Revisions in the Audits of Federal Government Contractors
Esernio, Robert A., Jr., Dyson, Robert A., Coorssen, Harriet, The CPA Journal
The rules and regulations applying to government contracts seem like a giant maze to the newcomer to this work. The new AICPA guide captures the essence of the required knowledge needed a CPA in this work and provides references to more detailed instructions.
In 1990, the AICPA issued an audit and accounting guide, Audits of Federal Government Contractors. The guide replaced the industry audit guide, Audits Of Government Contractors, which was originally issued in 1975 and subsequently enhanced in 1981 by SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." The guide applies to audits of financial statements of entities providing goods and services to the federal government or their subcontractors. It reflects changes resulting from the accounting and auditing pronouncements and federal statutes and regulations issued since 1975.
The objectives of the guide are to provide both a general background of the federal government contracts environment and practical guidance regarding accounting, auditing, and financial reporting for federal contractors. It describes relevant federal regulations and associated business and operating risks and describes the prevalent practices in applying professional accounting and auditing pronouncements and SEC regulations to government contractors. And if more information is needed, the guide contains an annotated bibliography of selected books, periodicals, and manuals useful in obtaining additional understanding of government contracting, keeping abreast of current developments, and researching specific issues.
The federal contract sector has become more complex with the passage of new laws and regulations. The guide reflects that growing complexity by providing a more complete description of Federal Acquisitions Regulations (FAR) that include FAR supplements, Cost Accounting Standards Board pronouncements (CAS), cost principles, definitions of cost allowability, changes in cost accounting practices, and cost estimation. In addition, the guide discusses supplemental acquisition regulations issued by various government agencies and circulars issued by the Office of Management and Budget which supplement and implement FAR. Finally, the guide describes defective pricing, contract claims, terminations, and suspension and debarment. The guide, however, presents only a general description of these matters and practitioners and industry accountants are advised to refer directly to FAR and other publications listed in the guide's bibliography in order to keep current or to research specific situations.
USING THE GUIDE
The guide is a mini-course in contracting with the federal government. It explains what it means to do business with one of the world's largest purchasers of goods and services. The guide alerts the CPA to the unique circumstances present when a business entity decides to contract with a sovereign power that "conducts its procurement activities under specific laws and implementing regulations."
Chapter 1, "Contract Procurement Process," provides general background on how the federal government contracts for goods and services. Some it buys the shelf, just as many other customers. Frequently, however, the federal government will be the only purchaser and there will be no market to establish prices or foster competition. Accordingly, the federal government must introduce procedures to insure quality at a reasonable price. The auditor must understand these procedures.
Chapter 2, "Federal Acquisition Legislation and Regulations," provides the background for the auditor to understand the laws and regulations that must be considered in designing the audit of a federal contractor. It explains the role of FARs and the cost principles that must followed in accounting for federal government contracts. The auditor is made aware of the fact that there are differences between GAAP and FAR and CAS requirements. …