Defense Contract Audits - The CPA's (Certified Public Accountant's) Role

• NCJ Number: 80662
• Journal: Journal of Accountancy Volume: 151 Issue: 4 Dated: (April 1981) Pages: 42-46,48
• Author(s): D Neuman
• Date Published: 1981
• Length: 6 pages
• Sale Source: National Institute of Justice/
• Language: English
• Country: United States of America

Annotation

Several key areas that should be given greater emphasis by the independent auditor of firms with defense contracts are identified and discussed.

Abstract

Auditor responsibilities under defense contracts are discussed with regard to contract cost limitations, overruns, termination clauses, and the law on truth in negotiations. The limitation-of-cost clause requires the contractor to notify the Government when cumulative cost will exceed 75 percent of the estimated costs shown in the contract. The contractor is also expected to notify the Government if costs will be substantially more or less than those in the contract. The auditor should determine that the client has followed the provisions of this clause for each cost-type contract. The auditor must review fixed price contracts to determine the potential liabilities of the client in regard to completion of products or services required. The auditor should carefully review the booking of any costs to evaluate the reasonableness of those costs in excess of the contract amount. Each defense contract includes a termination clause permitting the Government to unilaterally terminate the contract. When a contract is terminated, the contractor will not receive the full amount of the contract; therefore, the auditor should consider what amounts will be received and what portion of those amounts should be included as a sale and as a receivable. Under the truth in negotiations law, all negotiated contracts over $100,000 and contract modifications over $100,000 give the Government the right to adjust the contract price in the event that the price agreed on was based on inaccurate, incomplete, or noncurrent cost of pricing data. The auditor should be aware of whether the Defense Contract Audit Agency has conducted or is conducting a defective pricing review of the client company and whether such a review had occurred during the audit period. This indicates a potential problem. Resources for accountants to use in obtaining guidance for properly servicing defense contract clients are noted.