It’s a universal truth for all accounting: the best planning for an audit is an existing, systematic, consistent approach to your accounting system with strong internal control.
The DCAA will send you a demand for information that ensures the audit package is ready for their review. This doesn’t actually mean an audit is near. However, this notice is a good indication to begin cleaning off previous submissions or to submit any updates to your Incurred Cost proposal (ICP). There may be a number of unique situations, cost treatments, or calculations that will require you to refresh your memory.
An incurred cost submission decides the actual indirect cost rates that the contractor incurred during the year. The contractor then uses these actual indirect rates to settle the agreement. Govt entities may owe the contractor money or the contractor may owe the government money. Then, any improvements found in the ICS can be accounted for on the final invoice. The Contracting Officer should close agreements after the ICS has been presented, the prices accepted and any bill presented.
The DCAA Audit has in the past audited several ICPs covering some of all of a contractor’s financial years awaiting final indirect cost review. Be sure to review all ICP submissions for potential updates and various cost treatments.
Talk to your accountant as soon as possible if you are uncertain as to whether government agreement requires an incurred cost submissions. If possible consult your financial advisor before you sign a legal agreement. This will allow you and your accountant to be proactive and ready for preparing an ICS.
