the relationships of DCAA to other Department of Defense components,
other Government agencies, and contractors.
1-100 Section 1 --- Establishment and Responsibilities of DCAA
This section describes the establishment, responsibilities, and inter-organizational
relationship of DCAA.
1-102 Establishment and Responsibilities
a. The Defense Contract Audit Agency was established by a directive of the
Department of Defense for the purpose of performing all contract auditing for the
Department of Defense (DoD) and providing accounting and financial advisory services,
in connection with the negotiation, administration and settlement of contracts and
subcontracts, to all DoD procurement and contract administration activities. DCAA also
furnishes contract audit service to other Government agencies (see 1-302b.).
b. The role of the auditor is advisory, except that on cost-type contracts the
auditor is required to comply with specific contract provisions. Procedures for such
compliance are discussed in Chapter 6.
c. Although the detection of fraud or similar unlawful activity is not the
primaryfunction of contract audit, the auditor has a responsibility to plan and perform the
audit to obtain reasonable assurance about whether the contractor submissions and
supporting data are free of material misstatement, whether caused by error or by fraud.
When fraud or similar unlawful activity is suspected, the auditor shall be guided by 4-
1-103 Relationship --- DCAA and the Office of the Secretary of Defense
DCAA is a separate agency of the Department of Defense under the direction,
authority, and control of the Under Secretary of Defense (Comptroller). Supplement 1-
1S1 contains the Agency charter, DoD Directive 5105.36.
1-104 Nature of Contract Auditing
The following paragraphs state the objective of contract auditing and in broad terms
how the objective is accomplished.
1-104.2 Contract Audit Objective
a. The purpose of contract auditing is to assist in achieving prudent contracting by
providing those responsible for Government procurement with financial information and
advice relating to contractual matters and the effectiveness, efficiency, and economy of
contractors' operations. Contract audit activities include providing
professional advice on accounting and financial matters to assist in the negotiation,
award, administration, repricing and settlement of contracts. Audit interest encompasses
the totality of the contractor's operations. Audits are performed to assure the existence of
adequate controls which will prevent or avoid wasteful, careless, and inefficient practices
by contractors. These audits include the evaluation of a contractor's policies, procedures,
controls and actual performance, identifying and evaluating all activities which contribute
to, or have an impact on, proposed or incurred costs of Government contracts. Areas of
concern to the auditor include the adequacy of contractor's policies, procedures, practices,
and internal controls relating to accounting, estimating, and procurement; the evaluation
of contractors' management policies and decisions affecting costs; the accuracy and
reasonableness of contractors' cost representations; the adequacy and reliability of
contractors' records for Government-owned property; the financial capabilities of the
contractor; and the appropriateness of contractual provisions having accounting or
financial significance. Contract auditors perform evaluations of contractors' statements of
costs to be incurred (cost estimates) or statements of cost actually incurred to the extent
deemed appropriate by the auditors in the light of their experience with the contractors
and relying upon their appraisals of the effectiveness of the contractors' policies,
procedures, controls, and practices. Such evaluations may consist of test checks of a
limited number of transactions or in-depth examinations at the discretion of the auditor.
b. To accomplish the objective of contract auditing, the auditor must examine or
develop sufficient evidence to support a valid opinion of the extent to which costs or
estimates contained in a contractor's claim or proposal are:
(1) reasonable as to nature and amount,
(2) allocable, and measurable by the application of duly promulgated cost
(3) generally accepted accounting principles and practices appropriate to the
particular circumstances; and
(4) in accordance with applicable cost limitations or exclusions as stated in the
contract or in FAR. The auditor will find it extremely useful at the onset of the
examination, in planning the audit program and approach to review the contractor's
accounting nomenclature, chart of accounts, accounting manuals and financial
statements. It should, however, be recognized that professional opinions and conclusions
on the acceptability of contract costs must be based on the auditor's knowledge of the
contractor's classification practices and the actual nature of the expenditures charged to
the various accounts and classifications. This knowledge is best gained by selective
testing of transactions recorded in the various accounts.
c. The auditor should at all times be alert to any matters that may affect the
Government's prudent and efficient management of its procurement program. When the
auditor becomes aware of the need for improved Government practices, the appropriate
office should be advised and, to the maximum extent feasible, the corrective measures
should be recommended in the audit report.
d. In performing normal auditing procedures in connection with an examination,
auditors should be alert for indications of excessive contract prices or profits and for
evidence of overcharges or inadequate compensation to the Government. If the auditor
finds an indication of such a condition, he or she should discuss it with the supervisor to
decide whether further evaluation is warranted and whether the condition is
properlyreportable as one involving:
(1) suspected fraud or other similar irregularities (4-700);
(2) defective pricing (14-100); or
(3) solicitation of a voluntary refund (4-800). Guidance for determining which of
the above reporting procedures should be used is contained in the referenced paragraphs.
If the condition is not reportable under the
foregoing guidance, a report stating the pertinent facts should nevertheless be submitted
to Headquarters, DCAA, Attention: Deputy Assistant Director, Operations.
e. FAR 15.408(b) prescribes the insertion of a "defective pricing" clause (FAR
52.21510) which accords the Government a contractual basis for reducing the contract
price under certain conditions. When, after contract execution, it is learned that the
contract price was negotiated on the basis of cost or pricing data furnished by the
contractor that was incomplete, inaccurate or not current, the contracting officer may
reduce the contract price. Guidance concerning the auditor's role in this area is stated in
f. FAR 52.230-2 prescribes the insertion into contracts and subcontracts of a "cost
accounting standards" clause which requires certain contractors or subcontractors to
disclose in writing their cost accounting practices, to follow the disclosed practices
consistently, to comply with duly promulgated cost accounting standards, and to agree to
contract price adjustment for any increased cost to the Government as a result of the
contractor's failure to comply with applicable cost accounting standards. Guidance
concerning the auditor's role with respect to cost accounting standards is stated in Chapter
g. FAR 16.102(c) provides that the cost-plus-a-percentage-of-cost system of
contracting shall not be used by the Government for any prime contract; or allowed to be
used in any chain of cost or redeterminable subcontracts, unbroken by a firm-fixed price
subcontract. If such a contract or subcontract is encountered, the entire cost, including the
amount representing the percentage added, will be disapproved under cost-type contracts
and recommended for non acceptance under fixed-price redeterminable contracts.
1-500 Section 5 --- Relationship with Contractors
Requirements for specific audit conferences with contractors are stated in 4-300. This
section covers other aspects of the relationships between DCAA and contractors.
1-503 Notification of Visits to Contractor Facilities
1-503.1 Security Requirements and Procedures
a. Section 3-101d of the DoD Industrial Security Regulation (DoD 5220.22R) and
Chapter 6 of the DoD Industrial Security Manual for Safeguarding Classified Information
(DoD 5220.22M) require that the contractor be given advance notice in writing when
access to classified information held by the contractor is involved. The manual requires
such notification to include:
The name and title of person(s) to be visited.
The name, title, date and place of birth, citizenship, and security clearance status of
the DCAA representative(s).
The purpose of and justification for the visit, including identification of related
program(s) or contract(s) and classified information to which access is required, if
The date of the proposed visit or period during which the notice is to be valid. It is
DCAA policy to also include the following information:
DCAA identification number (auditor credential card number or equivalent).
Visitor Category (the Industrial Security Manual designates category 1 for U.S.
When a visit will require access to classified matter held by the contractor and/or
access to a secured contractor plant, DCAA Form 5220-1 will be used to notify
contractors of planned visits. This form will also be used for DCAA personnel
permanently located at contractor facilities (such as those assigned to resident offices and
suboffices) and for those visiting contractors on a regular basis (such as regional audit
managers and members of regional audit teams). Notification in these cases will normally
consist of blanket notices submitted on an annual basis. A copy of each notification sent
to the contractor will be forwarded to the cognizant contract administration office.
DCAA personnel will inform their security officer of planned visits to contractor
facilities in sufficient time to enable timely notification.
1-503.2 Required Notification to Contract Administration Offices and Courtesy
Notice to Contractors
a. Whether or not access to classified matter or secured area(s) is required, to
preclude duplicate demands on the contractor, prospective visitors to contractor facilities
are to provide information concerning the visit to the cognizant Contract Administration
Office (CAO) sufficiently in advance and in adequate detail so as to permit the CAO to
advise the visitors in the event information related to the contract administration
functions currently exists that may satisfy the stated purpose of the visit (FAR 42.101(a)
and 42.402(a) and (b)). The visitor will make a courtesy telephone call to inform the
contractor and make appropriate arrangements if a planned visit will involve contractor
personnel. If desired, the visitor may send a letter to confirm arrangements made. Such a
letter will not substitute for any notification required by 1-503.1.
b. If a planned visit will involve contract administration personnel, make advance
arrangements comparable to those for contractors as stated in a above.
1-504 Access to Records of Contractor
a. Statutes, implementing regulations, or contract terms may provide access to
contractors' records for purpose of audit (1-504.2). The clause at FAR 52.215-2 provides
the auditor's primary authority for access to contractor records. This clause must be
inserted in all negotiated contracts, except those (1) not exceeding the simplified
acquisition threshold; (2) for commercial items; or (3) for utility services. (See FAR
15.209(b)). This clause provides the contracting officer's representative with the authority
to examine and audit contractors' books, records, documents and other evidence and
accounting procedures and practices, regardless of form (e.g., machine readable media
such as disk, tape, etc.) or type (e.g., data bases, application software, data base
management software, utilities, etc.), sufficient to reflect properly all costs claimed to
have been incurred or anticipated to be incurred in performing cost-reimbursement,
incentive, time-and-material, labor-hour, or price-redeterminable contracts. The clause
also provides access rights for the purpose of evaluating the accuracy, completeness, and
currentness of cost or pricing data.
b. In addition to access to specific cost records, access to records refers to
contractor policies, procedures, systems, management reports, personnel, minutes of its
board of directors meetings, charter and bylaws, and any other information source which
affects and reflects the incurrence, control, and allocation of costs to contracts.
c. Adequate audits are possible only when all existing evidence which pertains to
the representations, claims, or proposals under audit is available to the auditor. A
contractor's failure to make all pertinent records available to the auditor when needed
leads to audit reports that contain qualified or adverse opinions, and may result in more
difficult negotiations and delay in the contract award or settlement.
d. For field pricing support audits, FAR 15.404-2(c)(3) states that the auditor is
responsible for determining the scope and depth of audit. Inherent in this responsibility is
the right of auditors to determine the specific records or other evidential matter needed to
accomplish the audit. DCAA auditors must adhere to generally accepted Government
auditing standards in determining what comprises competent, relevant, and sufficient
evidential matter. Therefore, auditors must use good judgment and rationale in deciding
what contractor records or other evidential matter should be sought. In determining the
sufficiency of evidence needed, auditors must consider the audit objective, the risk, and
materiality of an error or misstatement in the area being audited and the effect on the
audit opinion. See 5-502.1 for additional guidance on access to contractor budgets and
14-305.2 on access to cash flow forecasts.
e. FAOs should not enter into written agreements with contractors, or concur with
contractor letters, containing access to records provisions or procedures. Any such
written agreements may give the appearance of limiting access. However, responses to
contractor requests for written confirmation that proprietary data will be protected in
accordance with applicable laws and regulations are permissible. See 1-805 for guidance
on memorandums of agreement pertaining to matters other than access to contractor
f. While FAOs will not sign agreements, letters or procedures indicating
concurrence on access to records matters, they will obtain and review any such
documents containing contractor procedures or policies. If the FAO believes the policies
and procedures will invoke unreasonable delays, waste audit time or otherwise impede
the orderly process of the audit, the contractor should be notified in writing of such
concerns in accordance with procedures in 1-504.4, and 1-504.5. If no such concerns
exist, the FAO should follow contractor procedural arrangements for obtaining access to
g. Agreements between a contracting officer and a contractor which appear to
restrict DCAA's access to a contractor's records should be transmitted through
Headquarters, ATTN: PAS, to the General Counsel for a legal analysis.
1-504.2 Statutory and Regulatory Requirements
Among statutory bases for access to contractor records are 10 U.S.C. 2313(a),
"Examination of Records of Contractor," 10 U.S.C. 2306a, ("Truth in Negotiations"), and
41 U.S.C. 422(k) (Cost Accounting Standards). The following acquisition regulations
have implemented these statutory and other access requirements:
a. FAR 15.209(b)(1) requires an "Audit - Negotiation" clause (FAR 52.215-2) in
all negotiated contracts other than those which are not expected to exceed $100,000.
b. FAR 15.408 Table 15-2, Instructions for Submission of a Contract Pricing
c. FAR 52.215-20 and 52.215-21 (Requirements for Cost or Pricing Data or
Information Other Than Cost or Pricing Data).
d. FAR 52.230-2 and 52.230-3 (Cost Accounting Standards).
e. FAR 52.216-4 (Economic Price Adjustment - Labor and Material).
f. FAR 52.232-16 (Progress Payments).
1-504.3 Guidance for Requesting Access to Contractor Records
a. Records should first be verbally requested during the FAO's normal course of
business with the contractor. The auditor should be ready to discuss the basis for the
request with the contractor. CAM or other Agency guidelines should not be cited as the
reason for requesting a record in lieu of explaining the underlying audit need.
b. Occasionally contractors may ask that requests for records be in writing.
Auditors should generally accommodate the contractor where it will facilitate access and
avoid misunderstanding. However, contractor requirements that all requests for records
be in writing are unacceptable as such a process would unnecessarily impede the audit
c. All requests should be for specific records rather than a general class of records.
For example, requests should be for "the general ledger for FY 2000," or "the payroll
register for the pay period ending July 4, 2000" rather than "the general ledger," or
"payroll data." Addressing specific records relates the request to a specific audit. This
action should avoid lengthy discussion with the contractor on the merits of the request.
d. When the auditor does not know precisely what records exist, a listing of what
does exist (such as "recurring financial reports" or "IT files") should be requested. The
listing itself may be considered a record, particularly if the contractor already produces
such a list for other purposes.
e. Unusual or extensive requests for reproduction of contractor records should be
made by supervisors and be in writing if requested by the contractor.
f. When original records or documents are provided by the contractor, auditors
will ensure that all such records and documents are returned to the contractor as soon as
g. Circumstances justifying an evaluation of original records at locations other
than contractor facilities include records seized by investigators under a warrant or
obtained by Government counsel through criminal, investigatory, or civil subpoena.
DCAA has the right to evaluate any records in the hands of Government agents.
Regardless of the circumstance under which the auditor obtains access to contractor
records, due professional care will be exercised in protecting the records while in the
h. Auditors will not remove original records from the locations at which they are
furnished without prior Agency approval. Auditors who might be confronted with an
unusual circumstance and need to move the contractor’s original records from the
location at which they are furnished will request their regional office to obtain the
contractor’s authorization. Auditors will fully explain in their request the reasons the
contractor’s original records cannot be used at its site. Regional offices will submit their
approved auditors’ requests to Headquarters, attention: PAS, for evaluation and
coordination with legal counsel.
i. Auditors should not request copies of contractor records for the sole purpose of
allowing the auditor to work at home rather than at the contractor’s site. Auditors who
might be confronted with an unusual circumstance related to working at home, and need
to obtain and remove a copy (total or a portion) of the contractor’s original records from
the location at which they are furnished will request the FAO manager’s written request
to obtain and document the contractor’s authorization. Auditors will fully explain in their
request the reasons the records cannot be used at the contractor’s site and why a copy is
needed. Contractors who encourage auditors to take copies of records from their premises
rather than work onsite should not be accommodated without good cause. Auditors may
continue to request copies of selected records which are necessary to document audit files
and support audit positions. See 1-507 guidelines for safeguarding contractor
1-504.4 Conditions Representing Denial of Access to Contractor Records
The following conditions qualify as access to records problems where a specific record
is needed within these general areas:
a. Contractor refusal to provide access to any requested record including (i)
support for unclaimed costs excluded under CAS 405 or (ii) records maintained in an
electronic or optical format (even if paper copies are available).
b. Unreasonable delays by contractor representatives in permitting the audit
commencement or in providing access to needed data or personnel. Since the
determination of unreasonable delay is subjective, it is important to distinguish between
occasional delays due to unexpected circumstances (for example, a key employee is out
sick) and recurring delays which suggest that it is a contractor's practice to engage in
delaying tactics. Recurring delays should be carefully documented with the names of
contractor employees, data requested, dates when requested, dates when provided, etc.
c. Restrictions on reproduction of necessary supporting evidential matter.
d. Partial or complete denial of access to internal audit data or other management
reports on contractor operations.
e. Denial of access to the contractor's data base. This denial can be a refusal to
produce the necessary reports, or allow DCAA to validate reports by testing the database
using DATATRAK, or other data retrieval software.
f. Chronic failure of contractor personnel to comply with agreed-to dates for
g. Assertion of attorney-client privilege or attorney work product rule. The auditor
is not in a position to accept a claim of attorney-client privilege or the work product rule.
Therefore, auditors should request that Headquarters, Policy and Plans obtain a legal
opinion from DCAA counsel when a claim of privilege is made.
1-504.5 Resolution of Contractor Denials
a. When contractor personnel deny or unreasonably delay access to records
needed for audit, auditors should immediately notify and thoroughly discuss the issue
with responsible contractor officials authorized to make decisions. Reasonable effort
should be made to resolve the issue in a timely manner at the lowest possible DCAA and
contractor management level. If access is denied following the initial conference with the
contractor, the auditor should follow the procedures cited in DCAA Instruction No.
b. When implementation of DCAA Instruction No 7640.17 does not resolve
contractor denial of access to records, then the regional office should consider requesting
Headquarters to subpoena the records in accordance with DCAA Regulation No. 5500.5.
The DCAA Director is authorized to subpoena contractor documents and records needed
to audit costs incurred under flexibly priced Government contracts and subcontracts, and
to audit the accuracy, completeness, and currentness of cost or pricing data used for
negotiated Government contracts and subcontracts.
1-504.6 Impact of Contractor Denial of Access
a. When the contractor denies the auditor access to records/data, the costs affected
by the denial should be questioned under price proposals. Such costs should also be
questioned on progress payments and suspended under cost-reimbursement contracts per
6-902a. A contractor's denial of access to records may be so extensive that it is
impractical to perform any audit or determine an amount affected by the denial. In such a
case, immediately notify all procurement and contract administration activities that may
be involved with the subject audit and request their assistance. In addition, the auditor
should recommend suspension of payments on all affected contracts until the access to
records problem is resolved.
b. The impact of a contractor's denial of access to records on the scope of audit
should be described in the "Qualifications" and "Results of Audit" paragraphs of the audit
report. The report should identify the records that were sought, discuss the need for the
records, and describe the measures that were taken to gain access (see 10-210.4).
1-505 Other Access to Records Issues -- Transfer of Records from Hard Copy
to Computer Medium
a. FAR 4.703(d), which was effective February 27, 1995, and Public Law 103-355
allow contractors to retain records in any medium or any combination of media if the
following requirements are met:
(1) The requirements of FAR Subpart 4.7 are satisfied.
(2) The process used to create and store records must reproduce the original
document, including signatures and other written or graphic images, completely,
accurately, and clearly.
(3) The procedures for data transfer, storage, and retrieval protect the original data
b. To comply with FAR 4.703(d), a contractor's system of transferring records
from hard copy to computer medium should contain the following elements:
(1) A reliable computer medium (typically, this includes vendor supported
(2) Documented procedures for data retention and transfer which provide
reasonable assurance that the integrity, reliability, and security of the original hard copy
data will be maintained.
(3) An audit trail describing the data transfer.
(4) A computer medium which cannot be destroyed, discarded, or written over.
The contractor will need to consider appropriate transition, after exception reporting, to
(5) A transfer process that includes all relevant notes, worksheets, and other
papers necessary for reconstructing or understanding the records (this also includes
appropriate back-up procedures).
(6) Adequate internal control systems, including segregation of duties,
particularly between those responsible for maintaining the general ledger (and related sub
ledgers) and those responsible for the transfer process.
(7) A procedure prohibiting record destruction during the implementation phase
until it can be shown that the system is actually providing acceptable copies of the
records being transferred.
(8) An acceptable system of continuing surveillance over the computer medium
transfer system. This includes comparisons of the original records and the computer
generated copies, as well as periodic internal control audits. The policies and procedures
should provide for the maintenance of adequate evidence to support the nature and extent
of the continuing surveillance.
(9) A requirement to maintain all original records for a minimum of one year after
the date of transfer.
(10) Adequate procedures for periodic internal and external audit.
(11) Adequate procedures for labeling and storing the computer medium in a
secured environment. The storage procedures should meet the minimum standards
prescribed by the National Archives and Records Administration for maintenance and
storage of electronic records.
(12) Adequate procedures for the random sampling and testing of all records
retained in accordance with the requirements of the National Archives and Records
Administration. Procedures should include provisions for notifying the contracting officer
of any significant data losses on a timely basis.
(13) Procedures for retrieving retained records at the time of audit. Procedures
should include provisions for printing a hardcopy of any record. In addition, policies
should include provisions for access by Government representatives, at the time of
examination, to the necessary computer resources (terminal access, printer, etc.) that are
necessary for the production of the retained records.
(14) Procedures for preventing the destruction of any hard copy records that are
required to be maintained by existing laws or regulations.
1-506 Other Access to Records Issues -- Records Destroyed or Not in Condition
a. When the contractor's records are inadequate, not current, or otherwise not in
condition for audit, immediately bring the deficiency to the contractor's attention. If
corrective action is not instituted promptly, notify the regional office, the requesting
procurement activity, and other Government offices affected. Except as authorized by
law, regulation, or court order, the auditor should not undertake or participate in
correcting the deficiencies.
b. When records are alleged to have been destroyed, lost, stolen, or otherwise
cannot be located, obtain a written statement from the contractor describing the
circumstances. Notify the contracting officer of the extent to which an audit can be made
using the remaining available records. The auditor should not attempt reconstruction of
c. Any audit reports issued under these circumstances should contain appropriate
comments on all the facts, with any necessary disclaimer, adverse opinion, qualifications,
and/or explanations of questioned costs.
1-507 Security Requirements for Contractor Information
a. Auditors should perform audits in such privacy as warranted under the
circumstances, and should provide all necessary safeguards to contractor-confidential
data. Working papers, audit reports, unpublished financial statements, correspondence,
files, and other records and sources available to or in the possession of the auditor usually
contain information that the contractor regards as confidential. Auditors shall use such
information only for performance of official duties. Except as authorized by law,
regulation, or court order, the auditor shall not disclose the information to other persons
except with the contractor's permission, and shall not discuss information in a manner
that might permit disclosure to unauthorized persons.
b. The law pertaining to unauthorized disclosure of contractor information, and
penalties for violation thereof, is contained in 18 U.S.C. 1905, as amended, and is quoted
Whoever, being an officer or employee of the United States or of any department or
agency thereof, any person acting on behalf of the Office of Federal Housing
Enterprise Oversight, or agent of the Department of Justice as defined in the Antitrust
Civil Process Act (15 U.S.C. 1311-1314), or being an employee of a private sector
organization who is or was assigned to an agency under chapter 37 of title 5, publishes,
divulges, discloses, or makes known in any manner or to any extent not authorized by
law any information coming to him in the course of his employment or official duties
or by reason of any examination or investigation made by, or return, report or record
made to or filed with, such department or agency or officer or employee thereof, which
information concerns or relates to the trade secrets, processes, operations, style of
work, or apparatus, or to the identity, confidential statistical data, amount or source of
any income, profits, losses, or expenditures of any person, firm, partnership,
corporation, or association; or permits any income return or copy thereof or any book
containing any abstract or particulars thereof to be seen or examined by any person
except as provided by law; shall be fined under this title, or imprisoned not more than
one year, or both; and shall be removed from office or employment.
c. Contracting commands and contract administration offices may use contractors,
commonly referred to as third party service providers (TPSPs), to assist in contracting
activities, such as contract closeouts and pricings. DCAA personnel are not to provide
contractor proprietary information directly to TPSPs. Before discussing contractor
proprietary data with individuals from contracting commands or contract administration
offices, or release of such information, DCAA personnel should confirm the contacts are
Government employees. If Government officials request that DCAA provide contractor
proprietary information directly to a TPSP, the auditor should explain that DCAA cannot
provide proprietary data to non-Government employees and arrangements should be
made to provide the information to the contracting officer or his/her designated
Government staff member.
d. Release of contractor information to the Government Accountability Office,
members of Congress and congressional committees and their staffs, offices of inspector
general, and Government investigative agencies, should be handled in accordance with
the procedures outlined in the applicable paragraph under 1-203, 1-404.6, or 1-405.
Release of contractor provided information in litigation is governed by DCAAR 5410.11
and the discovery rules of the forum involved. Release of contractor provided
information in response to requests under the Freedom of Information Act is governed by
1-508 Assistance in Preparing Claims Against the Government
a. Officers and employees of the Government are prohibited by law (18 U.S.C.
205) from acting as agents or attorneys for prosecuting any claim against the United
States or aiding or assisting in the prosecution or support of any such claim other than in
the proper discharge of their official duties. A part of the auditor's official duties is to
inform contractors of the manner in which public vouchers, termination settlement
proposals, cost statements, and other financial representations connected with the
negotiation and performance of Government contracts should be prepared and submitted.
b. The auditor may advise contractors as to types of costs which are considered
allowable and unallowable and on request may orally express an opinion as to the
acceptability of a specific item of cost.
c. The auditor may advise contractors to screen and not claim costs specifically
unallowable by contract terms, statute, public policy, or Government regulations. If the
contractor consistently claims costs which are clearly unallowable under the contract
terms, refer the matter to the Plant Representative/ACO for appropriate action. (See 8-
5-000 Audit of Policies, Procedures, and Internal Controls Relative to Accounting
and Management Systems
TYPES of Audits
The relevant accounting and management systems in the contract audit
environment and their respective CAM sections are listed below:
Control Environment and Overall 5-300
General IT System 5-400
Budget and Planning System 5-500
Purchasing System 5-600
Material System 5-700
Compensation System 5-800
Labor System 5-900
Indirect and ODC System 5-1000
Billing System 5-1100
Estimating System 5-1200
5-1000 Section 10 --- Audit of Indirect and Other Direct Cost System Internal
a. Refer to 5-101 for the auditor's fundamental requirements on obtaining and
documenting an understanding of a contractor's internal controls and assessing control
b. This section presents guidance for auditing a contractor's internal controls of
both a manual and automated nature over indirect/other direct cost. The guidelines relate
to the assessment of control risk based on an audit of the contractor's policies,
procedures, and internal controls.
5-1002 Background Information
a. An indirect cost is any cost which is not directly identified with a single final
cost objective, but is identified with two or more final cost objectives or an intermediate
cost objective (FAR 2-101(b)). Indirect costs are to be accumulated by logical groups and
distributed on the basis of benefits accruing to the several cost objectives. The number
and composition of cost groupings should be governed by practical considerations.
b. Other direct costs are costs which are in addition to direct labor and material
and can be readily identified with a specific job. Examples are:
(1) special tooling, dies, jigs, and fixtures;
(2) plant rearrangement;
(3) packaging and packing;
(4) consultant's fees;
(5) outbound freight;
(8) travel; and
(9) computer center and other service center costs. Costs of this nature may be
charged direct to jobs, allocated on some representative basis, or charged partially direct
and partially by allocation.
c. Generally, a contractor's indirect/other direct cost system should have:
(1) Contractor compliance audits to provide reasonable assurance that the policies
and procedures relating to indirect/other direct cost submissions are established, currently
in practice, understood, and effectively implemented by contractor employees.
(2) Policies and procedures established and maintained to charge/allocate, directly
or indirectly, allowable costs in billings, claims, or proposals applicable to U.S.
Government contracts in accordance with FAR 31.2 and CAS.
(3) Policies and procedures to ensure indirect/other direct costs are properly
classified as allowable or unallowable in accordance with FAR and contract terms,
including directly associated costs, and unallowable costs are identified and excluded
from proposals, billings, and claims submitted to the Government.
(4) Policies and procedures to ensure indirect/other direct costs are properly
charged/allocated to cost objectives in accordance with FAR and CAS.
5-1003 General Audit Policy - Indirect and Other Direct Costs
a. Refer to 5-103 for DCAA's general audit policy for the audit of contractor
accounting and management systems and related internal controls.
b. In the absence of indicators of widespread risk as documented by a current
audit risk assessment, the need for a comprehensive audit of a contractor's indirect/other
direct cost system would normally be limited to certain situations. Such situations might
(1) Contractor locations with significant Government business where a detailed
indirect/other direct cost system audit has never been performed or has not been recently
performed and where the auditor's knowledge of the indirect/other direct cost system is
(2) New Government contractor locations where anticipated or actual
Government business is significant.
c. FAOs with audit cognizance over corporate and/or group offices allocating
substantial costs to other segments for ultimate allocation to Government contracts are
responsible for performing indirect/other direct cost audits at these offices and providing
the results to the segment auditor. Segment auditors are responsible for requesting such
audits as needed.
5-1004 Audit Objectives
The purpose of this audit is to evaluate the adequacy of and the contractor's
compliance with the indirect and other direct cost system's internal controls. Refer to 5-
104 for DCAA's primary objectives for auditing the contractor's accounting and
management systems. The objectives of auditing the indirect/other direct cost system are
a. Gain an understanding of the contractor's indirect/other direct cost system and
related internal control to provide reasonable assurance that indirect/other direct cost in
billings, claims, or proposals applicable to U.S. Government contracts are properly
classified as allowable, allocable and reasonable in accordance with FAR 31.2 and CAS.
b. Document the understanding of the indirect/other direct cost system internal
control in working papers and permanent files (see 5-100).
c. Test the operational effectiveness of indirect/other direct cost system internal
controls. Refer to 5-108 for additional detail on the testing of internal controls.
d. Assess control risk as a basis to identify factors relevant to the design of
e. Report on the understanding of the internal controls, assessment of control risk
and adequacy of the system for Government contracts.
f. Document in the working papers evidence of the performance of the assessment
of risk of material misstatement due to fraud. The discovery of fraud or other
unlawful/improper activity is not the primary audit objective, but the auditor must be
attentive to any condition which suggests that such a situation may exist. If such activity
is suspected, the circumstances should be reported in accordance with 4-700.
5-1005 Scope of Audit
a. The nature and extent of audit effort depends upon contractor size, amount of
Government business, and audit risk. In general, the audit scope should be consistent with
the guidance in 5-105.
b. In many instances, control activities will be embedded in the contractor's IT
system. In these cases, the auditor should adequately document and test the automated
portions of the system, and give proper consideration to the use of Computer Assisted
Audit Techniques (CAATs).
c. The extent of audit effort should also be influenced by:
(1) the types of Government contracts and their materiality,
(2) deficiencies noted in ongoing audits (audit leads),
(3) input from the contracting officer,
(4) contract provisions, and
(5) the degree of system automation, especially where new or existing IT systems have
been revised to better identify, extract, and record indirect and other direct costs. General
information regarding these scope areas is provided in 3-104 and additional
considerations specific to the indirect/other direct cost system are discussed below. A risk
assessment documenting conclusions reached regarding the impact of the above areas on
the scope of this audit should be documented in the working papers.
d. The scope of audit should include both indirect and other direct costs (ODCs),
unless ODCs are not considered material. The audit should provide assurance that when
items ordinarily chargeable as indirect costs are charged to Government work as direct
costs, the costs of like items applicable to other work of the contractor are treated in the
e. If the contractor uses the same process for both indirect and ODCs, and the
ODCs are considered material, the auditor should include test transactions related to both
indirect and ODC in determining whether the internal controls are operating effectively.
If the contractor uses different processes for indirect and ODCs, and the ODCs are
considered material, the auditor should evaluate the internal controls for indirect cost and
ODC separately, and determine whether the controls related to each are in place and
f. As noted in 5-1004c, one of the objectives is to test the operational
effectiveness of the indirect/other direct cost system internal controls. Transaction testing
performed as part of the incurred cost audit should periodically include a trace of selected
transactions through the system to fully test and evaluate the controls (see 5-108).
Alternatively, controls may be separately tested as part of the internal control audit of the
indirect/other direct cost system.
g. The contractor’s indirect and ODC system may be comprised of numerous
processes and/or subsystems (i.e., travel, accounts payable, etc.). The auditor should
identify those processes and/or subsystems that comprise the indirect and ODC system
and consider the materiality and risk, in terms of both indirect costs and ODCs, of the
processes and/or subsystems in establishing the scope of audit.
h. The majority of the non-labor expenses may flow through the accounts payable
system. Therefore, the auditor should perform a risk assessment. Based on materiality
and sensitivity, consider performing an audit of the contractor’s accounts payable system
internal controls as a subsystem of the indirect/ODC system if it has not been previously
examined in another internal control audit. If an audit is performed, consider steps set
forth in 5-1400.
5-1006 Compliance Reviews
Contractor compliance reviews should provide reasonable assurance that policies and
procedures relating to indirect/other direct cost claims, billings, and proposals applicable
to U.S. Government contracts are established, currently in practice, understood, and
effectively implemented by contractor employees. The existence of strong internal
controls increases the reliance that can be placed on the cost representations from that
system. Therefore,the contractor should have written policies and procedures for
monitoring its indirect/other direct cost systems, including regular compliance reviews.
5-1006.1 Internal Audit Function
The auditor should ascertain the effectiveness of the internal audit staff and consider
the manner in which the internal audit function is utilized by management. Occasionally
contractors use management teams in lieu of internal auditors to perform compliance
reviews. The auditor should evaluate the competence, independence, and objectivity of
the management teams. (Refer to 4-1000).
5-1006.2 Scope of Compliance Reviews
a. Adequacy of Procedures. The contractor's policies and procedures should provide
for regular internal compliance reviews. These compliance audits should address the
(1) adequacy of written policies, procedures, and controls for indirect and other
(2) employee knowledge and compliance with policies and procedures;
(3) composition of indirect cost pools and the bases over which they are allocated;
(4) periodic sampling of expense accounts to ascertain if unallowable costs are
properly identified and segregated;
(5) periodic sampling to determine that when items ordinarily chargeable as
indirect costs are charged to Government work as direct costs, the costs of like items
applicable to other work of the contractor are treated in the same manner;
(6) consistency with which the policies and procedures are applied; and
(7) treatment of miscellaneous income, credits, rebates, and discounts.
b. Adequacy of Reviews. The adequacy of the reviews should be assessed in
accordance with the criteria in 4-1000. The reviews should be performed in accordance
with the written procedures and by personnel possessing a level of competence,
independence, and objectivity required of a reviewer. The scope and depth of audit
should be consistent with the contractor's risk assessment level and sufficient to identify
outdated written procedures, inconsistent application of the procedures, and lack of
employees' knowledge or compliance with the written procedures. The auditor should
consider and rely on, if appropriate, contractor internal audit control tests already
performed. The auditor should:
(1) identify and evaluate the documentary evidence and the frequency of the
internal and external reviews to determine whether the scope of such reviews are
appropriate, the conclusions are sound, and appropriate follow-up actions recommended,
(2) determine if the methodology used to select sensitive accounts to be reviewed
is consistent with the risk assessment level as documented by the contractor.
5-1006.3 Follow-up Procedures
There should be policies and procedures for tracking responses to, and resolution of,
required corrective actions. The policies and procedures should provide that corrective
actions are communicated to management responsible for action, and that corrective
actions are documented and verified.
5-1007 Trained Employees
A well trained staff results in accurate submissions to the Government. Contractor
personnel should be aware of the certification requirements and potential penalties
associated with submissions; therefore, they require special training in the preparation
and submittal of billings, claims, and proposals.
a. Types of training. The contractor may provide internal courses or opportunities
for personnel to take outside education courses. The contractor may also provide detailed
on-the-job training and/or detailed desk procedures. In some instances, the contractor
may require that personnel assigned to the preparation, approval and/or review process
have special qualifications prior to their being hired.
b. Adequacy of Procedures. Procedures should identify the minimum required
course topics, the frequency of the training (periodic training should be given as needed,
e.g. issuance of new and revised regulations, evidence of internal control weaknesses,
etc.), and the criteria for documentation of completion. If specific procedures are not
available, have the contractor identify its practice in the above areas for later verification
with employees. The procedures should require that the training program be updated to
cover current Government rules and regulations, and adjusted to comply with revisions to
the contractor's systems. These areas may be covered under more than one class, and
some may be covered by memorandums, bulletins, or pamphlets.
c. Adequacy of Training Topics. The contractor should have policies and
procedures requiring an employee awareness training program which informs employees
of the special requirements that apply when a business contracts with the Government.
The training should include procedures for reporting and identifying false claims and the
penalties associated with the statutes on false claims and false statements. Further, those
employees with contractual responsibilities related to costs should be made aware of the
FAR,DFARS, CAS, and applicable contract provisions. The contractor's procedures
should provide instruction in claim preparation that provides for compliance with the
(1) FAR 52.216.7, Allowable Cost and Payment clause, which requires that the
contractor submit a final indirect cost rate proposal reflecting actual cost experience
during the covered period, together with supporting data (see DCAAP 7641.90 section on
Incurred Cost Proposals for sample illustration of what is considered an adequate
(2) FAR 42.703-2 which requires that the submissions include a signed
"Certificate of Final Indirect Costs." Policies and procedures should also require that
employees be trained in contract briefing, reconciliations of claims to accounting records,
year-end adjustments of direct and indirect costs, and other related procedures.
d. The auditor should evaluate the adequacy of the training policies and
procedures to determine if they cover the appropriate topics, contain interpretation of the
Government rules and regulations on the allowability of indirect/other direct costs, and
that there are provisions to assure course materials are adjusted to comply with revisions
to Government rules and regulations. The contractor may have training records or
attendance sheets that document employee training. If the contractor does not provide
formal training, evaluate alternative procedures that ensure that employees and
management involved in the approval process and/or preparation of indirect/direct costs
submissions have the required knowledge. The auditor may consider making inquiries of
employees who performed a procedure and inspecting documents and reports to ensure
that employees are knowledgeable.
5-1008 Indirect and Other Direct Costs Preparation and Submissions
a. The contractor should establish and maintain written policies and procedures
for preparing submissions (billings, claims, or proposals), applicable to U.S. Government
contracts that include only allowable costs in accordance with FAR 31.2 and CAS.
b. The contractor's policies and procedures should require that claimed
indirect/other direct costs be reconciled with actual costs as recorded in the books and
records. Claimed costs may often be different from actual costs incurred; however, there
should be a clear identification of all adjustments and an explanation that describes why
such adjustments are necessary.
c. In addition, the contractor should have sufficient documentation for the auditor
to assess the reasonableness of the contractor's interpretations of allowability. This
documentation can be in the form of policies and procedures, desk instructions,
preprinted forms, etc., and should provide enough detail for employees to determine the
allowability of costs. Documentation supporting the allowability of costs per advance
agreements should also be provided. There should be documentation supporting the
segregation and control of data rejections, corrections, and adjustments, e.g., year-end
accruals, variances, and suspense accounts.
5-1009 Unallowable Costs Screening and Segregation
Policies and procedures should provide for the identification and exclusion of
unallowable costs from Government contract costs as required by FAR 31.201-6 and
DCAA Contract Audit Manual 629 November 5, 2008 5-1009
a. Certain costs are rendered unallowable by provisions of pertinent laws and
regulations. Examples of costs declared expressly unallowable by federal statute or
(1) costs for contingencies (FAR 31.205-7),
(2) entertainment expenses (FAR 31.205-14),
(3) fines and penalties (FAR 31.205-15),
(4) costs of organizing or reorganizing a business enterprise (FAR 31.205-27),
(5) contributions (31.205-8),
(6) interest (FAR 31.205-20),
(7) losses on other contracts (FAR 31.205-23),
(8) certain types of advertising and business meetings (FAR 31.205-1),
(9) bad debts (FAR 31.205-3), and
(10) federal income taxes (FAR 31.205-41). A description of these and other
items and the criteria for a determination of allowability are provided in FAR Part 31 (see
Appendix A) and Chapter 7.
b. Other costs may be specifically identified in the contract as being unallowable.
In these instances, the contract terms may also provide specific criteria that must be met
before a cost is considered allowable, or there may be ceiling limitations on certain types
of costs. For example, the contract may state that subcontracts or travel must be approved
by the contracting officer prior to incurring the cost, or it may state that overtime is
unallowable over a specific dollar amount. Contract briefs should be prepared to identify
c. Still other costs or portions of cost may be identified as unallowable based on
advance agreements negotiated by the ACO, such as IR&D and B&P Advance
d. In addition, all costs which are directly associated with unallowable costs are
also considered to be unallowable. For example, travel costs associated with an
unallowable business activity (e.g., business reorganization) are also considered to be
5-1009.1 Screening of Unallowable Costs
a. General Policies and Procedures. The contractor's accounting procedures should be
in writing and should provide that indirect/other direct costs are properly classified as
allowable or unallowable, including directly associated costs, and unallowable costs are
identified and segregated for U.S. Government contract costing, billing, and pricing
purposes as required by FAR 31.201-6 and/or CAS 405, if applicable. When evaluating
the contractor's policies and procedures, the auditor should consider whether they:
(1) Address all major duties and responsibilities in the indirect/other direct cost
system. The procedures should be comprehensive and easily understood in order to
minimize the risk of errors arising from causes such as misunderstood instructions, and
mistakes in judgment. The procedures should require management/supervisory review
and approval at appropriate control levels. Management review should be evidenced by
the proper approval signature on the documentation and records in accordance with the
contractor's policy. Electronic signature procedures should be implemented for automated
cost records. There should be separation of key duties such as authorizing, processing,
recording, and reviewing; and accountability over access to and use of assets and records.
The auditor should be alert for aspects of the indirect/other direct cost system process
which are not covered by policies and procedures. Additionally, the auditor should note
any instances where actual practices are inconsistent with established policies and
procedures. In these instances, the auditor should consider the underlying cause for these
inconsistencies (e.g., failure to adequately communicate changes in established policies
and procedures). When testing the critical control points outlined in the procedures, the
auditor should review evidence on adjustments as well as on regular transactions. If
applicable, the auditor should compare relevant parts of the contractor's CAS disclosure
statement to the policies and procedures.
(2) Are approved by an appropriate level of management to signify the delegation
of authority and to effectively convey management's commitment to adhering to
established policies and procedures, and complying with FAR 31.2 and CAS.
(3) Provide for the design and use of adequate documents and records. Records
should be kept on all aspects of a procedure to ensure the proper recording of
transactions. Records should also be classified in a way that permits easy access for audit
trail (e.g., chart of accounts could be imbedded in the applicable systems internal edit
schedules which segregates and identifies unallowable accounts at point of origin).
Supporting documentation should be complete (i.e., include purpose), accurate (e.g.
include credits if applicable), and readily available for examination. Various FAR clauses
require specific documentation in order for allowability to be established. FAR
31.2012(d) states that contractors are responsible for accounting for costs appropriately
and for maintaining records to support claimed costs. This rule permits contracting
officers to disallow any inadequately supported cost. The contractor's procedures should
provide for documentation that contracts have been briefed and expressly/mutually
agreed to be unallowable costs, and directly associated costs have been identified and
(4) Were communicated to those individuals within the organization who are
responsible for executing them. This communication involves not only making sure that
appropriate employees are aware of established policies and procedures but providing the
necessary training to ensure that they understand how to interpret and execute them. If
the training for employees who approve, process, and screen costs is separate from that
provided to employees who prepare cost submissions, follow the guidance in 5-1006.2.
b. Controls for Selected Sensitive Accounts. The following are examples of
sensitive costs that warrant special consideration to comply with the regulations (refer to
Chapter 7and FAR 31.2 for a complete list of sensitive areas and their requirements):
(1) Entertainment costs. Procedures and controls should be established that
distinguish entertainment costs, as defined in FAR 31.205-14, from allowable costs, such
as public relations cost; travel cost; employee morale, health and welfare cost; and trade,
business, technical and professional activity cost.
(2) Independent Research and Development (IR&D) and Bid and Proposal
(B&P)cost. Procedures and controls should be established which provide that IR&D and
B&P are classified and allocated to U.S. Government contracts in accordance with FAR
31.20518 and CAS 420. Specifically, procedures should require that:
(a) Each IR&D and B&P project should be separately identified if material in
amount. When not material in amount, these costs may be accumulated in one or more
project(s) within each of these two types of effort.
(b) The B&P projects should be described and identified, as appropriate, with a
specific procurement objective and/or applicable request for proposal (RFP), request for
quotation (RFQ), or invitation for bid (IFB).
(c) Effort such as production engineering, productivity improvement, etc. should
not be confused with IR&D and/or B&P effort. Effort of this type and the related cost
accounts should be described in sufficient detail and specificity that distinguishes it from
IR&D and B&P effort so as to preclude misclassification of these costs.
(3) Legislative lobbying costs. Procedures and controls should be established to
provide that all allowable and unallowable costs under FAR 31.205-22 are properly
classified and documented.
(4) Professional and consultant service costs should be supported as prescribed in
(5) Relocation costs. Procedures and controls should be established to require
(a) Payments be in accordance with an established policy or practice that is
(b) Amounts claimed as allowable costs under Government contracts be in
accordance with the requirements stated in FAR 31.205-35.
(6) Selling costs. Procedures and controls should be established which provide
that selling costs are classified in accordance with FAR 31.205-38 and that:
(a) Allowable direct selling and market planning costs should be separately
identified from unallowable costs.
(b) Allowable selling costs should be distinguished from B&P costs with respect
to Government business.
(c) The method selected and analysis used to allocate selling and marketing costs
should be documented and in compliance with FAR and CAS, as appropriate.
(d) Direct selling and market planning costs should be segregated by class of
customer (i.e., U.S. Government, FMS/foreign sales of military products, and
commercial). The method of segregation should be verifiable through documentation.
(7) Travel costs. Procedures and controls should be established which provide
(a) Allowable and unallowable travel costs in accordance with FAR 31.205-46 are
appropriately classified at some point between incurrence of the cost and the time when
claimed as a contract cost.
(b) Routines are in place to identify material amounts of unallowable labor
activity based on the purpose of the travel.
(c) Records required to substantiate and justify contractor-owned, leased, or
chartered aircraft costs are maintained in accordance with FAR 31.205-46.
(8) Trade, business, technical, and professional activity costs. Procedures and
controls should be established which provide that an adequate description of the business
purpose of meetings and conferences is either contained in or referenced in the
c. Screening. Point of entry screening is inherently more effective than after-the-
fact screening/scrubbing for the identification and segregation of unallowable costs. As a
point of entry control, the contractor can use its chart of accounts to identify and
segregate allowable and unallowable accounts (refer to the accounting system internal
control). The contractor's failure to establish point of entry controls places an added risk
on after-the-fact screening (refer to compliance reviews in 5-1006). Contractor follow-up
on unclear or questionable costs can become ineffective with the passage of time. This
added risk would translate into higher required confidence levels and precision than
would otherwise be required, thereby impacting the nature and extent of audit effort. As a
result of the required certification process, some contractors have incurred extraordinary
costs for screening overhead costs prior to certifying their proposal. This extraordinary
effort is often the result of the contractor's earlier negligence in establishing, maintaining,
and/or implementing an adequate system of internal control, and may not be subject to
reimbursement (see 7-2109.2). Deficiencies should be reported in accordance with 8-
302.7 if they are non compliances with CAS 405, or in accordance with FAR 31.201-6 if
they are not CAS-related.
d. Self-governance. When a contractor that participates in self-governance
programs furnishes the FAO with its initial internal control evaluation and compliance
testing plans on its screening procedures for unallowable costs, the FAO should establish
a current assignment to update its audit of related internal controls. The objective is not to
complete an overhead audit, but rather to provide the contractor with feedback on its
control activities and its compliance approach.
e. Directly Associated Costs. All costs which are directly associated with
unallowable costs are also unallowable and should be screened to preclude charging such
costs to Government contracts. In auditing the adequacy of contractor procedures for
screening directly associated costs, the auditor should also consider materiality of the
costs(FAR 31.201-6(e)(1). A directly associated cost is any cost which is generated solely
as a result of incurring another cost, and which would not have been incurred had the
other cost not been incurred. The following are examples of directly associated
unallowable costs: (1) Bad debts. Actual or estimated losses arising from uncollectible
accounts receivable due from customers and other claims and any directly associated
costs i.e., collection fees and/or legal costs associated with collection efforts are
unallowable (see FAR31.205.3).
(2) Entertainment costs. FAR 31.205-14 states that cost of amusement, diversion,
social activities, and any directly associated costs such as tickets to shows or sports
events, meals, lodging, rentals, transportation, and gratuities are unallowable.
(3) Lobbying costs. Pursuant to FAR 31.205-22, costs incurred in attempting to
improperly influence (see FAR 3.401), either directly or indirectly, an employee or
officer of the executive branch of the Federal Government to give consideration or to act
regarding a regulatory or contract matter are unallowable. Employee(s) travel and/or
administrative support costs directly associated with unallowable lobbying effort are also
5-1010 Allocability Policies, Procedures, and Controls
Policies and procedures should assure that indirect and other direct costs are properly
charged/allocated to cost objectives in accordance with FAR and CAS as appropriate.
a. The contractor's accounting procedures should ensure that items of the same
nature as those charged as direct costs are not included in the indirect cost pools. The
auditor should be alert to the possibility of inconsistencies in the treatment of direct and
indirect costs, especially between cost reimbursable and other contracts or between
Government and other contracts. Such inconsistencies may result in inequitable charges
to the Government. For example, the auditor should ensure that costs charged to
Government work as direct costs are to be treated in the same manner on the contractor's
other work, as required by FAR 31.202, FAR 31.203, and/or CAS 402. Therefore, the
contractor should have policies and procedures for adequately describing and classifying
costs as direct or indirect.
b. For CAS-covered contractors, such policies and procedures are a requirement
of CAS 418.40(a). They should include provisions for justification and approval of
changes in the direct or indirect classification of costs. Effective procedures will
minimize the amount of testing needed. The extent of required testing may be further
reduced by evidence of thorough contractor internal audit coverage of this area.
c. The contractor should have accounting policies and procedures which provide
that all items of other direct costs are readily identifiable with the contract to which they
have been charged. When an item is purchased, documents such as the purchase
requisition, purchase order, receiving report, and inspection report should identify the
contract for which the cost was incurred. When the contractor manufactures components
or parts, the work orders and all documents serving as a basis for charges to the work
order, such as requisitions and job tickets, should be identified with the contract.
d. Procedures should provide that indirect costs be accumulated by logical
(homogeneous) cost groupings (pools), with due consideration of the reasons for
incurring such costs, and allocated to cost objectives in reasonable proportion to the
beneficial or causal relationship of the pool costs to the final cost objective (FAR
31.203(c)). To satisfy MAAR 18, the auditor should determine that the allocation bases
used by the contractor for the allocation of indirect costs are equitable and consistent with
any applicable CAS requirements, generally accepted accounting principles, and
applicable provisions of the contract.
(1) Procedures and controls should be established to provide that all costs
(allowable and unallowable) properly included in an indirect cost allocation base bear a
pro rata share of indirect costs irrespective of their acceptance as Government contract
costs in accordance with FAR 31.203(d).
(2) Procedures and controls should be established to provide that expressly
unallowable costs and costs mutually agreed to be unallowable are excluded from any
indirectcost pool which is allocated to U.S. Government cost objectives. Directly
associatedcosts should be handled in the same manner, unless the cost with which it is
associated is included in the base over which the indirect cost pool is allocated. In such
instances, the directly associated cost should remain in the indirect cost pool.
e. The auditor should determine if the contractor's policies and procedures require
a thorough study of the indirect cost activity, including the activity bases used for
allocation and the costs to be allocated, to determine whether the activity base chosen is
appropriate for cost allocation and results in a reasonable measure of the activity. The
(1) be a reasonable measure of the activity,
(2) be measurable without undue expense, and
(3) except for the residual G&A expense, fluctuate concurrently with the activity
which is the source of the costs.
f. Part IV of the contractor's disclosure statement provides information on the
contractor's bases and pools, including a functional or departmental breakdown of
indirect expenses. An audit of the disclosure statement (or equivalent data from non-CAS
covered contractors) will frequently assist in determining whether cost allocations
described in the policies and procedures are equitable. Any differences or inadequacies
should be identified and reported to the cognizant Federal agency official (CFAO) in
accordance with 8-200.
5-1011 Indirect/ODC System - Information Technology System Internal Controls
a. Where information technology (IT) is used in significant financial applications,
control activities are sometimes defined by classifying them into two types, IT general
controls and IT application controls. Whether the control activities are classified by the
auditor as general or applications controls, the objectives of control activities remain the
same: to provide reasonable, but not necessarily absolute, assurance that assets are
safeguarded from unauthorized use or disposition and that financial and cost records are
reliable to permit the preparation of financial statements and cost representations.
b. The auditor should audit the IT general and indirect/ODC application controls
to determine if they have been designed according to management direction, GAAP, and
applicable Government regulations and that internal controls are operating effectively to
provide reliability of and security over the data processed.
c. General controls are composed of:
(1) organization and operation controls,
(2) systems development and documentation controls,
(3) hardware and systems software controls, and (iv) data and procedural controls.
(See 5-400 for a more detailed explanation of general internal controls.)
d. Indirect/ODC application control activities are applied to the input, processing,
and output phases of this single IT application. In contrast, IT general controls affect all
systems applications and operational elements of all IT systems. Separate control
activities are developed for each unique application system, such as labor, billing, and in
this instance, indirect/ODC. Although some application control activities affect only one
or just a few control objectives, most of the control activities are designed to prevent or
detect several types of errors in most or all phases of the application. (See 5-1400 for
amore detailed explanation of application internal controls.)
5-1012 Internal Control Reporting
The auditor should follow the guidance in 5-110, 10-200, and 10-400 for reporting on
internal controls relative to the contractor's accounting and management systems.
Explanation of Terms and Abbreviations
DCAA --- The Defense Contract Audit Agency.
Director --- Director, DCAA.
Headquarters --- Headquarters, DCAA.
DoD --- The Department of Defense.
Regional office --- The DCAA office having responsibility for all DCAA audit offices
and auditors within a specified geographical area. Each is headed by a regional director
and is the only organizational echelon between Headquarters and the field audit offices.
Within each regional office, a particular regional audit manager exercises line authority
over designated field audit offices.
Field audit office (FAO) --- A DCAA term which encompasses both branch offices and
resident offices. It does not include regional offices.
Resident office --- The field audit office having responsibility for the DCAA
mission,generally at one contractor location, and physically located at the contractor's
plant. Branch office --- The field audit office having responsibility for the DCAA mission
for all contractor locations in a designated area except those assigned to a resident office.
Auditor --- An auditor performing the contract audit function of DCAA.
Financial liaison advisor (FLA) --- A DCAA auditor assigned responsibility for
coordinating contract audit matters with a procurement or contract administration office.
Assignment Code --- The smallest scope of audit review which may be separately
programmed, including a five-digit identifier, a title and a scope statement or the five-
digit number recognized by the DCAA DMIS as specifying a discrete audit scope.
Audit Area --- A set of interrelated internal controls or elements of risk within one of the
four major functional groupings.
Major Functional Grouping --- An element of the contractor's cost accounting system.
The four major groupings presently in use are: General Controls (accounting and
estimating systems, balance sheet, and income accounts); Direct Labor; Direct
Material; and Indirect Expense.
Subarea --- An element of internal control or risk within an audit area. For example, the
audit area E.1, Special Purpose Reviews within the major functional grouping
Indirect Expense is further analyzed through the subareas Insurance, Pensions, Cost
Allocation Bases, IR&D/B&P, and Other Audits.
DCAA Contract Audit Manual 004 October 15, 2008 0-008
ABC Activity Based Costing
ACMS Advanced Cost Management Systems
ACO Administrative Contracting Officer
ACRS Accelerated Cost Recovery System
ADR Alternative Dispute Resolution
ADR Asset Depreciation Range
ADV Auditable Dollar Volume
AFAA Air Force Audit Agency
AID Agency for International Development
AICPA American Institute of CPAs
APPS Audit Planning and Performance System
ASBCA Armed Services Board of Contract Appeals
AT Attestation Standards
B&P Bid & Proposal
BCA Board(s) of Contract Appeals
BOA Basic Ordering Agreement(s)
BOM Bill of Material
CAC Contract Audit Coordinator (DCAA)
CACO Corporate/Home Office ACO
CACS Contract Audit Closing Statement(s) (DCAA)
CACWS Cumulative Allowable Cost Worksheet
CAD/CAM Computer-Aided Design & Manufacturing
CAIG Cost Analysis Improvement Group (DoD)
CAM Contract Audit Manual (DCAA)
CAOs Contract Administration Offices
CAS Cost Accounting Standard(s)
CCDR Contractor Cost Data Report(s)/ing
CCR Central Contractor Registration
CDA Contract Disputes Act
CECSR Contractor Employee Compensation System Review
CFAO Cognizant Federal agency official
CFR Code of Federal Regulations
CFSR Contract Funds Status Report(s)/ing
CFY Contractor Fiscal Year
CHOA Corporate Home Office Auditor (DCAA)
CIPR Contractor Insurance/Pension Review
CMTL Computer Managed Training Library
CO Contracting Officer
COBOL Common Business-Oriented Language (EDP)
COE Corps of Engineers (Army)
CPA Certified Public Accountant(s)
CPAF Cost-Plus-Award-Fee (Contract)
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CPFF Cost-Plus-Fixed-Fee (Contract)
CPIF Cost-Plus-Incentive-Fee (Contract)
CPR Contract Performance Report (previously Cost Performance
CPSR Contractor Purchasing System Review
CPU Central Processing Unit (EDP)
C/SCSC Cost/Schedule Control System Criteria
CSRA Civil Service Reform Act
CSSR Cost/Schedule Status Report(s)/ing
CY Calendar Year
DAC Defense Acquisition Circular
DAR Defense Acquisition Regulation
DCAAI Defense Contract Audit Agency Instruction
DCAAM Defense Contract Audit Agency Manual
DCAAP Defense Contract Audit Agency Pamphlet
DCAAR Defense Contract Audit Agency Regulation
DCAI Defense Contract Audit Institute
DCMA Defense Contract Management Agency
DCMD Defense Contract Management District
DFARS Defense Federal Acquisition Regulation Supplement
DFAS Defense Finance & Accounting Service
DHHS Department of Health & Human Services
DIIS DCAA Integrated Information System
DL General Counsel (DCAA Hqs)
DLA Defense Logistics Agency
DLAD Defense Logistics Agency Directive
DLAM Defense Logistics Agency Manual
DMIS Defense Contract Audit Agency Management Information
DoDD Department of Defense Directive
DoDI Department of Defense Instruction
DoDIG Department of Defense Inspector General
DOE Department of Energy
DOJ Department of Justice
DOL Department of Labor
DOT Department of Transportation
Defense Procurement, Acquisition Policy, and Strategic
DPRO Defense Plant Representative Offices
DSCA Defense Security Cooperation Agency
EAC Estimate At Completion (Cost)
ECPF Electronic Contractor Permanent File
EDP Electronic Data Processing (Computer(s))
EEO Equal Employment Opportunity
EEOC Equal Employment Opportunity Commission
EPA Economic Price Adjustment
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EPA Environmental Protection Agency
ERISA Employee Retirement Income Security Act (1974)
ERP Enterprise Resource Planning
ESOP Employee Stock Option Plan
ESS Estimating System Survey
ETC Estimate to Complete (Cost)
EVMS Earned Value Management System
FAC Federal Acquisition Circular
FAO Field Audit Office
FAR Federal Acquisition Regulation
FASB Financial Accounting Standards Board
FASC Financial Advisory Services Center
FAT First Article Testing
FCR Federal Contracts Report (BNA)
FCRC Federal Contract Research Center(s)
FEMA Federal Emergency Management Agency
FERC Federal Energy Regulatory Commission
FFP Firm-Fixed Price (Contract)
FFRDC Federally Funded R&D Center(s)
FICA Federal Insurance Contributions Act (Social Security)
FLA Financial Liaison Advisor
FLRA Federal Labor Relations Authority
FLSA Fair Labor Standards Act
FMS Foreign Military Sales
FOUO For Official Use Only
FPI Fixed-Price Incentive (Contract)
FPR Fixed-Price Redeterminable (Contract)
FPRA Forward Pricing Rate Agreement(s)
FUTA Federal Unemployment Tax Act
FY Fiscal Year
G&A General & Administrative (Expense)
GAAP Generally Accepted Accounting Principles
GAAS Generally Accepted Auditing Standards
GAC Group Audit Coordinator (DCAA)
GAGAS Generally Accepted Govt. Auditing Standards (GAO)
GAO Government Accountability Office
GASB Governmental Accounting Standards Board
GBL Government Bill of Lading
GFAE Government-Furnished Aeronautical Equipment
GFM Government-Furnished Material
GFP Government-Furnished Property
GOCO Government-Owned, Contractor-Operated (Plant)
GPO Government Printing Office
GSA General Services Administration
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GSBCA General Services Administration Board of Contract Appeals
HCFA Health Care Financing Administration
I/PS Insurance/Pension Specialist
ICAPS Internal Control Audit Planning Summary
ICQ Internal Control Questionnaire
IG Inspector General
IIA Institute of Internal Auditors
IPA Independent Public Accountant
IPT Integrated Product Team
IR&D Independent Research & Development (Cost)
IRC Internal Revenue Code
iRIMS Integrated Recorded Information Management System
IRS Internal Revenue Service
IS Information Systems
IT Information Technology
JCL Job Control Language (EDP)
JTR Joint Travel Regulation
MAAR Mandatory Annual Audit Requirement(s)
MICOM U.S. Army Missile Command
MMAS Material Management and Accounting System
MOU Memorandum of Understanding
MRD Memorandum for Regional Directors (DCAA)
MRP Material Requirements Planning (Inventory Control System)
MWS Major Weapon System
NASA National Aeronautics and Space Administration
NGB National Guard Bureau (DoD)
NRC Nuclear Regulatory Commission
OAL Audit Liaison Division (DCAA Hqs)
ODC Other Direct Cost
OFPP Office of Federal Procurement Policy (OMB)
OIG Office of the Inspector General
OMB Office of Management and Budget
ONR Office of Naval Research
OPSEC DoD Operations Security Program
OT Other Transactions
OTS Technical Audit Services (DCAA Hqs)
OWD Workload and Trends Division (DCAA Hqs)
PAC Accounting & Cost Principles Division (DCAA Hqs)
PACO Principal ACO
PAS Auditing Standards Division (DCAA Hqs)
PAT Process Action Team
PBIS Performance Based Incentive System
PBP Performance Based Payment
PCO Procuring Contracting Officer
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PDR Plantwide Data Report
PL Public Law
PMM Personnel Management Manual
PNM Price Negotiation Memorandum
PPD Programs Division (DCAA Hqs)
PQA Quality Assurance Division (DCAA Hqs)
PROCAS Process Contract Administration Services (DLA)
PS&C Production Scheduling & Control
PSAD Planning and Staff Allocation Document
PSP Special Projects (DCAA Hqs)
PWT Participative Work Team
R&D Research & Development (Cost)
RAM Regional Audit Manager
RD Regional Director
RFP Request(s) for Proposal(s)
SAS Statement on Auditing Standards (AICPA)
SAS Statistical Application Software
SEC Securities & Exchange Commission
SF Standard Form
SIC Suspected Irregular Conduct
SIS Synopsis Information System(s) (DCAA)
SSAE Statements on Standards for Attestation Engagements
SSEB Source Selection Evaluation Board
T&M Time-and-Materials (Contract)
TBSR Total Business System Review (ONR)
TCO Termination Contracting Officer
TEFRA Tax Equity and Fiscal Responsibility Act
TQM Total Quality Management
TRASOPs Tax Reduction Act Stock Ownership Plans
TSC Technical Services Center
U.S.C. United States Code
VAP Vulnerability Assessment Procedure(s) (DCAA)
VLSI Very Large Scale Integration
WAWF Wide Area Workflow
W/P Working Papers
WBS Work Breakdown Structure(s)
ZBB Zero-Based Budgeting
52.215-2 Audit and Records—Negotiation.
As prescribed in 15.209(b), insert the following clause:
AUDIT AND RECORDS—NEGOTIATION (JUNE 1999)
(a) As used in this clause, “records” includes books, documents, accounting procedures and
practices, and other data, regardless of type and regardless of whether such items are in written
form, in the form of computer data, or in any other form.
(b) Examination of costs. If this is a cost-reimbursement, incentive, time-and-materials, labor-
hour, or price redeterminable contract, or any combination of these, the Contractor shall maintain
and the Contracting Officer, or an authorized representative of the Contracting Officer, shall have
the right to examine and audit all records and other evidence sufficient to reflect properly all costs
claimed to have been incurred or anticipated to be incurred directly or indirectly in performance of
this contract. This right of examination shall include inspection at all reasonable times of the
Contractor’s plants, or parts of them, engaged in performing the contract.
(c) Cost or pricing data. If the Contractor has been required to submit cost or pricing data in
connection with any pricing action relating to this contract, the Contracting Officer, or an
authorized representative of the Contracting Officer, in order to evaluate the accuracy,
completeness, and currency of the cost or pricing data, shall have the right to examine and audit
all of the Contractor’s records, including computations and projections, related to—
(1) The proposal for the contract, subcontract, or modification;
(2) The discussions conducted on the proposal(s), including those related to negotiating;
(3) Pricing of the contract, subcontract, or modification; or
(4) Performance of the contract, subcontract or modification.
(d) Comptroller General—
(1) The Comptroller General of the United States, or an authorized representative, shall
have access to and the right to examine any of the Contractor’s directly pertinent records
involving transactions related to this contract or a subcontract hereunder.
(2) This paragraph may not be construed to require the Contractor or subcontractor to
create or maintain any record that the Contractor or subcontractor does not maintain in the
ordinary course of business or pursuant to a provision of law.
(e) Reports. If the Contractor is required to furnish cost, funding, or performance reports, the
Contracting Officer or an authorized representative of the Contracting Officer shall have the right
to examine and audit the supporting records and materials, for the purpose of evaluating—
(1) The effectiveness of the Contractor’s policies and procedures to produce data
compatible with the objectives of these reports; and
(2) The data reported.
(f) Availability. The Contractor shall make available at its office at all reasonable times the
records, materials, and other evidence described in paragraphs (a), (b), (c), (d), and (e) of this
clause, for examination, audit, or reproduction, until 3 years after final payment under this
contract or for any shorter period specified in Subpart 4.7, Contractor Records Retention, of the
Federal Acquisition Regulation (FAR), or for any longer period required by statute or by other
clauses of this contract. In addition—
(1) If this contract is completely or partially terminated, the Contractor shall make available
the records relating to the work terminated until 3 years after any resulting final termination
(2) The Contractor shall make available records relating to appeals under the Disputes
clause or to litigation or the settlement of claims arising under or relating to this contract until such
appeals, litigation, or claims are finally resolved.
(g) The Contractor shall insert a clause containing all the terms of this clause, including this
paragraph (g), in all subcontracts under this contract that exceed the simplified acquisition
(1) That are cost-reimbursement, incentive, time-and-materials, labor-hour, or price-
redeterminable type or any combination of these;
(2) For which cost or pricing data are required; or
(3) That require the subcontractor to furnish reports as discussed in paragraph (e) of this
The clause may be altered only as necessary to identify properly the contracting parties and
the Contracting Officer under the Government prime contract.
(End of clause)
Alternate I [Reserved]
Alternate II (Apr 1998). As prescribed in 15.209(b)(3), add the following paragraph (h) to the
(h) The provisions of OMB Circular No. A-133, “Audits of States, Local Governments, and Nonprofit Organizations,”
apply to this contract.
Alternate III (June 1999). As prescribed in 15.209(b)(4), delete paragraph (d) of the basic
clause and redesignate the remaining paragraphs accordingly, and substitute the following
paragraph (e) for the redesignated paragraph (e) of the basic clause:
(e) Availability. The Contractor shall make available at its office at all reasonable times the records, materials, and other
evidence described in paragraphs (a), (b), (c), and (d) of this clause, for examination, audit, or reproduction, until 3 years
after final payment under this contract or for any shorter period specified in Subpart 4.7, Contractor Records Retention, of
the Federal Acquisition Regulation (FAR), or for any longer period required by statute or by other clauses of this contract.
(1) If this contract is completely or partially terminated, the Contractor shall make available the records relating to
the work terminated until 3 years after any resulting final termination settlement; and
(2) The Contractor shall make available records relating to appeals under the Disputes clause or to litigation or the
settlement of claims arising under or relating to this contract until such appeals, litigation, or claims are finally resolved.