When working as a government contractor, it’s important to know what is being looked for when it comes to your accounting system. If you are having trouble figuring out what evidence is necessary to show that your business satisfies DCAA audit requirements, here is a checklist of the QuickBooks Reports you must provide.
The DCAA focuses on three things: the way your accounts are set up, the flow of your transactions in your accounting system, and the computations that have come from it. If you follow this checklist, you shouldn’t have to worry about an audit if one comes up.
Set Up of Accounts
It is important to have your accounts properly set up in case of an audit in a way that allows costs to be distinguished easily from each other. You’ll want to be intentional when it comes to your accounting sequence so that your entire accounting system is in order.
1. Chart of Accounts
The chart of accounts is basically a list of general ledger accounts where financial transactions are posted. Make sure that you separate costs that are direct, indirect, and unallowable to keep your setup organized.
DCAA will also want to make sure you’re following Generally Accepted Accounting Principles (GAAP) by taking a look at this report.
Flow of Your Transactions in Your Accounting System
DCAA will be interested in the flow of transactions through your accounting system and these reports will help show that. They want to ensure that transactions are recorded accurately and make sense with other systems.
2. General Ledger Detail
A general ledger provides information on beginning balances, transactions, and ending balances for each account over whatever specified period of time is chosen.
3. Trial Balance
This includes both a Summary Trial Balance and a Working Trial Balance. A Summary Trial Balance summarizes both the debit and credit balances on each account. A Working Trial Balance contains more details such as the opening balance, transfers, transactions, and closing balance.
The Computations Derived from It
Lastly, DCAA will look at how costs and revenue are allocated to projects. They will also look at how you calculate your indirect rates.
4. Labor Distribution Report
Labor distribution refers to how you are allocating labor costs, whether direct or indirect, to the total time that is being recorded on timesheets.
It may be smart to separate your cost categories so that you have separate sections of direct labor for government and commercial contracts, as well as overhead for commercial and government contracts.
All DCAA wants to see is that labor costs are being fairly distributed between government and commercial contracts.
5. Profit & Loss by Job
It is important that your accounting system has the ability to accumulate costs by project. The Profit & Loss by Job report should agree with the standard Profit & Loss (P&L) so that there is confidence in accuracy.
6. Rate Calculations
No matter the software or template you use, DCAA audit compliance can be achieved if you are able to show a spreadsheet that you have used before to correctly calculate any indirect rates you’ve had.
Wrap rates will require that you justify the basis of your calculations. FAR will require that trends and budgetary data is shown to prove the reasonableness of proposed rates so they can be evaluated.
As long as this is based on reasonable sales forecasts and costs, you should be good. If you are a smaller firm with limited budgetary data, you can use historical data to calculate out-year rates.
7. Contract Backlog Reports
This report allows you to see the percentage of work that has been completed and the remaining cost to complete each job in your backlog. It’ll let you know the money left on your contract, any potential contract overruns, and any corrective actions that may be required.
There may sometimes be issues relating to revenue recognition or unbilled account receivables. Unbilled receivables may arise because of various reasons.
Revenue recognition can differ depending on contract type but generally, any billed amounts should be based on the accounting principle of a contract with matching revenue with the cost associated with earning said revenue.
8. Monthly/Period Close Checklist
This last item on the checklist is mostly to show auditors the system you have in place to check for errors in your books. The month-end or period-end process involves recording transactions, making sure that account balances are correct and adjusting if you need to, and monitoring different reports.
As long as you have a system in place to identify and fix mistakes in your accounting system, you should not run into any problems.
Call Diener & Associates
You may still be asking yourself “what is DCAA compliance?” This can be a lot to take in and difficult to understand. If you still have questions about keeping your business in compliance with the DCAA, Diener & Associates can help give you all the support you need.