Audit Guidance on Documenting the Understanding of Internal Controls for Contractors With Less Than $15

DEFENSE CONTRACT AUDIT AGENCY DEPARTMENT OF DEFENSE 8725 JOHN J. KINGMAN ROAD, SUITE 2135 FORT BELVOIR, VA 22060-6219 IN REPLY REFER TO PQA 720.7.A. November 1, 2005 05-PQA-066(R) MEMORANDUM FOR REGIONAL DIRECTORS, DCAA DIRECTOR, FIELD DETACHMENT, DCAA SUBJECT: Audit Guidance on Documenting the Understanding of Internal Controls for Contractors With Less Than $15 Million Annual Dollar Volume (ADV) Summary This memorandum is being issued to provide examples of working paper (W/P) B-2, Section 1, “Review of Internal Controls and Assessment of Control Risk”, (Enclosures) to illustrate the documentation necessary to support the auditor’s understanding of internal controls at contractors with less than $15 million of annual dollar volume (ADV). Background In MRD 05-PQA-045(R), dated June 28, 2005, we provided key results of the FY 2005 PCIE-based review on incurred cost audits, along with related audit guidance to address areas needing improvement. (The complete results of the PCIE-based review can be found on the DCAA intranet at the Policy Quality Assurance web page under “PCIE-based reviews.”) As stated in MRD 05-PQA-045(R), auditors are required to document their understanding of contractor internal controls in every audit performed in accordance with the Government Auditing Standards. This step is required even when control risk is assessed as maximum (CAM 5-111.2). Generally, at smaller contractors, ...