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									                    New Jersey Department of Transportation
                   Bureau of Auditing - External Audit Section

                                   Work Program
                                Consulting Engineer's
                            Overhead and Direct Cost Audits

Consultant's Name: ___________________________________________________________

For the Fiscal Year Ended: _____________________________________________________

Contact Person at Company: ____________________________________________________

Telephone Number: ___________________________________________________________

                                                                             April 2008

                                          Page 1
Note to the Auditor
The following work program is not all inclusive but is presented as a guide for the auditor to use in
performing an audit of a Consulting Engineer's Indirect Cost Rates and an audit of its contracts with the
NJDOT. The auditor, based upon the their experience and the situations as they arise, may have to amend
the audit procedures in order to meet the requirements of the audit.

If additional audit procedures are required, they should be added to the appropriate section(s) of the
work program. Any printed audit work program procedures that are not performed must be explained in the
work program as to why they were not performed.

Compliance Criteria

The regulations applicable to the audit of a Consulting Engineer's Indirect Cost Rate and Direct Costs are:

1) Generally Accepted Government Auditing Standards promulgated by the Comptroller General of the U.S.

2) The Code of Federal Regulations, Title 48, Federal Acquisition Regulations (FAR) Part 31.0, 31.1 and 31.2

3) Contract Payment Provisions

4) State of New Jersey Circular Letters

Errors, Irregularities and Illegal Acts

The Field Work Standards of the Government Auditing Standards require that audit steps and procedures
be designed to provide reasonable assurance of detecting errors, irregularities and illegal acts that could
have a direct and material impact. The steps contained herein are intended to provide reasonable
assurance that these procedures were performed.

Additional audit steps and procedures are to be devised if the auditor has reason to believe that fraud, abuse or
improper or illegal acts may exist.

Risk Assessment

All indirect cost accounts do not lend themselves to the same level or risk for unallowable items. Certain indirect cost accounts,
including, but not limited to Travel and Professional Services have a greater likelihood of containing unallowable expenses and
thus should be considered as high risk. Indirect costs such as Office Supplies and Utilities are considered a lower risk for
containing unallowable costs. Thus, in determining sample sizes for Indirect Costs, it is expected that separate criteria will be
used for determining samples of higher risk transactions versus lower risk transactions.

Presentation of Audit Adjustments

When preparing the Summary Schedule of Direct Costs and Fee and the supporting schedules for each contract, the direct labor
and the direct expense adjustments must be identified separately with the appropriate explanatory notes. The adjustments to
indirect costs resulting from application of the adjusted overhead rate must be presented separately with the appropriate
supporting schedules.

When preparing the Schedule of Indirect Costs, the audit adjustments must be segregated into FAR adjustments and NJDOT
policy adjustments with appropriate explanatory notes.

                                                               Page 2

                                                  TABLE OF CONTENTS

 I. Planning Phase                                                                                  4

 II. Review and Evaluation of Internal Controls                                                     4

 III. Field Audit - General                                                                         5

 IV. Field Audit                                                                                    5

 Audit of NJDOT Contract Costs                                                                      5

    A. Summary Schedule of Billed Costs and Fee and Supporting Schedules of Individual Contracts    5

    B. Direct Cost Testing                                                                          6

           1. Direct Labor                                                                          6

           2. Direct Non-Salary Expenses                                                            6

           3. Review of In-House Billing Rates                                                      6

 Audit of Schedule of Indirect Costs                                                                6

    A. Analysis of Labor                                                                            6

           1. Labor Reconciliation                                                                  6

           2. Analysis of Labor Distribution                                                        7

           3. Analysis of Officers Compensation                                                     7

    B. Analysis of Indirect Cost Accounts                                                           7

           1. General Considerations                                                                7

           2. Analysis of Accounts                                                                  8

           3. Corporate Allocations                                                                 9

           4. Other/Miscellaneous Income                                                            9

           5. Gain on Sale of Assets                                                                9

           6. Review of Cancelled Checks                                                            9

V. Final Procedures                                                                                 9

VI. Audit Report                                                                                    9

VII. Computation of a Field Rate (Construction Inspection Projects)                                 9

                                                          Page 3
I. Planning Phase                                                                           Initials / Date        WP Reference

A. Review the prior year(s) audit report and working papers for any pertinent
   information and any audit areas requiring special attention.

B. Compare the submitted indirect cost schedule with last year's schedule. When
   material variances are found, obtain and document the reasons for these differences.

C. Follow up on any known material findings and recommendations from the prior

D. Review the Uniform Audit and Accounting Guide prepared by the AASHTO
   Audit subcommittee which was developed as a guide to assist in the auditing of
   indirect cost rates of consultants.

II. Review and Evaluation of Internal Controls


Government Auditing Standards require that auditors obtain a sufficient understanding of a firm's internal controls. This is
necessary to plan the audit and to determining the nature, timing and extent of the tests to be performed.

The elements of internal controls that must be considered include but are not limited to:

 ~ Compliance with applicable governmental regulations

 ~ Consistency among estimating/proposal preparation and billing processes

 ~ Cost Accounting Systems

 ~ Assuring that labor is tracked and properly allocated

 ~ Assuring that non-labor direct costs are properly allocated

 ~ Determining if unallowable costs are segregated and cost allocations are in
   conformance with CAS/GAAP

 ~ Obtaining an understanding of the firm's billing procedures and controls.

 ~ Performing a review of Miscellaneous Revenues/Credits

 ~ Obtaining an understanding of related party and inter-organizational transactions

The auditor should:
                                                                                            Initials / Date        WP Reference
 1) Review the Consultant's audited Financial Statement if one is issued for information
    related to the internal control structure. The extent of testing will be in direct
    relation to the adequacy of the firm's internal controls.

                                                              Page 4

                                                                                            Initials / Date        WP Reference
 2. Document your understanding of the internal control structure through appropriate
     questionnaires, flow charts, and/or narrative information. The preliminary
     evaluation must be summarized including your conclusions as to the expected
     reliability of the internal control structure.

 3. Correlate your reliance/non-reliance on the internal control structure to your level
    of testing.

III. Field Audit - General

A. Prepare a working paper that reconciles the amounts in the Schedule of Indirect Costs
   prepared by the company to the audited financial statements or adjusted trial balance.
   Document reason(s) for variances.

B. Review the audited financial statements for leasing policies, common control and any
   other specific information.

C. Obtain a chart of accounts from the company and discuss with company personnel
   the types of indirect and direct cost accounts and what type of expenses are included
   in the accounts.

D. Determine the basis of accounting (cash or accrual) from the financial statements.

E. Obtain the firm's most recent Cost Accounting Disclosure Statement if they are
   required to submit one and include in the working papers.

F. Inquire of the Company whether there are employees classified as Part-Time or
   Temporary. If yes, obtain a listing of the names of the individuals, the types of
   benefits these individuals receive (vacation, holiday, sick, health benefits, etc.) and the
   amount of direct labor hours applicable to these individuals.

IV. Field Audit

Audit of NJDOT Contract Costs

A. Summary Schedule of Billed Costs and Fee and Supporting Schedules of Individual
   Contracts/Settle-Up Sheets

   1. From the Company's records, prepare a listing of all NJDOT contracts where the
      company incurred cost in the audit period. This should include all projects
      whether the firm was a prime or a subconsultant. This summary schedule should
      include the contract date, the contract I.D. number, the period covered and the
      amount billed. The schedule should have separate columns to identify any
      audit adjustments and the adjusted amounts.

   2. Prepare separate supporting schedules/settle up sheets for each contract which
      includes the following:

       a.   Contract Date
       b.   Contract I.D. Number
       c.   Project Description
       d.   Indication of Prime Consultant or Subconsultant to ____________________
       e.   Period of Cost Incurrence

                                                                 Page 5

                                                                                                 Initials / Date   WP Reference
       f. Amounts Billed by Cost Component (Labor, OH, Fee, DNSE's, Lump Sum)
       g. Audit Adjustments by Cost Component (Including Explanatory Notes/
          Schedules for all Audit Adjustments)
       h. Certification by Company Official
    Note - A Sample Settle Up Schedule is included on the Bureau of Auditing

B. Direct Cost Testing

 1. Direct Labor

    a. Obtain sample of direct labor billings on NJDOT contracts in the audit period.
       From this sample:

       1. Trace labor hours billed to employee times sheets. Verify that time sheets
          include supervisory approval.
       2. Trace hourly rates billed to actual rates from the company's payroll reports.
       3. Trace labor amounts billed to the firm's project cost reports.
       4. On a sample basis, examine cancelled payroll checks.

 2. Direct Non-Salary Expenses

    a. Obtain sample of direct non-salary expenses billings on NJDOT contracts in the
       audit period. From this sample:

       1. Trace vendor invoiced costs billed to original vendor invoices.
       2. Trace employee expenses billed to expense reports.
       3. Verify that rates billed (i.e.. Mileage, Subsistence) are in accordance with
          Department maximums.
       4. Verify that expenses billed are allowable in accordance with the contract
          payment provisions.
       5. Trace expense amounts billed to the firm's project cost reports.
       6. On a sample basis, examine cancelled checks.

 3. Review of In-House Billing Rates

     a. Determine if the firm has billed NJDOT contracts directly for any in-house
        (i.e.. Company vehicle mileage, in-house equipment usage) costs. Verify the
        calculation of the billing rates as follows:

       1. Obtain the firm's calculations of in-house rates.
       2. Trace the expense amounts billed to the source documentation (i.e.. Leases,
          vendor invoices, maintenance agreements).
       3. Determine that total usage was used in the denominator.
       4. Assure that the indirect cost pool was reduced by the amount of direct usage.
       5. Determine that standard billing rates were compared with the audited rates
          and were revised as necessary.

Audit of Schedule of Indirect Costs

A. Analysis of Labor

  1. Labor Reconciliation

                                                              Page 6

                                                                                          Initials / Date   WP Reference
    a. Summarize total labor as per the submitted Schedule of Indirect Costs.
       Reconcile the resulting labor amount to the total labor as per the following:

       1. Labor distribution system summary (Review Any Adjusting Entries)
       2. Financial Statements/General Ledger
       3. Payroll Tax Returns (941's)
  2. Analysis of Labor Distribution

     a. Select a representative sample from the labor distribution records and perform
        the following:

        1. Trace hours to employee time sheets and verify the proper activities are
        2. Verify hourly rates to the payroll reports.
     b. Ensure the premium portion of overtime is removed from the direct labor
     c. Determine that the direct/indirect labor split is properly stated for those
        employees who work in excess of 40 hours per week.

 3. Analysis of Officers Compensation

   Note: In accordance with FAR 31.205-6, compensation for each employee or job
         class of employees must be reasonable for the work performed. DCAA Audit
         Guidance on Evaluating Compensation Costs indicates that the FAR
         compensation limitations for the top five covered executives should not be
         construed as also being reasonable levels of compensation. Reasonableness of
         compensation needs to be established using the FAR guidelines and
         appropriate benchmarking surveys and techniques. The Consultant bears the
         burden of proof regarding reasonableness.

     a. Summarize the principals' wages per the payroll reports and determine the

       1. Compensation is allowable in accordance with the FAR's including:

          a. Amount is reasonable for work performed
          b. Within the allowable benchmark amounts as per DCAA
          c. Bonuses paid to officers are reasonable and not a distribution of profits

B. Analysis of Indirect Cost Accounts

 1. General

    a. Review adjusting entries and test any unusual or significant entries as necessary.

    b. The working papers detailing the analysis of the indirect cost accounts must
       include a detailed description of the expense being reviewed.

    c. When an unallowable cost is adjusted, be sure to eliminate its directly associated

    d. The approach to audit sampling should be documented.

                                                              Page 7

                                                                                            Initials / Date   WP Reference
 2. Analysis of Accounts

    a. Payroll Taxes
       1. Trace the presented amount to the applicable tax returns.

    b. Printing/Reproductions
       1. Determine that direct costs are consistently handled by the firm and that all
          direct costs are removed from the overhead pool.
  c. Travel
     1. Based on a representative sample of selected transactions:
         a. Eliminate entertainment costs, costs of alcoholic beverages and personal
         b. Assure that project related costs are eliminated from the overhead pool.
      2. Determine if the personal usage of company vehicles is removed from the
          overhead pool.
      3. Determine if travel costs are within the maximum allowable amounts as per
          the Federal Travel Regulations.

 d. Insurance
    1. Review insurance policies to determine that annual premiums compare to the
       amounts presented.

 e. Legal and Accounting
    1. Determine if account includes reorganization costs, costs related to bad debt
       collection, direct settlement costs or any other unallowable costs.

 f. Rental Costs

    Note: Per FAR 31.205-36, rental costs of personal property leased from any
          division, subsidiary or affiliate of the contractor under common control
          shall be limited to the actual, allowable costs incurred.

     1. Trace presented amounts to leases and review for common control.
     2. If common control exists, allow costs in accordance with FAR 31.205-36.

  g. Depreciation
     1. Compare the presented amount to the tax return.
     2. Obtain the depreciation schedule and:
        a. Review the depreciation method for reasonableness.
        b. Trace asset amounts to invoices on a sample basis.
        c. Review for allowability in accordance with FAR 31.205-11.

 h. Facilities Capital Cost of Money (if applicable)
    1. Determine if the amount presented is proper and in accordance with
       FAR 31.205-10.

  i. Other Indirect Cost Accounts
     1. Review the submitted Schedule of Indirect Costs to determine if any
        additional accounts should be reviewed for allowability in accordance with
        the FAR's. Determination should be made based on the nature and materiality
         of the account.

                                                           Page 8

                                                                                        Initials / Date   WP Reference
3. Corporate Allocations (if applicable)

  a. Obtain company's corporate allocation schedules and determine the following:
     1. FAR unallowables were removed from the corporate allocation.
     2. Review the basis used in allocating the corporate costs and determine its
        reasonableness. Verify that the proper amounts were used in the calculations.

4. Other/Miscellaneous Income
    a. Determine if any recorded other or miscellaneous revenue amount should be
       credited to an indirect cost account.

    b. Review the cash receipts and general ledger accounts for other income which
       should be credited to indirect costs in accordance with FAR 31.201-5.

   5. Gain on Sale of Assets

     a. Determine if the indirect cost pool receives the proper credit on gains on sale of
        assets which were originally presented as part of the depreciation expense.

   6. Review of Cancelled Checks

      a. On a sample basis, compare the check numbers and the amounts as per the
         cash disbursements to the cancelled checks and bank statements.

V. Final Procedures

A. Formulate audit adjustments and compute preliminary results.

B. Discuss preliminary results with company personnel and document company's
   response. Obtain any additional information as necessary and formulate final results.

VI. Audit Report

A. Prepare Independent Auditor's Report on Schedules of Billed Costs and Fee

B. Prepare Independent Auditor's Report on Schedule of Indirect Costs

C. Prepare Independent Auditor's Report on Compliance and Internal Controls

VII. Computation of a Field Rate (Construction Inspection Projects)

Note: The firm must disclose the existence of Field Office Rates in the Schedule
      of Indirect Costs. A separate column showing the Field Office Expenses,
      direct labor and resulting rate along with a footnote disclosure describing the
      allocation methods used should be provided.

A. Ensure a field rate is developed by the firm if they are approved to utilize
   separate field and home office overhead rates on NJDOT projects.

B. Verify the field rate computation based on an analysis of the costs and a review
   of the allocation methods utilized by the firm.

                                                               Page 9

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