Master Document – Audit Program
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Activity Code 10320
MAAR 13 – Purchase Existence and Consumption
Version 2.13, dated November 2017
B-1
Planning Considerations
Type of Service - Attestation Examination Engagement
Audit Specific Independence Determination
Members of the audit team and internal specialists consulting on this audit must complete the
Audit Specific Independence Determination (w/p 34) prior to starting any work on this
assignment.
(Note: Because staff is sometimes added to on-going audits, supervisors should ensure that all
individuals who are directing, performing audit procedures, or reporting on this audit as a
member of the audit team who are performing as a consultant have signed this work paper. For
example, an FAO may add additional auditors (e.g., technical specialists) to the audit assignment
or may need to consult with an internal specialist (e.g., industrial engineers, and operations
research specialists) as the audit progresses.)
Purpose and Scope
1.
The purpose of this evaluation is to verify that purchased direct materials/services were, in
fact received and ascertain that they were:
needed for the contract;
purchased in reasonable quantities;
purchased at a prudent price,
used on the contract, and
properly accounted for as to initial charge, transfer in or out, and residual value.
2.
This program should be used to verify purchased materials/services existence and
consumption at major and non-major contractor locations to satisfy the mandatory annual
audit requirement (MAAR) requiring verification that material was received and, if
applicable, used on the contract. For mobile contractors, MAAR 13 must be performed
for the current year during the first field visit to the contractor facility within the year. This
will normally be accomplished during a price proposal audit, annual incurred cost audit, or
within a specific material audit.
3.
"Purchased materials" are raw materials, purchased parts, subassemblies, etc., which are
physically incorporated into an end product. Equipment purchased for the customer’s use
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on a flow-through basis, such as computer hardware, or commercially available items for
the contractor’s use in performing the contract such as trucks and other equipment, are not
deemed to be incorporated in the end product.
4.
“Purchased services” may include the performance of certain contract tasks by non-
company personnel under the direction of the contractor or replacing entire functions
within the contractor’s organization. Services provided include purchased direct labor
personnel to meet temporary requirements, who are supervised by the contractor, or
purchasing specific types of services, such as engineers, technical writers and craftsmen,
on a regular basis to perform contract requirements.
5.
If audit leads from prior evaluations suggest significant risk exists, the auditor should
consider performing a MMAS review outside the normal cycle. The extent of audit effort
in testing and verifying purchases existence and consumption is dependent on the
perceived audit risk and is influenced by (1) the nature and significance of purchased
material and services expenses, (2) prior audit experience with the contractor, (3) the
reliability and acceptability of the contractor’s MMAS system and related internal controls,
(4) the contractor’s mix of contracts and nature of contract provisions, and (5) the nature
of the contractor’s organization and operations.
6.
If the purchased services costs include a significant amount of consultant service costs, the
consultant costs should be audited using the Consultant Services audit program (under
10160 activity code in APPS) to evaluate those costs for allowability, allocability, and
reasonableness in accordance with FAR 31.205-33.
7.
This program contains audit steps that will help satisfy all or part of the following
mandatory annual audit requirements (MAARs):
MAAR 1 – Update Internal Control Survey
MAAR 3 – Permanent Files
MAAR 13 – Purchases Existence and Consumption
Other Planning Considerations
Prior to commencing the audit, review guidance that may impact the audit and adjust the scope
and procedures appropriately. Guidance to review includes CAM, open MRDs, FAQ training
material, guidebooks, etc. available on the DCAA Intranet.
References
1.
CAM 6-300 Audit of Incurred Material Costs and Purchased Services
2.
CAM 5-700 Audit of Material Management and Accounting Systems
3.
DFARS 242.72, 244, 252.242-7004, and FAR 31.205-26
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4.
CAM 4-702.3 and Figure 4-7-3 Identify “Examples of Characteristics and Types
of Activity Associated with Illegal Expenditures and Acts for Specific Audit
Areas”
B-1
Preliminary Steps
Version 2.13, dated November 2017
W/P Reference
1.
Review CAM 6-300
2.
Review the current MMAS business system examination and
related section of the contractor's permanent file to obtain an
understanding of the contractor's material accounting policies,
procedures, and the level of control risk associated with the related
internal controls. Contractor organization charts, material charging
and distribution system flowcharts, and listings of current
Government contracts are very useful sources of information and
should be referred to often during the analysis. All relevant
information gathered during the audit should be referenced in the
permanent file. (MAAR 3)
3.
Using the framework and the guidelines in WP B-2, obtain and
document an understanding of the contractor's internal controls that
are relevant to the audit. With the proper planning auditors should
be able to obtain and document a major portion of this
understanding during a walk-through of the contractor's assertion.
4.
Contact the contracting officer to ascertain any known concerns
(including risk related to the contractor’s financial condition) that
will impact the audit and adjust the audit scope and procedures
accordingly. If information regarding the contractor’s financial
condition is not available from the contracting officer, the auditor
should perform the procedures addressed in CAM 2-306.1c(2)and
(3). If during the course of the audit the auditor becomes aware of
unfavorable or adverse financial conditions, they should
immediately communicate their concerns to the contracting officer,
and appropriately adjust the scope of audit. If the work is technical
in nature, so that the auditor might be unable to determine whether
the effort is being appropriately charged, consider requesting
specialist assistance.
5.
Electronically transmit an acknowledgement/notification to the
ACO/Buying Command notifying them of the commencement of
the risk assessment and that the expected completion date will be
provided in the formal acknowledgement/notification once the risk
assessment is complete. (CAM 2-305). The
acknowledgement/notification process should be within the
timeframe and in accordance with the procedures in CAM 4-104.
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6.
Consider audit leads or key prior audit findings from a review of
permanent files and prior audits.
7.
Determine whether there are any outstanding contract or CAS
noncompliances affecting purchased materials/services
(particularly CAS 402 and 411). If there are noncompliances,
discuss with your supervisor how they will affect your audit scope.
8.
Review permanent file to determine if previous audits included
findings and recommendations that impact the subject matter
under audit (GAGAS 5.06). If there were findings, auditors should
document this information in the risk assessment and perform the
following procedures:
a.
During the entrance conference, ask contractor management if
corrective actions were taken to address findings and
recommendations reported in previous DCAA audits (e.g.,
questioned costs, business system deficiencies, CAS audits)
that are relevant to the subject matter of audit. If yes, have
contractor explain corrective actions taken and determine if
additional audit procedures should be included in the fieldwork
to test the corrective actions.
b.
Document the results of the inquiry and the impact of the
corrective actions to the subject matter under audit. (Note: The
purpose of this question is to follow up with contractor on
relevant prior DCAA audit findings that could have a material
effect on the subject matter of audit.)
9.
Review permanent file to determine if the contractor has
previously provided other studies or audits (e.g., summary listing
of internal audits or external audit reports) that directly relate to
the subject matter under audit (GAGAS 5.06). If there are no
other studies or audits, document that information in the work
papers and perform the procedures below. (If you do not perform
the following procedures, you must document your justification for
the departure.)
a.
During the entrance conference:
Ask contractor management if internal audits were
performed. If yes, request contractor provide a summary
listing of the internal audits that would assist us in
understanding and evaluating the efficacy of the internal
controls relevant to the subject matter of the audit.
Ask contractor management if other types of audits or
studies were performed by other than DCAA (e.g., other
Government audit agencies, consultants, Independent
Public Accountants, etc.) that would impact the subject
matter under audit. If yes, have contractor explain what
type of audits or studies were performed, if there were any
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related findings or recommendations, and any contractor
corrective actions taken as a result.
b.
If the review of the perm file or the contractor identifies
relevant internal audits:
Determine if access to these reports is necessary to
complete the evaluation of the relevant internal controls to
support the risk assessment or audit procedures related to
the subject matter of the audit. There must be a nexus
between the internal audit reports and the scope of this
specific assignment.
Document the results of the determination in writing.
If assignment is at a major contractor location, coordinate
with the CAC or FAO point of contact (POC) for internal
audit reports to request the contractor provide access to the
reports.
If assignment is at a non-major contractor and the FAO
does not have a designated POC, the auditor should request
the contractor provide access to the internal audit reports.
The request, issued by the CAC, FAO POC or auditor,
should include information on how the internal audit report
is relevant to the DCAA audit. Place a copy of the request
in the assignment administrative work papers.
c.
If the review of the perm file or the contractor identifies
relevant other audits or studies:
Obtain publicly available information for the relevant other
Government agency audits (e.g., websites for DoD IG or
other IGs, service audit agencies, etc.).
Make appropriate adjustments to your risk assessment
and
planned procedures based on the reported findings.
d.
Document the results of the inquiries including the response
received from contractor’s for any request for access to internal
audit reports. (If access was not granted this should include
the contractor’s rationale or justification for not granting
access).
e.
Determine if additional audit procedures are needed to address
any identified risk. (Note: The purpose of this question is to
discover any new audit leads that could affect the scope of
current audit.)
10.
Hold an entrance conference with the contractor to exchange
preliminary information. If applicable, include a follow up with
contractor management on:
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a.
corrective actions that address previous DCAA audit findings
and recommendations (step 9),
b. other studies or audits that impact the subject matter under audit
(step 10).
11.
Issue a notification letter to the contractor regarding the audit in
accordance with CAM 4-302.3.
12.
During the entrance conference, or other appropriate meeting,
make inquiries of contractor management regarding knowledge of
any fraud or suspected fraud affecting the subject of this audit,
managements awareness of allegations of fraud or suspected fraud
affecting this audit, and management’s understanding about the
risks of fraud relevant to this audit. Note: This discussion and any
data submitted should be documented in the working papers.
13.
Based on the team's understanding of the criteria, subject matter,
and the contractor and its environment, hold a planning meeting
with the audit team (at a minimum, Supervisor and Auditor) to
discuss and identify potential noncompliances, due to error or fraud,
that could materially affect the subject matter.
The discussion should include:
relevant prior audit experience (e.g., questioned cost, relevant
reported estimating or accounting system deficiencies)
relevant aspects of the contractor and its environment
risk of material noncompliance due to fraud (e.g., the extent of
incentives, pressures and opportunities to commit and conceal
fraud, and the propensity to rationalize misstatements)
other known risk factors
the audit team’s understanding of relevant internal controls,
inquiries to the contractor regarding its fraud management
plans and controls
Document fraud risk factors/indicators (see - Sources of Fraud
Risk Factors below) that are present and could materially affect the
subject matter. If fraud risk factors are present, document specific
audit procedures designed to address the increased risk of material
noncompliance due to fraud.
Communication among audit team members about the risk of
material misstatement due to error or fraud should continue as
needed throughout the audit.
Sources of Fraud Indicators:
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GAGAS Appendix Section A.10 – Examples of Indicators of
Fraud Risk (
http://gao.gov/products/GAO-12-331G
)
AU-C 240.A75 (Appendix A)- Consideration of Fraud in a
Financial Statement Audit, Examples of Fraud Risk Factors
(
http://www.aicpa.org/Research/Standards/AuditAttest/Downl
oadableDocuments/AU-C-00240.pdf
)
DoDIG’s Contract Audit Fraud Scenarios and Resources
website
(
http://www.dodig.mil/Fraud-Resources/ContractAudit/
)
(To access the Sources of Fraud Indicators, copy and paste the web
address shown above into the address block in Internet Explorer.)
C-1 Verification of Purchases Existence and Consumption
W/P Reference
Version 2.13, dated November 2017
1.
Obtain the appropriate contractor accounting records that support
the direct charges to contracts and provide the detail of materials
and
services
purchased
from
an
immediately
prior
accounting/reporting period (preceding day, week, or month) (CAM
6-302f., g., & h.).
2.
Select an appropriate sample from the contractor’s accounting
records.
3.
Physically locate all sample material items and/or verify that the
sample services have been received/performed. Determine if any
assist audits are required for any off-site locations (CAM 6-
305.3a(2)). Request and track the assist audit in accordance with
CAM 6-805. (MAAR 12)
4.
If the selected parts are not located at the contractor’s facilities, the
auditor needs to perform sufficient follow-up effort. Similarly, if
selected purchased services are not being performed at the primary
contractor's location, sufficient follow-up effort is required to verify
the services are being performed. Follow-up effort could include:
a.
Request confirmation of the existence of selected parts and/or
the performance of purchased services from the cognizant
offsite auditors.
b.
Review shipping and receiving documents.
c.
Make inquiries to contractor and/or Government personnel and
confirm through other corroborating evidence.
5.
Obtain purchase orders for the sampled materials/services and trace
to receiving reports.
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6.
Match receiving reports to vendor invoices.
7.
Verify that the sampled items were:
a.
Needed for the contract, by comparing purchase requisitions or
purchase orders to contract requirements and/or bill of materials.
b.
Purchased in reasonable quantity. If a MMAS business system
examination is planned for the current fiscal year at this
contractor, this step should not be included in the MAAR 13
review, since it is covered in greater detail in the MMAS
business system examination.
c.
Purchased at a prudent price. If a MMAS business system
examination is planned for the current fiscal year at this
contractor, this step should not be included in the MAAR 13
review, since it is covered in greater detail in the MMAS
business system examination. All significant transactions
involving charging to Government contracts on a basis other
than cost should be reviewed.
d.
Used on the contract. When materials are requisitioned from
stores, audit tests should include items charged to work orders
or similar records.
e.
Properly accounted for as to initial charge, transfer in or out, and
residual value in the accounting records. Miscellaneous costs
associated with material purchases, such as transportation,
charged directly or as items of indirect costs should be reviewed,
if material or risk warrants.
f.
Considered properly for make or buy.
8.
Perform a follow-up of any back-ordered materials. Verify that
these materials were either received at a later date or deleted from
applicable vendor invoices.
D-1 Development of Findings
W/P Reference
Version 2.13, dated November 2017
1.
Document the sample audit results.
2.
Discuss audit results with the audit supervisor.
3.
If applicable, determine if material mischarges disclosed represent
isolated instances or indicate more widespread conditions.
4.
Determine any costs questioned related to material mischarges.
5.
If conditions which raise a reasonable suspicion of fraudulent or
other suspected irregular activities are disclosed and cannot be
resolved by audit, promptly report these as described in CAM 4-
702.4.
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6.
Incorporate any assist audits, and follow-up on any outstanding
assist audits.
A-1
Concluding Steps
W/P Reference
Version 2.13, dated November 2017
1.
Team Discussion. Hold a meeting with the audit team (whoever is
appropriate for the level of audit risk or preliminary audit results).
Discuss the results
.
2.
Draft a MEMORANDUM FOR RECORD documenting your results for
incorporation in the future incurred cost audit. If the contractor does not
agree with any identified questioned cost(s), draft a DCAA Form 1 in
accordance with CAM 6-900, Notices of Cost Suspensions and
Disapprovals under Cost-Reimbursement Contracts. If the assignment is
an assist audit, provide a copy of the memo to the requesting office.
3.
If material weaknesses/significant internal control deficiencies are
disclosed, ensure that the findings have been fully developed (including
which specific audit criteria are identified (i.e., DFARS 252.242-7006(c)
and that a material weakness truly exists. If so, open a Business Systems
Deficiency (Activity Code 11090) assignment to report the deficiencies.
4.
Obtain supervisory review of working papers and draft memorandum
prior to discussions with the contractor.
5.
Prior to the exit conference, auditors should discuss the draft results with
the contracting officer and invite the contracting officer to attend the
exit conference:
a.
Brief the contracting officer on significant questioned costs or other
significant issues, or
b.
If there are no significant findings, discuss the results of the evaluation
with the contracting officer.
6.
Conduct an exit conference in accordance with CAM 4-304. Provide a
draft copy of the results to the contractor and incorporate the contractor’s
reaction into the draft memorandum in accordance with CAM 10-
208.5(d). If necessary, respond to contractor’s comments. Finalize the
memorandum.
7.
Update the contractor permanent file (MAAR 3) in accordance with CAM
4-405 Permanent File.
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