Risk Assessment, Audit Processes and Sample Sizes

Report
Risk Assessment, Audit
Processes and Sample
Sizes
It’s Really Just Auditing…..But
Agenda
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What is Really Necessary?
Risk Assessment
Audit Processes and Sample Size
• Labor
• Indirect Costs
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Guidelines
Conclusion
What is Really
Necessary?
It’s Not Just About Auditing
CPA Firm Responsibilities
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Comply with professional standards
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Generally Accepted Government
Auditing Standards –GAGAS
(Yellowbook)
Generally Accepted Auditing
Standards (GAAS)
UNDERSTAND terms of engagement
Realistic self-assessment
Establish quality control standards
unique to overhead audits
Communicate with state DOT
Allow cognizant agency full access
to workpapers
Basic Accounting
Alignment
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Accrual based (GAAP) Accounting
required.
Labor cost must be reconcilable to
individual payroll records.
Project costs (labor and ODCs) must
reconcile to General Ledger Direct
Costs.
Overhead must reconcile to General
Ledger.
Total labor per General Ledger must
reconcile to annual payroll records.
Overhead must correspond to firm fiscal
year.
Job Cost system under General Ledger
control.
Two Sets of Books?
Accrual
Meter
Profit = Revenue – Direct Costs – Overhead
Project Costs
Personnel
Adjustments
WIP
Invoice
Write-offs
Expenses
A/R
Cash Flow = Cash In – Cash Out
Equipment Usage
Collection
Pay to
$
Payroll
$
Value Added
(Pricing)
Cash
Meter
Cash in the Bank
$
Accounts Payable
What is “Overhead”?
Which of these cost elements should legitimately be charged directly to jobs and
which to overhead?
Cost Element
Overtime premium on a project
Time spent preparing a proposal
Use of equipment on a project
Time spent by accounting to prepare an invoice
Company vehicle used on project
Personal vehicle used on project
Use of CAD equipment on a project
Use of a pencil to write the final report
Direct
OH
Answer
It Depends
Internally Allocated Costs
• Typically known as “in-house”
costs
• Allocates costs to projects
based on an estimated unit rate
using a “contra” account
• Typically used for:
• Company owned vehicles
• Printing
• Equipment
• Can be used for CADD costs but
not typical
Debits and Credits
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Contra accounts should be set up to “relieve”
overhead of allocated costs
These accounts can be anywhere in the overhead
section of the chart of accounts but we prefer them to
be at the bottom of the chart of accounts before
other income/expense
Separate contra accounts should be set up for each
category of cost. Eg: vehicles, equipment, unit pricing
Unit costs ALWAYS are charged to projects
Labor Costing Options
Standard cost (preferred) – Standard hourly rate
based on hours employee is expected to work
during year (usually 2,080). Any differences
(uncompensated overtime, premium overtime)
allocated to overhead. (Labor rate stays fixed)
Average cost – Divide paycheck by actual hours
worked during pay period. (Labor rate can change
each pay period)
The Golden Rules of
Accounting Policies
Bill according
to contract
Accumulate costs
according to policy
The BIG Breakdown
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Anything FAR is an accounting issue thus the
responsibility of the financial/accounting department
FAR compliance is NOT just about accounting for
unallowable costs or even accounting procedures
FAR compliance issues typically occur when principals
or project managers propose and negotiate contracts
that DO NOT reflect current firm policies
Firm policies MUST be communicated to the entire
organization
Risk Assessment
The First Step
Internal Control Questionnaire
(ICQ) for Consulting Engineers
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Great starting point for audit planning
Covers major areas of cost accumulation POLICY!
Identifies firm size
Identifies officers
Identifies owners
Identifies related parties
Information on financial management system
Labor costing method
Premium overtime
Contract labor
Formal Risk Assessment
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Fraud
Evaluate the controls over cash disbursements
Evaluate the controls over payroll (including time
reporting)
Evaluate the controls over the computer systems
Consider fraud risk factors
Control environment (management attitude)
Control methods (policies and procedures)
Communications
Monitoring
Accounting System
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Deltek Vision
Deltek (Axium) Ajera
BST
Clearview InFocus
BillQuick
Oracle
QuickBooks
Peachtree
Other
Audit Processes and
Sample Sizes
Where it all Comes Together
Labor
Largest Cost and Least Documented
Executive Compensation
Key Matrix Points
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Match executive job description and duties to position
description in Matrix
Only one each Chairman, CEO and Executive Vice
President are allowed
Multiple Senior Vice Presidents and Vice Presidents
are allowed
Small firms must pay close attention to “duties” as
opposed to title
Related parties must be evaluated
The Word on Timesheets
They are very important!
Individuals
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EVERYONE must prepare a
time sheet
Total hours MUST be
reported
Time sheets must be
approved by employee
and supervisor
Firm
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Must have a timekeeping
system that identifies
employees’ labor by
intermediate and final cost
objective
System must charge direct
and indirect labor to the
appropriate cost objectives
At least monthly posting to
financial management system
This Means…
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Firm must maintain a comprehensive accounting
system.
Firm must prepare time (total hours).
Time sheets must be posted to job cost records.
Job cost records must be posted to the general
ledger.
Time sheet changes must be approved by employee
and supervisor
What is Really Necessary
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A timesheet from each pay period
Selections MUST be traced from the timesheet to:
• Payroll register (actual pay)
• Personnel file (approved pay rate)
• Job cost system
• General ledger
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Is every item on the timesheet necessary?
• It depends on RISK ASSESSMENT
• Over 60 individual time entries
Do We have a Problem?
Indirect Costs
FAR Knowledge is Critical
Guidelines
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Materiality (Only for planning purposes)
• Cost Certification
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Use of sampling
Minimum sample size of 2 to 20 items
High risk accounts
Evil alcohol
No fun
Marketing (now we are talking about some dollars)
Conclusion
Quality is not in Quantity
Audit Quality
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Art not science
The CPAs understanding of industry accounting best
practices is critical
Understanding of the accounting system set-up is
critical
Understanding of the firm’s accounting policies is
critical
Sample size……not so much
T. Wayne Owens &
Associates, PC
[Built for A/E/C]
We are a CPA firm that provides a full range of accounting
and financial management solutions, including audits,
FAR audits and tax services tailored for the design
industry. Our services are specifically geared toward
boosting the effectiveness, well-being and profitability of
your A/E/C firm. Our relationship with you is the driver;
consider us a partner on your success team, providing
experienced guidance and advice for your situation and
spotting opportunities to position your company for the
future.
Questions
T. Wayne Owens, CPA
T. Wayne Owens & Associates, PC
O: 678.325.1063
C: 404.358.2390
[email protected]
www.twocpa.com
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