5794
AUDIT GUIDE
FOR
EPA CONTRACTS
ENVIRONMENTAL PROTECTION
AGENCY
WASHINGTON, D.C. 20460
FEBRUARY 1976
-------
B.7581 Galley 01
This document is not a replacement to the Acts, the regulations, the guidelines, or thk
official EPA policy statements. It is a supplement to these documents, providing basic
audit guidance and showing example audit reports. Any clarifications and the specific
conditions of each audit should be discussed with the appropriate EPA audit Manager.
-------
TABLE OF CONTENTS
Chapter Page
1: INTRODUCTION 1.1
1.1 Purpose of Audit Guide 1.1
1.2 Authority for Audit 1.1
1.3 Standards of Audit 1.1
1.4 Audit Objectives 1.1
1.5 Matters Requiring Immediate Attention 1.2
1.6 Quality Control 1.2
2: BACKGROUND ON CONTRACTING 2.1
2.1 General 2.1
2.2 Methods of Procurement 2.1
2.3 Types of Contracts 1.2
2.4 Rules, Regulations and Requirements . 2.3
3: PRELIMINARY PROCEDURES 3.1
3.1 Preliminary Planning 3.1
3.2 Preparing for the Audit 3.1
3.3 Entrance Conference 3.2
3.4 Initial Field Audit Procedures 3.2
4: AUDIT OF COSTS 4.1
4.1 Basic Guidelines 4.1
4.2 Approach to Costs 4.1
4.3 Payroll/Fringe Benefits 4.4
4.4 Subcontracts 4.6
4.5 Equipment, Supplies, and Material 4.7
4.6 Travel 4.8
4.7 Other Direct Costs 4.8
4.8 Indirect Costs 4.9
5: AUDIT OF OTHER MATTERS 5.1
5.1 Program Accomplishment 5.1
5.2 Cash 5.1
5.3 Property Management 5.2
5.4 Cost Overruns 5.3
5.5 Cost Sharing Contracts 5.3
-------
6: AUDIT OF DEFECTIVE PRICING Reserve
7: AUDIT OF TERMINATIONS Reserved
8: EXIT CONFERENCE 8.1
9: AUDIT REPORT 9.1
9.1 Introduction 9.1
9.2 Content and Format 9.1
9.3 Presenting the Findings 9.1
9.4 Auditor's Reports on Subcontract Costs 9.1
APPENDIX
A SURVEY OF CONTRACTORS MANAGEMENT SYSTEMS
B EPA AREA AUDIT OFFICES AND COGNIZANT GEOGRAPHIC AREAS
C REFERENCES
11
-------
CHAPTER 1: INTRODUCTION
1.1 PURPOSE OF AUDIT GUIDE
This guide is intended to assist the Environmental Protection Agency (EPA) auditors,
independent public accountants, and auditors of public agencies to understand the special
requirements for audit coverage of EPA contracts. The audit steps in this guide are
intended to provide general insight into the nature and scope of audit contemplated. This
guide is not intended to be a complete manual of procedures, nor is it intended to supplant
the auditor's judgment of the work required to meet the audit objectives outlined in this
guide. The audit procedures contained in this guide may not cover all circumstances or
conditions encountered in auditing a particular contract and similarly not all of the audit
procedures will apply to each contract audited. Auditors must use their professional
judgment to tailor the procedures to meet conditions at the audit site so that the audit
objectives set forth in the guide may be achieved.
1.2 AUTHORITY FOR AUDIT
Each of the Public Laws authorizing EPA to make grants and contracts provides that
EPA shall have the authority to audit and examine the books and records of the parties
receiving such financial assistance. The provisions regarding audit are clearly spelled out
in the general provisions of each EPA contract.
The EPA Office of Audit is responsible for all audits of EPA contracts. The Area Audit
Manager (see Appendix B) may elect to have an individual audit conducted by his staff,
another Federal agency, state or local auditors, or an independent public accountant.
When the Area Audit Manager elects to have the audit performed by an independent
public accountant, he will notify the contractor as to which firm will perform the audit. It
will be the selected firm's responsibility to contact the contractor to arrange the start of
the audit.
1.3 STANDARDS OF AUDIT
Audits of EPA contracts will be made in accordance with the Standards for Audits of
Governmental Organizations, Programs, Activities, and Functions issued by the
Comptroller General in 1972. The auditor will not be required to express an opinion as to
the efficiency and economy of operations or with respect to program evaluations. He may
however, be requested by the Area Audit Manager to perform certain audit tests related to
these aspects and to report the results of his examination.
In performing audits of EPA contracts, the auditor is expected to adhere to generally
accepted auditing standards. In addition, he should utilize those portions of the American
Institute of Certified Public Accountants' (AICPA) industry audit guides considered
applicable. Of particular importance is the guide "Audits of Government Contractors."
1.4 AUDIT OBJECTIVES
The objectives of the audits of contracts are:
to determine whether the management controls exercised by the contractor through its
management system, accounting system, procurement system, and property control
systems are adequate to provide assurance that costs claimed are reasonable,
allowable, and allocable to the sponsored project under the contract terms and
applicable sections of the Federal Procurement Regulations (FPR's),
1.1
-------
to review operations and report any noncompliance with applicable contract provisio;
or EPA rules and regulations and, based upon the review, to provide recommendations
for improvement.
to determine whether the costs claimed under the EPA contract are reasonable,
allowable, and allocable to the sponsored project.
1.5 MATTERS REQUIRING IMMEDIATE ATTENTION
During the course of the audit, the auditor may encounter suspected fraud, irregularity,
or collusion and insufficient evidence or inadequate systems.
1. Suspected Fraud, Irregularity, or Collusion
The purpose of audits performed in accordance with this guide is not to detect fraud,,
although performance of the audits may minimize fraud loss, discourage irregularities,
and identify conditions of gross mismanagement. If, during the examination, instances of
possible fraud, gross mismanagement, or other irregularities are identified, the auditor
will:
document the situation;
immediately notify the Area Audit Manager of the situation encountered; and
proceed only in accordance with instructions provided.
2. Insufficient Evidence or Inadequate Systems
Auditors are expected to use professional judgment in arriving at conclusions
concerning the sufficiency of available supporting evidence. If additional guidance i°
needed as to the acceptability of certain evidence, the auditor should contact the An
Audit Manager or his designated representative. When insufficient data or inadequate
systems preclude the reaching of conclusions concerning the reasonableness, allocability,
and allowability of costs, within a reasonable period of time, the auditor must, as a
minimum:
document tests and observations to support opinions regarding insufficient evidence or
inadequate systems;
inform the Area Audit Manager by telephone and confirm by letter; and
cease work until instructions are received.
1.6 QUALITY CONTROL
EPA retains the right to review audit work papers to evaluate the overall quality of the
audit. In this regard, EPA may require copies of the audit work papers to be forwarded,
along with the completed audit report, to the responsible Area Audit Manager or his
designated representative. The audit work papers will be returned to the auditor upon
completion of the EPA evaluation. Based on EPA's evaluation, the auditor may have to
return to the job site to perform additional work required. In this regard, the auditor
should retain the work papers applicable to the audit of any EPA contract for three years
after completion of the assignment and submission of the required audit report.
1.2
-------
CHAPTER 2: BACKGROUND ON CONTRACTING
2.1 GENERAL
EPA was established under Presidential Reorganization Plan No. 3 of 1970. By this
Plan, the environmental functions and responsibilities of five different Federal agencies
were transferred to EPA. The responsibilities transferred included research, standard-
setting, monitoring, and enforcement related to all six environmental hazards: air and
water pollution, solid waste disposal, radiation, pesticides, and noise.
Under the various appropriations acts, EPA has the authority to enter into contracts for
services and/or products needed to further EPA programs.
'2.2 METHODS OF PROCUREMENT
The two methods of EPA procurement are by formal advertising and negotiation. By
law, the preferred method of procurement is formal advertising. Negotiated procurements
are permitted only under certain defined exceptions to the preferred method, although
these exceptions are commonly used.
Formal Advertising. Procurement by formal advertising covers four basic phases of
government involvement: (a) preparation of invitations for bids, (b) publication and
distribution of invitations for bids to companies appearing on qualified bidders listings,
(c) receipt of bids in response to the invitation, and (d) award of contract to the lowest
responsive, responsible bidder whose bid is most advantageous to the government, price
and other factors considered. (See FPR 1-2)
Negotiated Procurement. "Negotiation" pertains to procurements made without the use
A formal advertising. Requests for quotations or requests for proposals (commonly
referred to as RFQs and RFPs) for the item to be procured are sent to contractors whose
names appear on qualified bidders listings. Contractors responding to an RFQ submit
only total item contract price quotations; contractors responding to an RFP usually
support the total price by submitting cost and pricing data, or other evidence of
reasonable prices, and in certain instances data regarding technical and management
plans and capabilities for the job. The contracting officer may accept price quotations or
proposals without negotiation, or he may conduct price negotiations with those firms
whose offers fall within a competitive range. He may analyze, question, require audit, and
bargain in important areas of the proposals. (See FPR 1-3).
2.3 TYPES OF CONTRACTS
Generally contracts may be classified within two broad categories; fixed-price contracts
and cost contracts. Fixed-price contracts provide for a stated contract price, a specified
scope of work, and a specified performance schedule, but may be subject to adjustment
based on the application of economic price adjustment (escalation), redetermination,
incentive, or other pricing provisions. Cost contracts provide for reimbursement of
allowable or otherwise defined costs incurred plus a fee (profit) in many cases. Such a
contract requires that the contractor use his best efforts to accomplish the scope of work
within a specified time and within the stated dollar limitation.
Within these two broad categories there are presently a number of variations, the more
common of which are described below.
2.1
-------
1. Fixed-Price Contracts
Firm fixed-price contract. A contract in which the price is not subject to any adjustment
by reason of the cost experience of the contractor for his performance under the contract.
Fixed-price contract providing for firm target cost incentives. A contract which provides
at the outset for a firm target cost, a firm target profit, a price ceiling (but not a profit
ceiling or floor), and a formula (based on the relationship which final negotiated total cost
bears to total target cost) for establishing final profit and price.
Fixed-price contract providing for successive target cost incentives. A contract which
provides at the outset for an initial target cost, an initial target profit, a price ceiling, a "
formula for subsequently fixing the firm target profit (within a ceiling and a floor
established along with the formula, at the outset), and a production point at which thet
formula will be applied.
Fixed-price contract providing for performance incentives. A contract which incorpo-
rates an incentive to the contractor to surpass stated performance targets by providing for
increases in the profit to the extent that such targets are surpassed and for decreases to
the extent that such targets are not met.
Fixed-price level-of-effort term contract. A contract which usually calls for investigation
or study in a specific research and development area. It obligates the contractor to devote
a specified level of effort over a stated period of time for a fixed dollar amount.
2. Cost Contracts
Cost-sharing contract. A contract under which the contractor is reimbursed only for an
agreed portion of costs and under which no provision is made for fee.
Cost-without-fee contract. A contract under which the contractor is reimbursed for costs
with no provision for a fee.
Cost-plus-fixed-fee contract. A contract under which thecontractor is reimbursed for
costs plus the provision for a fixed fee.
Cost-plus-award-fee contract. A contract under which the contractor is reimbursed for
costs plus a fee consisting of two parts: (1) a fixed amount which does not vary with
performance and (2) an award amount based on performance in areas such as quality,
timeliness, ingenuity, and cost-effectiveness. The amount of award fee is based upon a
subjective evaluation by the government of the con tractor's performance judged in light of
criteria set forth in the contract.
Cost-plus-incentive-fee contract (Incentive based on cost). A contract under which the
contractor is reimbursed for costs plus a fee which is adjusted by formula, in accordance
with the relationship which total allowable costs bear to the target cost. At the outset
there is negotiated a target cost, a target fee, a minimum and maximum fee, and the
adjustment formula.
Cost-plus-incentive-fee contract (Incentive based on performance). A contract under
which a contractor is reimbursed for costs plus an incentive to surpass stated performance
targets by providing for increases in the fee to the extent that such targets are surpassed
and for decreases to the extent that such targets are not met.
2.2
-------
Under cost contracts statutory limitations have been imposed on fees negotiated at the
utset of the contract as follows:
Fees for experimental, developmental, or research work cannot be more than 15 percent
of estimated cost.
Fees for architectural or engineering services for a public work or utility cannot be more
than 6 percent of estimated cost.
Fees on other cost contracts cannot be more than 10 percent of estimated cost.
It should be noted that fixed-price and cost incentive contracts may include a
combination of both cost and performance incentives.
In addition to the two broad categories of contracts described above, there is a time and
material contract. Under this type of contract the contractor is paid on the basis of direct-
labor hours, expended at fixed hourly rates (that include direct-labor, indirect expenses,
and profit), and the costs of materials or other specified costs.
2.4 RULES, REGULATIONS AND REQUIREMENTS
Companies engaged in government contracting are subject to rules and requirements
set forth in the applicable procurement regulations. The Federal Procurement Regulations
contain provisions covering contract clauses (FPR 1-7), terminations (FPR 1-8), and
contract costing principles (FPR 1-15). In addition, general familiarity with the
pronouncements of the Cost Accounting Standards Board and regulations of the
Renegotiation Board is important.
The government has significant rights in the award and control of government
contracts and related subcontracts not generally found in contracts between commercial
enterprises. Some of the more important rights permit the government to do the following:
Negotiate contract price adjustments depending on contract type or specific contract
clauses.
Disallow specific costs and expenses.
Require advance agreements by contractor before sharing in certain costs and
expenses.
Provide government-furnished material or equipment.
Terminate contracts at the convenience of the government.
Direct changes at any time within the general scope of the contract subject to equitable
adjustment of the contract price.
Subject the contractor to preaward and post-performance audits of costs of certain
contracts.
More complete guidance as to the rules and regulations which apply to an individual
contract are set forth in the terms and conditions, or general provisions of the contract. A
general discussion of the common contracting requirements utilized under EPA contracts
is as follows:
2.3
-------
1. Prior Approval Items
To control the contractor's cost expenditures and to ensure that EPA objectives are met
contract provisions require that the contractor obtain the prior authorization and
approval of the EPA contracting officer before he takes specified actions or incurs certain
costs. For example, prior approval (or consent, in the case of subcontracting) is required
for subcontracting under cost-reimbursement and certain other types of contracts, for
reimbursement of anticipated costs to be incurred in excess of cost limitations under cost-
reimbursement type contracts, and for reimbursement for overtime and premium wage
payments. In all cases, the cognizant contracting officer is responsible for providing such
approvals.
a. Special provisions can be written into the cost-reimbursement contract which require
the contractor to obtain EPA approval before incurring costs for such special elements as
travel (foreign or local), consultants, property, data processing equipment or services, etc.
The contracting officer will attempt to resolve approvals on these special elements prior to
contract award; however, if there are certain unknowns, this may not be possible, and
prior approval requirements may have to be written into the contract. In the event the
contractor is required to request approval of certain cost elements, his request will be
directed to the contracting officer or his designated representative.
b. Under cost-reimbursement contracts, the contractor must obtain consent for placing
(1) all cost reimbursement, time and material, and labor hours subcontracts; (2) fixed-
price subcontracts that exceed $25,000 or 5 percent of the contract price; (3) any
subcontract for facilities, regardless of value, or for special tooling having a value in
excess of $1,000; and (4) any subcontract having experimental, developmental, or
research work as one of its purposes.
The subcontract consent requirement enables the government to review proposed
subcontracts with regard to the necessity for subcontracting; the technical capabilities ol
the prospective subcontractor; the reasonableness of the costs and subcontract terms; the
type of subcontract (fixed-price, cost-reimbursement, etc.); the scope of the solicitation
(competitive or noncompetitive); and the work statement, including applicable specifica-
tions, to be included in the subcontract. With regard to the subcontracts for facilities, the
requirement for consent does not permit any facilities acquisition to be charged to the
government unless it has been otherwise specifically authorized. Subcontract review and
consent provisions are not normally included in firm fixed-price contracts.
c. Contracts are to be performed, as far as practicable, without the use of overtime, extra
pay shifts, or multishifts and, in particular, without the use of overtime as a regular
employment practice. Additional details on overtime are contained in the overtime clause
inserted in cost type contracts.
2. Cost Overruns
A cost overrun occurs when a contractor exceeds the estimated costs or the fund
limitation of a cost-reimbursement contract. Cost overruns are applicable only on cost-
reimbursement type contracts because the contractor is legally responsible for any costs
exceeding the total or ceiling prices of fixed-price contracts.
2.4
-------
Under cost-reimbursement type contracts, a contractor may not be reimbursed for costs
icurred in excess of the total estimated costs set forth in his contract schedule.
Accordingly, if the contractor has incurred costs up to the contractual cost limitation, he is
not obliged to continue performance unless the cost limitation is increased by written
notification from the contracting officer. To avoid delay of work on the procurement while
additional funds are being obtained, the standard "Limitation of Cost" clause contained
in all cost-reimbursement research and development contracts obligates the contractor to
notify the contracting officer when the costs he expects to incur in the next 60 days will
increase his total incurred costs above 75 percent of the total estimated cost of the
contract. The contractor must also give notice whenever he believes the total cost will be
substantially higher or lower than the estimated costs for performing the contract.
3. Inventions and Data Rights
Under research and development negotiated contracts, inventions are required to be
reported to EPA by the contractor. In addition, questions may arise pertaining to rights in
data by the contractor and by the government. The project officer will be consulted on both
the invention and rights in data type determinations which may develop during the
contract period of performance.
In the event the contractor reports an invention under the EPA contract, it will be
reported directly to the contracting officer. The invention report will contain all
information required by the "Patent Rights" provisions of the negotiated contract. Final
determination of rights to inventions shall be made by the administrator after seeking-
advice from EPA general counsel.
4. Monitoring and Closing Out of Contracts
The auditor should be aware of the method EPA uses to monitor and close out contracts.
/his information is summarized in the following paragraphs.
a. Progress Reporting of Contracts
Periodic progress reporting can serve as a tool in performance evaluation. Technical
reports which the contractor is required to submit furnish most of the information needed
to evaluate the physical status of the work. If cost control is a concern, the contractor will
be required to submit financial reports which will outline the various elements of costs
expended versus original or revised projected elements of costs. An item which is very
effective is a cost/technical completion overview which requires the contractor to interpret
its technical report in terms of a percentage of technical completion in relation to a
percentage-of-costs-expended figure.
b. Contract Reserves
Contractual provisions covering fees, patents, royalties, etc., usually provide for the
accumulation of a withholding reserve until certain contract requirements are met to the
satisfaction of the contracting officer. For example, payment of fixed fee is limited to 85
percent. The withheld fee (15 percent) is payable upon submission of appropriate closing
documents after final audit of the contract has been completed and all audit exceptions
have been resolved. It is the contractor's responsibility to include in his reimbursement
claims appropriate adjustments to cover the required accumulation and release of
contract withholding reserves. The contractor should resolve with the contracting officer
any questions regarding the amount of these reserves.
2.5
-------
c. Contractor's Completion Voucher and Cumulative Claim and Reconciliation
The contractor shall submit its Completion Voucher and Cumulative Claim and
Reconciliation to the accounting office and an additional copy of each directly to the
contracting officer when:
physical completion of all performance provisions of the contract and acceptance of the
final report have been accomplished; and
all costs applicable to the contract have been incurred.
The contractor shall identify the Completion Voucher by typing "Completion Voucher" in
the upper right hand corner of the SF 1034 beside the voucher number. This will advise the
contracting officer that the contract is ready for final audit.
d. Contractor's Final Voucher and Closing Documents
The contractor shall submit its Final Voucher and the appropriate closing documents to
the accounting office and an additional copy of each directly to the contracting officer
after:
the final audit has been completed;
all suspensions and/or audit exceptions have been resolved, and there is mutual
agreement between the contractor and the contracting officer on the final allowable
costs and fixed fees of the contract; and
acceptable final fixed overhead rates for all periods involved under the contract have
been approved by the contracting officer or his authorized representative and have been
incorporated into the contract.
The contractor shall submit an original and four copies of the final voucher to finalize the
financial settlement of the contract. The voucher shall be specifically identified as the
"final voucher" and should include the remaining fee reserves and any adjustments to
vouchered costs necessitated by the final settlement of the contract price. The following
documents shall be submitted with the final voucher:
contractor's release;
assignee's release, if applicable;
contractor's assignment of refunds, rebates, credits and other amounts;
assignee's assignment of refunds, rebates, credits and other amounts, if applicable; and
contractor's affidavit of waiver of lien, when required by the contract.
2,6
-------
CHAPTER 3: PRELIMINARY PROCEDURES
3.1 PRELIMINARY PLANNING
Once a request for audit is received from EPA contract officials, the Area Audit
Manager will assure that all documents necessary for audit have been provided. These
will include:
a copy of the contract (including general provisions) and all amendments.
a copy of the Completion Voucher or Final Voucher and Cumulative Claim and
Reconciliation.
a copy of indirect cost proposals covering any periods for which the indirect cost rates
have not been finalized in the contract.
The Audit Manager will review this documentation to make a preliminary determination
of the scope, schedule, and resources needed for the audit. The Audit Manager will extract
certain information for inclusion in an audit planning package for use in planning the
audit. This package will contain the following information:
contract number
contractor name, address, and phone
type of contract
amount of contract
amount claimed
narrative discussion of scope of audit contemplated.
3.2 PREPARING FOR THE AUDIT
In accepting any contract from EPA, the contractor agrees to comply with those
conditions or requirements contained in the contract or applicable portions of the Federal
Procurement Regulations. To audit these contracts, the auditor must become thoroughly
familiar with those conditions and requirements related to the individual contracts.
Accordingly, once the auditor has been selected and the preliminary audit planning has
been completed, the Area Audit Manager will provide the auditor with the necessary
documents (see paragraph 3.1), as well as copies of the latest EPA audit reports
concerning the contractor. The auditor should:
review in detail the contract and all amendments,
identify any contract conditions requiring special audit attention,
analyze the composition of costs as reflected on the completion/final voucher; and
review prior audit reports to identify potential or known problem areas to be examined
during the audit.
3.1
-------
3.3 ENTRANCE CONFERENCE
After establishment of a mutually agreed upon date for starting the audit, an entrance
conference should be held with the contractor. During this conference, the contractor
should be advised of the purpose and scope of the audit. The results of the entrance
conference should be documented in the audit work papers, and this documentation
should include a list of entrance conference attendees.
3.4 INITIAL FIELD AUDIT PROCEDURES
In starting the audit, the auditor should:
obtain background information on the contractor. This may be in the form of charters,
bylaws, incorporation documents, or public relations documents which identify the
nature of the organization's operations and key employees. In addition, the auditor
should obtain copies of the organization's financial reports as well as access to any
audit reports issued by the organization's internal or external auditors;
identify any additional EPA or other Federal grants or contracts being performed by
the contractor. In this regard, the auditor will obtain the contract number, the amount
of the agreement, the status of the contract, and the Federal agency involved. The
auditor should promptly communicate this to the Area Audit Manager so that a
decision may be made as to whether the scope of the audit will be expanded to cover
these agreements;
reconcile the expenditures claimed on the completion/final voucher with those amounts
shown on the cumulative claim and reconciliation and the contractor's official
accounting records; and
familiarize himself with the contractor's accounting, personnel, procurement, and
property management systems as they relate to contract expenditures. In this regard,
the auditor should initially obtain information regarding any established policies and
procedures governing these activities. He should then perform a limited survey to
identify significant weaknesses in the systems as they apply to the EPA grant,
utilizing, as a minimum, the survey questionnaire contained in Appendix A of this
audit guide. The survey should include sufficient testing of the records to validate the
information obtained in the survey.
3.2
-------
CHAPTER 4: AUDIT OF COSTS
4.1 BASIC GUIDELINES
Each contract contains reference to those cost principles to be used in evaluating the
acceptability of costs. Generally, EPA grants or contracts will be subject to one of the
following:
FPR 1-15.2 - Cost Principles for Contracts with Commercial Organizations
FPR 1-15.4 - Cost Principles for Architect-Engineer Contracts
FPR 1-15.7 - Cost Principles for Contracts with State and Local Governments
In addition to containing references to the allowability of individual types of costs, these
principles contain excellent background information and guidance as to the proper
treatment of costs, and the auditor should become thoroughly familiar with the
information contained in them.
4.2 APPROACH TO COSTS
In conducting an audit of EPA contracts, the auditor will be attempting to reach a
conclusion as to the acceptability of costs claimed on reimbursement vouchers submitted
to EPA. When the contractor has actually incurred costs in excess of the amounts claimed
or reported, the auditor may not increase the amount of the contractor's claim. He should,
however, disclose by means of footnotes the extent of unclaimed or unreported costs.
The scope of audit will depend on the nature and terms of the contract. Fixed-price
contracts will normally not be audited. For Labor-Hour contracts, audit effort will be
limited to reviewing the support for hours charged to the contract. Similarly, time and
material contract audits will be limited to examining the support for time and material
charges. The audit of a cost-type contract, however, will include an analysis of all types of
costs claimed. In reviewing contract costs, the auditor is evaluating each cost to determine
whether it is acceptable as a charge to the EPA contract. Costs that are not acceptable will
be questioned.
Costs questioned normally fall under one or ^ore of the following categories:
1. Unallowable costs. Costs which are specifically unallowable under the terms of the
contract or other cost principles cited in the contract or applicable EPA regulations.
2. Unreasonable costs. In determining the reasonableness of a given cost,
consideration shall be given to:
Whether the cost is of a type generally recognized as ordinary and necessary for the
conduct of the contractor's business or the performance of the contract;
The restraints or requirements imposed by such factors as generally accepted sound
business practices, arm's length bargaining, Federal and State laws and regulations,
and contract terms and specifications;
The action that a prudent businessman would take in the circumstances, considering
his responsibilities to the owners of the business, his employees, his customers, the
government, and the public at large; and,
Significant deviations from the established practices of the contractor which may
unjustifiably increase the contract costs.
4.1
-------
3. Unallocable costs. In reviewing the alienability of costs, the auditor will be guided
by the following criteria:
A cost is allocable to a particular contract to the extent of benefits received;
Any cost allocable to a particular project or function may not be shifted to a Federal
contract to overcome fund deficiencies, avoid restrictions imposed by law or contract
agreements or for other reasons; and,
Where an allocation of joint cost will ultimately result in charges to a contract, an
indirect cost rate proposal will have to be prepared to justify the equitability of the
charge.
4. Undocumented costs. Costs for which detailed documentation is not available
show that the costs claimed were in fact incurred under the EPA contract.
5. Unapproved costs. Costs for which contract provisions or applicable cost
principles require awarding agency approval, but for which the auditor finds no evidence
of such approval.
Figure 4.1 contains examples of questioned costs. The designation of a cost as
questionable by the auditor does not necessarily mean that the cost will be disallowed.
The final determination as to the acceptability of costs will be made by the appropriate
contracting officer.
4.2
-------
EXAMPLES OF UNALLOWABLE COSTS
Interest on bonds or other financing
Fines and penalties resulting from violation of Federal, State/and local laws
Personal injury compensation or damages as a direct result of construction on the
project
EXAMPLES OF UNREASONABLE COSTS
Purchase of a six month's supply of materials during the last month of the contract
Purchase of expensive equipment needed only for a short period when a lease would
have been more economical
Costs for which appropriate evidence is not available that the contractor employed
those controls necessary to assure that the price was reasonable
EXAMPLES OF IMPROPERLY ALLOCATED COSTS
Costs already matched to another Federal program
Inequitable allocation of indirect costs to the contractor
Costs allocated in total to the contract, which also benefited other contractor programs
EXAMPLES OF IMPROPER DOCUMENTATION OF COSTS
Lack of time and attendance records, invoices, etc.
Lack of written contracts with consultants and or subcontractors
EXAMPLES OF COSTS NOT PROPERLY APPROVED BY EPA
Hire of consultants and/or subcontractors
Purchase of capital equipment
4.3
-------
4.3 PAYROLL/FRINGE BENEFITS
1. Objective
The objectives of the audit of payroll and fringe benefits costs are to determine whether:
employee pay rates and benefits are commensurate with the type of work being
performed; and
total labor and benefit costs charged to the EPA contract are allocable and reasonable.
2. References
FPR 1-15.205-6
FPR 1-15.402-2
FPR 1-15.402-3
FPR 1-15.711-10
FPR 1-15.711-13
3. General Audit Procedures
Amounts charged to the EPA contract will be tested to determine that appropriate
salary rates were utilized for personnel working under the EPA contract, time charged
was properly supported, and fringe benefits claimed actually represent the actual costs to
the contractor.
4. Potential Areas Requiring Additional Audit
a. Compensation paid to key officials
In evaluating the reasonableness of compensation paid to owners of closely held
corporations, partners, sole proprietors or members of their immediate families, or persons
who are contractually committed to acquire a substantial financial interest in the
contractor's enterprise, the auditor should determine that such compensation is
reasonable for the actual personal services rendered and not a distribution of profits.
Compensation is reasonable to the extent that the total amount of compensation paid
under the company's established policy and conforms generally to compensation paid by
other firms of the same size, in the same industry, or in the same geographic area for
similar services. In the administration of this principle, it is recognized that not every
compensation case need be subjected in detail to the above tests. Such tests need be
applied only to those cases in which a general review reveals amounts or types of
compensation which appear unreasonable or otherwise out of line.
The auditor should determine that incentive compensation for management employees,
cash bonuses, suggestion awards, safety awards, and incentive compensation based on
production, cost reduction, or efficient performance are paid or accrued pursuant to an
agreement entered into in good faith between the contractor and the employees before the
services were rendered or pursuant to an established plan followed by the contractor.
For bonuses and incentive compensation paid in stock, the auditor should determine
that valuation placed on the stock transferred shall be the fair market value at the time of
transfer, determined upon the most objective basis available.
4.4
-------
b. Deferred compensation
The auditor should determine that any deferred compensation:
is for services rendered during the contract period (except past service pension and
retirement costs);
is paid pursuant to an agreement entered into in good faith between the contractor and
employees before the services are rendered or pursuant to an established plan followed
by the contractor so consistently as to imply, in effect, an agreement to make such
payment; and,
is made under a plan subject to approval by the Internal Revenue Service and falls
within the criteria and standards of the Internal Revenue Code and the regulations of
the Internal Revenue Service.
In determining the cost of deferred.compensation allowable under a contract, the
auditor should ascertain whether appropriate adjustments have been made for credits or
gains, including those arising out of both normal and abnormal employee turnover, or
any other contingencies that can result in a forfeiture by employees of such deferred
compensation.
The auditor should ascertain whether adjustments to deferred compensation for normal
employee turnover have been based on the contractor's experience and on foreseeable
prospects. If the contractor can demonstrate that his contributions take into account
normal forfeitures, such an adjustment will be unnecessary.
c. Overtime
When the contractor has claimed costs related to overtime, the auditor should:
(1) Determine whether the employee is, under company policy, entitled to receive
overtime, did work the overtime hours, and did receive payment. Wherever the individual
did work, but did not receive pay, appropriate adjustment should be made to the
employee's hourly or daily billing rates.
(2) Review the contractor's rationale for requiring overtime under the EPA project.
Where employees are working on more than one project, there could be some question as to
which project generated the overtime.
(3) Determine whether necessary justifications for overtime were prepared and
submitted for approval, where required on contract terms or provisions.
d. Fringe benefits
When a contractor has computed a fringe benefit rate, the auditor should identify the
basis used in computing the rate and determine that those elements making up the fringe
benefit pool have not been included as a part of direct labor charges.
To prevent the contractor from over recovering fringe benefit costs, special considera-
tion should be given to the annual or sick leave portion of fringe benefits. In this regard,
the auditor should determine whether annual and sick leave costs are claimed based on
the accrual or actual leave basis. Where leave costs are claimed on an accrual basis, the
auditor should examine the contractor's leave policies and leave administration in detail
to determine:
(1) Whether there are established annual or sick leave ceilings which could cause
employees to lose accrued annual or sick leave.
(2) Whether employees are actually paid for accrued annual or sick leave upon
termination or retirement.
4.5
-------
In instances where ceilings prevent employees from utilizing accrued leave or
employees do not get reimbursed for annual or sick leave upon termination or retirement,
contractors should not be permitted to claim leave costs on an accrual basis. They may
never incur the costs. Instead leave costs should be based on actual leave taken, not leave
entitlement.
4.4 SUBCONTRACTS
1. Objective
The objective of the audit of subcontract costs is to determine whether appropriate
controls were exercised to assure that the services were necessary and obtained at a
reasonable price, and that the procurement provided for free and open competition.
2. References
FPR 1-15.205-31
FPR 1-15.403-7
FPR 1-15.712-7
3. General Audit Procedures
The auditor should selectively review the rationale and documentation in support of
subcontracts to determine that:
the contractor evaluated his own resources to assure that the services or product could
not have been provided in-house;
the services or product was used under the EPA contract;
the method of procurement was sufficiently competitive (see FMC 74-7);
procurement techniques utilized by the contractor (competitive procurement or analysis
of the composition of costs) were sufficient to obtain a reasonable price;
the contractor gave consideration to the type of subcontract most appropriate for the
services or product obtained. (Fixed-price contracts are appropriate when the scope and
nature of work can be clearly defined. Where the scope or nature of work is more
indefinite, the cost-type contract is more appropriate. The cost-plus-a-percentage-of-
cost and percentage-of-cost-type contracts may not be used under EPA contracts.);
the nature, scope, time period, and costs were specific in the subcontract;
the contractor was satisfied with the work performed; and,
appropriate EPA approvals were obtained for all subcontracts in excess of $10,000.
4. Potential Areas Requiring Additional Audit
The existence of subcontracts mean that a portion of the project cost records are not
available at the contractor's site. The auditor should, therefore, compile a list of the
subcontracts. This list should identify the subcontractors, provide the address and
telephone numbers of the subcontractors, give a description of the nature of services or
products provided, and indicate the type and amount of each subcontract.
-------
a. Fixed-price subcontracts
Fixed-price subcontracts normally will not be audited. If subcontracts were obtained in
such a way as to establish the reasonableness of price and that the services .were needed,
the related costs will be considered acceptable. If the contractor did not adequately
determine the reasonableness of the fixed-price at the time of award, however, the costs
will be questioned.
b. Cost-type subcontracts
Cost-type subcontracts may require audit. The auditor should determine whether the
contractor has audited the subcontract or requested that an audit be performed by the
cognizant Federal Audit Agency. Where such action has not been taken, the auditor
should furnish the Area Audit Manager with a list of the subcontracts. The Manager will
decide whether an audit is needed and, if one is needed, who will perform the audit.
The auditor selected to perform the audit should advise the party performing work
under the subcontract that the review is being performed for both the prime contractor
and EPA. Thus, any information gathered during the course of the audit will be made
available to the prime contractor as well as to EPA.
If another agency will perform the audit, the Area Audit Manager will initiate the
request for audit and provide a copy of the request to the auditor performing the review of
the prime contract. The auditor does not have to wait for the results of an audit requested
from another Federal agency; he should prepare the audit report and set aside the
requested portions. The audit report should explain that the subcontract is being audited
by another audit agency and that the results will be transmitted as soon as received.
If the Area Audit Manager has determined that no other Federal Audit Agency is
.ognizant and that the subcontract should be audited, the auditor should make
arrangements to audit the accounting records of the subcontract to determine, that the
costs billed are reasonable and allowable. The audit steps in this guide applicable to the
particular types of costs claimed should be followed, and the auditor should apply those
cost criteria which apply to the type of organization receiving the subcontract.
If nc audit of the subcontracts is considered necessary, the Area Audit Manager will so
advise the auditor reviewing the prime contract. In such cases, the costs claimed under the
subcontracts will be considered allowable if costs were claimed in accordance with
subcontract provisions.
4.5 EQUIPMENT, SUPPLIES, AND MATERIAL
1. Objective
The objectives of the audit of equipment, supplies, and material costs are to determine
whether:
such items were needed and used on the sponsored projects; and
such items were obtained on a competitive basis.
2. References
FPR 1-15.205-22, 1-15.205-32, 1-15.205-40, 1-15.205-45, 1-15.205-50
FPR 1-15.4
FPR 1-15.711-18
FPR 1-15.712-3
4.7
-------
3. General Audit Procedures
For selected items the auditor should determine that:
procurement was made in accordance with normal procedures and that appropriate
supporting documentation was maintained;
items purchased were not already available and were actually utilized under the EPA
contract;
these items were acquired through use of competitive purchasing techniques;
appropriate approvals were obtained for the purchase of capital items; and,
costs related to these capital items properly represent direct rather than indirect
charges.
4.6 'TRAVEL
1. Objective
The objective of the audit is to determine that the cost of travel is allowable and
allocable to the EPA contract.
2. References
FPR 1-15.205-46
FPR 1-15.403-4
FPR 1-15.711-28
3. General Audit Procedures
The auditor should test travel charges to determine that:
travel costs were incurred in accordance with the contractor's travel policies and
amounts do not appear grossly unreasonable as compared to Federal Travel policies;
travel charges are adequately supported by travel vouchers and other documentation;
travel claimed was applicable to the EPA contract;
first-class transportation was not utilized without necessary justification; and,
prior approval was obtained for all foreign travel.
4.7 OTHER DIRECT COSTS
1. Objective
The objective of the audit of other direct costs is to determine whether the related costs
are allowable, and applicable to the EPA contract.
2. References
FPR 1-15.2
FPR 1-15.4
FPR 1-15.7
4.8
-------
3. General Audit Procedures
In general, the auditor must determine that:
the types of expenditures involved were contemplated in the original budget and the
expenditures were adequately documented;
in instances where the contractor has established separate pools for such costs as
computer services, reproduction, communications, etc., the methods used to calculate
and distribute such costs are equitable;
amounts claimed are properly supported as other direct costs and that similar costs are
not recovered through indirect costing methods;
the contractor credits to the government the applicable portion of any income, rebate,
allowance, and other credit relating to any allowable costs received by or accruing to
the contractor;
when applicable, necessary approvals have been obtained from the contracting officer.
For example, FPR 1-15.7 requires the specific approval for inclusion of costs related to
the acquisition of data processing equipment; and,
such costs are allowable under applicable cost principles.
4.8 INDIRECT COSTS
The indirect costs of a project are those costs not readily identifiable with the project
itself but nevertheless incurred by an organization for the joint benefit of the project and
other activities carried on by the organization. To recover its indirect costs, an
organization must submit an indirect cost proposal showing its methods of determining
,he portion of indirect costs each project should bear.
Where indirect costs have been claimed and the indirect cost rates have not been
finalized in the contract, the auditor will have to audit the organizations indirect cost
proposal. This audit should be performed in accordance with the EPA "Audit Guide for
Reviewing Indirect Cost Allocation Plans and Rate Proposals."
The auditor's use of the audited indirect cost rates will be based on the general
provisions of the contract.
Where the contract provides for an "audit determined rate," the auditor may use the
audited indirect cost rate in computing the costs considered acceptable under the
contract.
Where the contract provides, for a negotiated indirect cost rate, the auditor must utilize
the provisional rate contained in the contract for computing acceptable contract costs.
He should, however, provide sufficient information in a footnote to the cost schedules to
identify the audited rate and indicate the effect of using on contract costs.
4. 9
-------
CHAPTER 5: AUDIT OF OTHER MATTERS
During the course of the audit, the auditor will be examining the acceptability of the
contractor's controls as they relate to requirements contained in regulations, Federal
Management Circulars, and/or the terms of the individual contracts. A failure to adhere
to contract requirements may result in the questioning of a portion or all of the contract
costs.
In preparing this audit guide, we have examined in detail certain areas that should be
reviewed during all contract audits. These are discussed in the following paragraphs.
5.1 PROGRAM ACCOMPLISHMENT
In addition to the basic determinations of allowability, allocability, and reasonable-
ness, an integral part of the audit of EPA contracts entails a determination of program
accomplishment. Simply stated, the auditor should address himself to the question "Did
the government receive what it has paid for?" Essentially this determination is made by
reviewing compliance with the terms and conditions of the government agreement.
Normally contracts set forth certain milestones or objectives to be met during the course of
a contract. In some instances, the contractor will be expected to submit a report or other
product of his work. The auditor should perform certain basic reviews to determine
whether the contractor accomplished the desired project. In this regard, the auditor will
generally be reviewing records maintained by the contractor, reports prepared for
contractor management or EPA, and correspondence between the contractor and EPA.
Specific steps necessary to determine program accomplishment will be provided by the
Area Audit Manager on a project-by-project basis.
5.2 CASH
Payments to EPA contractors are made in three ways: after-the-fact reimbursement,
advance payment, and letter-of-credit. Depending on the method used, steps necessary to
audit cash will vary.
1. After-the-Fact Reimbursement
This method is generally used for EPA contracts. In auditing cash when after-the-fact
reimbursement has been made, the auditor should:
determine that vouchers were submitted based on the costs recorded on the contractor's
accounting records;
determine the payments received under these vouchers; and,
after reviewing the acceptability of costs claimed, compute the amount due the
government or the contractor.
2. Advance Payments
This section reserved.
3. EPA Letter-of-Credit
This section reserved.
5.1
-------
5.3 PROPERTY MANAGEMENT
The scope of audit of property management will vary significantly based on the type of
audit performed. When the audit is a final audit and EPA has no continuing work with the
contractor, the auditor should limit himself to determining that property was reported as
required and that appropriate disposition action was taken. However, review of the
adequacy of contractor property management systems should be emphasized when
auditing organizations which have received other EPA contracts.
It is stressed that each auditor evaluating a contractor's property management system
should be thoroughly familiar with the provisions of the EPA Guide for Control of
Government Property by Contractors. In evaluating a contractor's property management
system, the auditor should:
1. determine whether the contractor reported the acquisition or receipt of property as
required by the EPA guide.
2. determine whether the contractor maintains the required property records to account
for equipment purchased for use in EPA contract programs or provided by EPA.
3. evaluate the adequacy of the property records maintained and consider whether they
contain necessary information, such as:
a description of the property; and,
the manufacturer's serial number or other identification number, the acquisition date,
the cost, the source of acquisition, ultimate disposition data (including sales price and
the method used to determine fair market value), and the location, use, and condition of
the property.
4. ascertain whether the contractor takes a physical inventory of contract equipment
and reconciles the results with property records at least once every two years to verify the
existence, current utilization and continued need for the property.
5. determine whether:
differences between the property record balances and physical balances are investigat-
ed and fully documented;
property records are adjusted as a result of the inventory;
the contractor takes action to dispose of an item of equipment if it is no longer needed;
and,
periodic inspections and routine maintenance are performed on all equipment.
6. select, from the property records, a sample of equipment items purchased for EPA
contracts and physically inventory the equipment to see whether the system is adequate
in terms of 3. above.
7. determine whether the contractor has established procedures for disposing of
equipment that is no longer necessary. If he has, are the procedures adequate to ensure
that EPA's equity is protected when property is sold or used as a trade-in? If the
contractor has disposed of contract equipment, the auditor should ascertain whether
written approval was obtained from EPA prior to the disposition and whether the net
proceeds of the sale or fair market value at the time of sale, whichever was greater, were
paid to EPA.
5.2
-------
5.4 COST OVERRUNS
In reviewing the costs of a cost-type contract, the auditor may encounter instances
where the contractor has incurred costs in excess of the contract amount. It is the
contracting officer who makes the determination of whether or not the contract amount
may be increased. The auditor should review the acceptability of total costs incurred
(including the overrun). He may accept costs up to the amount of the contract. He may
not, however, accept any part of the overrun. The overrun costs would be considered
acceptable if the contracting officer increased the contract amount, a statement to that
effect should be included in the footnotes to the cost schedules.
5.5 COST SHARING CONTRACTS
While EPA contracts normally pay the total cost of a project, some contracts for
research, development, and demonstration projects are awarded on a cost sharing basis.
The nature of cost sharing requirements will be spelled out in contract provisions.
In performing the audit of project costs as described in Chapter 4: Audit of Costs, the
auditor will be reviewing both the contractor's and EPA's portion of the project. In
reviewing the contractor's portion, the auditor should ascertain the source of the non-
Federal matching share. Unless specifically authorized by law, expenditures incurred
with Federal funds may not be considered a part of the non-Federal matching share.
In addition, the auditor should be alert for instances where the non-Federal matching
share for the program under audit has been included as a matching share on any other
Federally assisted program.
The contractor's portion of costs should be reviewed utilizing the same criteria as if he
had used Federal funds.
5.3
-------
CHAPTER 6: AUDITS OF DEFECTIVE PRICING
This Chapter Reserved.
6.1
-------
CHAPTER 7: AUDIT OF TERMINATIONS
This Chapter Reserved.
7,1
-------
CHAPTER 8: EXIT CONFERENCE
Through the course of the audit, the auditors are expected to discuss deficiencies
disclosed during audit, their effect, and possible corrective actions with responsible
officials of the audited parties. The primary purpose of these discussions is to ensure that
the audited parties had an opportunity to provide additional data with respect to the
problem areas identified during audit.
For the audits with no findings or audits without significant findings the auditor should
nolify the Area Audit Manager and then hold an exit conference with the audited party
(at the site or by telephone). When the audited party is a subcontractor, a separate or joint
exit conference may be held with the contractor and the subcontractor. If the audited
parties desire to provide written comments with respect to matters raised in the audit, they
should be furnished a copy of the draft report and afforded the opportunity to provide
written comments.
For audits with significant findings, the auditor should initially discuss the findings
with the Area Audit Manager by telephone. The auditor should then hold a preliminary
exit conference with the audited party to discuss the factual information disclosed during
the audit. It should be emphasized that the audit results and findings are tentative at that
point, and that they will be included in a draft report forwarded to the audited party for
written comment.
The auditor should prepare his draft audit report, highlighting the costs considered
unallowable and other deficiencies disclosed during the audit. The Area Audit Manager
hould be promptly furnished a preliminary copy of the draft report. If after reviewing the
draft report, the Area Audit Manager agrees that the deficiencies are significant, he may
meet with the responsible EPA program officials to brief them of the situation. In
addition, he shall require that the contractor and other audited parties (such as those
performing under subagreements) be furnished a copy of the draft audit findings and
conclusions to enable review and written comment prior to the exit conference.
After receipt of written comments from the audited parties, the auditor will conduct an
exit conference with each of the responsible parties involved. Thus, exit conferences must
be held with the contractor and other parties having subagreements whose operations
and/or costs were audited.
The auditor's workpapers shall contain the name of the auditor who conducted the exit
conference, the names and positions of contractor representatives, details of the matters
discussed, and a summary of the reactions of the audited parties.
A synopsis of the audited parties reactions to the conclusions and findings will be
included in the section of the audit report entitled, "Comments on Compliance,
Performance, and Internal Controls." When written comments are obtained, they may be
included as an attachment to the report. The auditor may also include any rebuttal
considered appropriate in light of the audited parties comments.
8.1
-------
CHAPTER 9: AUDIT REPORT
9.1 INTRODUCTION
Audits of EPA contracts may result in findings and recommendations concerning costs
questioned or deficiencies in the administration of the contract. For effective administra-
tion of the contracts, it is imperative that audit reports contain all findings, observations,
conclusions, and recommendations resulting from the audit.
9.2 CONTENT AND FORMAT OF AUDITORS' REPORT
The audit report will be prepared in accordance with the following instructions and in
the formats shown in the Example Accountant's Reports and Exhibits and Schedules
contained at the end of this chapter.
1. Scope Paragraph
a. The scope paragraph will identify the contract audited and the period audited.
b. The scope paragraph will also include a statement that the examination was made
in accordance with the EPA "Audit Guide for Contracts" and the GAO "Standards for
Audit of Governmental Organizations, Programs, Activities, and Functions." If
conditions were encountered which preclude the inclusion of such a statement, an
appropriate statement will be prepared explaining the nature of conditions which required
a deviation.
2. Opinion
The report will contain an opinion as to the costs claimed under the EPA contract.
^ased on the review of the reasonableness, allowability, and allocability of costs claimed
.n conjunction with contract terms and conditions and applicable Federal regulations, the
auditor will classify costs as "accepted" or "questioned" in a separate schedule in the
report.
3. Comments on Cpmpliance, Performance, and Internal Controls
The report will include a separate section relating to the compliance, performance and
internal control reviews made during the examination. The report should include a
discussion of any deficiencies identified during the course of the audit. In addition, the
report must contain comments as to the adequacy of the accounting system and
procurement system.
9.3 PRESENTING THE FINDINGS
Audit findings, whether they relate to costs questioned or contract administration
procedures, will be presented in sufficient written detail to ensure that report recipients
may readily:
understand the finding;
understand the basis for the finding;
grasp the significance of findings not directly related to the costs questioned; and
include management improvement recommendations as applicable.
9.4 AUDITOR'S REPORT ON SUBCONTRACT COSTS
Findings and recommendations concerning costs questioned or deficiencies disclosed in
the audit of subcontract costs will be reported on in a separate Schedule.
9.1
-------
EXAMPLE AUDITOR'S REPORTS
-------
EXAMPLE AUDITOR'S REPORT
Area Audit Manager
Office of Audit
Environmental Protection Agency
Any City, U.S.A.
We have examined the statement of costs claimed (Exhibit A) by the City of Anywhere,
U.S.A. under EPA Contract No. XXXX for the period (month, day, year) to (month, day,
year). Our examination was made in accordance with the "Standards for Audit of
Governmental Organizations, Programs, Activities, and Functions" the "Audit Guide for
-£ EPA Contracts" issued February 1976 by EPA, and accordingly included such tests of the
§ accounting records and such other auditing procedures as we considered necessary in the
02 circumstances.
As part of our examination, the allowability of costs claimed under the.-contract was
determined in accordance with the provisions of the contract and applicable Federal
regulations. Schedule I sets forth the costs which we questioned in this regard and
includes an explanation of the reason such costs were questioned.
^ In our opinion subject to the effects, if any, on Exhibit A of the ultimate resolution by the
§ Environmental Protection Agency of the questionable expenditures referred to in the
'£ preceding paragraph, Exhibit A presents fairly the financial information contained
3. therein in accordance with the financial provisions of the contract and generally accepted
^ accounting principles.
In addition, in connection with our examination of the statement of costs claimed, we
§ j? have reviewed the Contractor's system of internal control and compliance with provisions
'5 & °fthe contract and applicable Federal regulations. Our report thereon appears as Exhibit
% g B.
£3 ^j This report is intended for use in connection with the contract to which it refers and
^" should not be used for any other purpose.
DATE
SIGNATURE
9.2
-------
EXHIBIT A
City of Anywhere, U.S.A.
Statement of Costs Incurred Under EPA Contract XXXXXX
For the Period (month, day, year) Through (month, day, year)
Costs Claimed
Personnel $1,225,373
Indirect Costs 122,537
Equipment 368,848
Subcontracts '94,473
Total Costs $1.811,231
Federal Share $1,811,231
EPA Contract No. XXXXXX was awarded to the City of Anywhere, U.S.A. on (month,
day, year). The scope of work under the contract provided for " ". Work under
the contract began on (month, day, year) and was completed on (month, day, year).
See Schedules A-l through A-3 for costs accepted and questioned during the audit.
9.3
-------
Schedule A-l
City of Anywhere, U.S.A.
EPA Contract No. XXXXXX
Statement of Costs Claimed, Accepted and Questioned
For the Period (month, day, year) Thru (month, day, year)
Auditor's Recommendations
Costs Costs Costs Reference
Description Claimed Accepted Questioned Notes
Personnel $1,225,373 $1,225,373 -0-
Indirect Costs 122,537 -0- $122,537 1
Equipment 368,848 368,848 -0-
Subcontracts 94,473 86,734 7,739 2
Total Costs $1,811,231 $1,680.955 $130,276
Federal Share $1,811,231 $1.680.955 $130,276
REFERENCE NOTES
1. The 10 percent indirect cost rate included in the contract.was based on an indirect cost
rate proposal prepared, audited and negotiated with the Department of Health, Education
and Welfare for FY 1969. Since that date, the City had not prepared any indirect cost
proposals. The Department of Health, Education and Welfare Guide for Local
Government Agencies requires local contractors to prepare indirect cost proposals
annually. Such proposals should be retained for future audit. Since the City had not
prepared such proposals, it has not complied with Federal requirements and accordingly
is not entitled to indirect costs.
Contractor officials indicated that they were unaware of the requirement to prepare
indirect cost proposals annually.
2. Amounts accepted and questioned were based on an audit of the subcontractor's
records. See Schedule A-2.
9.4
-------
Schedule A-2
XYZ Corporation
Subcontract XXXX Under EPA Contract No. XXXXXX
Statement of Costs Claimed, Accepted, and Questioned
For the Period (month, day, year) Thru (month, day, year)
Audit Recommendation
Description
Personnel
Fringe Benefits
Indirect Costs
Travel
Total Costs
Fee
Total Costs Plus
Fixed Fee
Funds Provided
mount Due Contractor
Reference Notes
Costs
Claimed
$48,712
13,152
20,859
5000
Costs
Accepted
$45,761
10,067
19,620
4,536
$94,473
$86,734
$94,473
$ 7,739
Costs
Questioned
$2,951
3,085
1,239
464
$7,739
-0-
$7,739
Reference
Notes
Schedule A-2(a)
1
2
3
1. The Corporation claimed fringe benefits at a rate of 27 percent of direct payroll costs.
This rate covered vacation, sick leave, holidays, and the company's portion of payroll
taxes. In analyzing this rate, we noted that the company included the 13 days of sick leave
accrued each year. Since Corporation employees are not paid for sick leave unless it is
taken, the accrual does not represent an actual cost. Accordingly, we adjusted the fringe
benefit rate by removing the accrual and adding in the actual sick leave taken. This
reduced the Corporation's fringe benefit rate to 22 percent. We then calculated allowable
fringe benefits as follows:
Claimed: 27 percent of $48,712 $13,152
Accepted: 22 percent of $45,761* 10,067
Questioned $ 3,085
* Amount of accepted personnel costs
Corporation officials agreed with the adjustment to the fringe benefit rates.
9.5
-------
2. Indirect costs were claimed at the fixed rate of 42 percent of direct labor included ir
subcontract. Amounts questioned were computed as follows:
Claimed: 42 percent of $48,712
Accepted: 42 percent of $45,761*
Questioned
$20,459
19,220
$ L239
* Accepted personnel costs
3. The Corporation's administrative procedures provide a per diem rate of $25 for
overnight travel. In several instances, travelers were reimbursed for actual subsistence
expense which exceeded the per diem allowance. The subsistence costs in excess of the per
diem are unallowable in that the costs'were not incurred in accordance with the
Corporation's normal practices. The total of $464 of unallowable travel costs were charged
to the EPA subcontract.
Details of the unallowable claims are shown as follows:
Employee Date of Trip
A May 1-5, 1973
B May 24-30, 1973
C Mar 20-25, 1974
D Mar 14-16, 1974
No. of
Days
4%
6
5l/2
2V4
Subsistence
$166.82
382.54
291.66
85.70
Maximum
Using
Per Diem
$118.75
150.00
137.50
56.25
Unallowable
Travel
Cost
$ 48.07
232.54
154.16
29.45
Total
$926.72
$462.50
$464.22
Corporation officials told us that the maximum per diem was not applied because trips
were made to high cost areas.
9.6
-------
Schedule A-2(a)
XYZ Corporation
Subcontract XXXX Under EPA Contract No. XXXXXX
Analysis of Payroll Costs
Individual
A
B
C
D
E
F
Payroll
Costs
Claimed
$14,897
14,911
11,043
3,199
3,257
1,405
Payroll
Costs
Accepted
$13,392
14,430
10,225
3,052
3,257
1,405
Payroll
Costs
Questioned
$1,505
481
818
147
0-
-0-
Reference
Notes
1
2
3
4
Total
$45,761
$2,951
Reference Notes
1. Mr. A was employed full time at a salary of $10,500 per annum. Mr. A is a professional
employee who receives no overtime. His salary was charged to the contract at $5.05 an
hours, $10,500 = 2080 hours. Our analysis of Mr. A's salary claims for FY 1973 and FY
1974 are as follows:
FY 1973
Claimed:
Accepted:
2,350 Hours @ $5.05/Hr.,
Total Salary Paid Mr. A
$11,867
10,500
FY 1973 Questioned
$1,367
FY 1974
Claimed:
Accepted:
600 Hours @ $5.05/Hr.,
During 1974 Mr. A worked
2,150 hours by dividing
2,150 hours into Mr. A's
salary, $10,500, we computed
an actual salary of $4.82/hr -
600 Hours @ $4.82/Hr.,
$3,030
2,892
FY 1974 Questioned
Total Questioned
2. In FY 1973, Mr. B's time records showed only 1,450 hours spent on the subcontract. We
have questioned the 100 hours claimed in excess of that amount at the salary rate claimed
by the contractor.
100 Hours @ $4.81/Hr.,
$ 481
9.7
-------
3. In FY 1974, Mr. C's time records showed only 1,300 hours spend on the subcontract. We
have questioned the 200 hours claimed in excess of that amount at the salary rate claimed
by the contractor.
200 Hours @ $4.09/Hr., $ 818
4. Mr. D was employed full time at a salary of $9,500 per annum. Mr. D is a professional
employee who receives no overtime. His salary was charged to the subcontract at $4.57 an
hour, $9,500 - 2080 hours. Our analysis of Mr. D's salary claims are as follows:
FY 1973
Claimed: 700 hours @ $4.57/Hr., $3,199
Accepted: During 1973 Mr. D worked
2180 hours by dividing 2180
hours into Mr. D's salary,
$9,500, we computed on
actual salary of $4.36/hr. -
700 hours @ $4.36/Hr., 3,052
Questioned $ 147
Corporation officials indicated that Mr. A and Mr. D had put in extra time and that they
did intend to pay them for this time. They agreed however that the claims for Mr. B and
Mr. C had inadvertently been overstated.
(While the Corporation may have intended to pay Mr. A and Mr. D for their overtime, no
action had been taken to do so. There were no accruals of other liabilities established to
indicate that payment would be made.)
9.8
-------
EXHIBIT B
COMMENTS ON COMPLIANCE, PERFORMANCE,
AND INTERNAL CONTROLS
As part of our examination, we reviewed and tested the contractor's system of internal
accounting control to the extent we considered necessary to evaluate the system as
required by generally accepted auditing standards. Under these standards the purpose of
such evaluation is to establish a basis for reliance thereon in determining the nature,
timing, and extent of other auditing procedures that are necessary for expressing an
opinion on the financial reports. The objective of internal accounting control is to provide
reasonable, but not absolute, assurance as to the safeguarding of assets against loss from
unauthorized use or disposition, and the reliability of financial records for preparing
financial statements and maintaining accountability for assets. The concept of
reasonable assurance recognizes that the costs of a system of internal accounting controls
should not exceed the benefits derived and also recognizes that the evaluation of these
factors necessarily requires estimates and judgements by management.
There are inherent limitations that should be recognized in considering the potential
effectiveness of any system of internal accounting controls. In the performance of most
control procedures, errors can result from misunderstanding of instructions, mistakes of
judgement, carelessness, or other personal factors. Control procedures whose effective-
ness depends upon segregation of duties can be circumvented by collusion. Similarly,
control procedures can be circumvented intentionally by management either with respect
to the execution and recording of transactions or with respect to the estimates and
judgements required in the preparation of financial statements. Further, projection of any
evaluation of internal accounting controls to future periods is subject to the risk that the
procedures may become inadequate because of changes in conditions and that the degree
of compliance with the procedures may deteriorate.
The "Audit Guide for EPA Contracts" issued February 1976 by the Environmental
Protection Agency requires a review and evaluation of the adequacy of the accounting
system and internal controls to safeguard assets, check the accuracy and reliability of the
accounting data, promote operating efficiency, and encourage compliance with prescribed
management policies and such additional fiscal, accounting, and administrative
requirements as EPA may establish. We understand that procedures in conformity with
the criteria referred to in the aforementioned Audit Guide are considered by EPA to be
adequate for its purposes in accordance with the Audit Guide and that procedures that are
not in conformity therewith indicate some inadequacy for such purposes. Based on this
understanding and on our study, we believe that the City's procedures were inadequate for
the purposes of EPA because of the conditions described below, which we believe are
material weaknesses in relation to the contract to which this report refers. In addition to
such weaknesses, other conditions which we believe are not in conformity with the criteria
referred to above are described on the following pages.
9.9
-------
PRIME CONTRACTOR'S PERFORMANCE
In June 19XX, EPA terminated this contract. The close-out report prepared by progra..
officials stated:
"Because of the poor performance record and because continuation of this program did
not support the immediate objectives of the FY 19XX program, we determined that we
could not justify continuation of this program. It was decided to inform the contractor
that the project would be terminated and that a final report should be submitted
documenting all data and progress to date.
"This office requested that the contractor submit a final technical report including the
Phase I interim report updated to include a description of all field work conducted and
data collected. The Phase I report, as submitted, covers a project planning and
preliminary laboratory analysis in preparation for the field studies. Record-keeping and
reporting on the field activities is totally inadequate. It appears that with the exception
of the Phase I report the contractor dumped out his files, correspondences and all, and
bound them with a cover titled final report. Unfortunately, adequate technical records of
the field work are not believed to exist and personnel connected with the project left the
contractor's organization before or within several weeks after the 'Final Report' was
submitted. It is recommended that the 'Final Report' not be published."
Since the EPA contract was awarded to accomplish specific objectives, the acceptability
of the work performed becomes critical in the determination of whether or not the
contractor has earned his contract. In this instance, the program official's close-out report
raised considerable doubt as to the acceptability of work performed. The report did not,
however, indicate whether the contractor's "Final Report" was acceptable or sufficient
competent work was performed by the contractor to earn the total EPA contract.
Recommendation: We recommend that EPA obtain a determination as to t.
acceptability of the contractor's work under this contract from responsible program
officials prior to closing out the contract. If EPA decides that the work was not acceptable,
they should establish the value of work actually performed.
PRIME CONTRACTOR'S ACCOUNTING SYSTEM
Several improvements to the accounting system are necessary in order for it to be
considered adequate. Specifically, these are the maintenance of time and attendance
records, and initiation of a procedure to provide an appropriate review and authorizing
signature on all "memo invoices" forwarded to the accounting division for payment.
There were no formal procedures for maintenance of time and attendance records at the
time of our audit. Even though the personnel working at the Agency are employed solely
for contract work, a record of time and attendance is necessary for annual and sick leave
purposes and as a matter of good business practice.
9.10
-------
The personnel working under the contract were hired as independent consultants. As
such, a "memo invoice" was prepared for each employee every pay period by the
administrative assistant. These "memo invoices" were then forwarded to the accounting
division where individual pay checks were prepared and the expenditures recorded on the
accounting records. At the time of our audit, there was no procedure in effect for a review
of these invoices, or an authorizing signature by the Administrator of the Agency. As a
result, the administrative assistant was preparing the documentation for payment of all
pay checks, including her own, as well as other miscellaneous payments, and the
accounting division made payment without further verification. In order to ensure proper
internal control and protect all employees involved, "memo invoices" should be reviewed
by the Administrator and an authorizing signature affixed, prior to payment.
Recommendation: We recommend that the contractor be required to implement
procedures to assure that time and attendance records are maintained to strengthen
internal controls over processing of "memo invoices."
Contractor's Comments: Contractor officials indicated a willingness to make the
suggested changes.
PRIME CONTRACTOR'S PROCUREMENT SYSTEM
The City did not go through a competitive selection process in hiring their
subcontractor. Instead, they simply hired the XYZ Corporation with whom they had done
previous business. In addition, no reviews were made to determine whether the $100,000
cost proposed by the Corporation under their cost plus fixed fee contract was reasonable.
Thus, the procurement was not made in accordance with FMC 74-7.
Recommendation: We recommend that the contractor be informed of the necessity of
adhering to the procurement requirements contained in FMC 74-7. In this regard, they
should be made aware that in the future the failure to adhere to such requirements may
result in the total costs of subcontracts being disallowed.
Contractor's Comments: Contractor officials indicated that they would request a copy of
FMC 74-7 and assure the adequacy of their procurement methods.
PRIME CONTRACTOR'S PROPERTY MANAGEMENT
Property was returned to EPA as required by the EPA Property Administrator.
SUBCONTRACTOR'S PERFORMANCE
The Corporation completed its work and submitted its final report to the City of
Anywhere, U.S.A., on May 15, XXXX. According to correspondence, City officials accepted
this report and thanked the Corporation for its excellent work.
SUBCONTRACTOR'S ACCOUNTING SYSTEM
Several improvements in the Corporation's accounting system are needed in order for it
to be considered fully adequate.
The Corporation must establish procedures to adjust the payroll billing rates to reflect
the actual cost of work performed. When professional employees are not paid for overtime
hours, the salary charges should be computed by dividing the employees salary by the
hours actually worked.
Improved reconciliation procedures are needed to assure that salary charges are based
upon labor distribution records which tie with the Corporation's payroll. This will help
prevent unsupported or inappropriate salary charges.
9.11
-------
In computing its fringe benefits rate, the Corporation should include only the costs o
sick leave actually expended. This will help prevent the over-recovery of fringe benefits
costs.
Recommendation: We recommend that the contractor implement procedures to assure
that:
(1) Salary charges are based on actual salary costs divided by actual hours worked;
(2) salary costs are properly supported by appropriate time records; and
(3) fringe benefits rates be computed exclusive of accrued sick leave.
Subcontractor's Comments: Subcontractor officials gave no indication as to whether or
not they would take the required corrective actions.
Prime Contractor's Comments: The prime contractor agreed with the audit finding and
recommendation.
SUBCONTRACTOR'S PROCUREMENT SYSTEM
Since no items were purchased under this subcontract, no review was made of the
Corporation's procurement system.
SUBCONTRACTOR'S PROPERTY MANAGEMENT
Since no equipment has been purchased under Federal grants or contracts, no review
was made of the Corporation's property management system.
9.12
-------
EXAMPLE AUDITOR'S REPORT
Area Audit Manager
Office of Audit
Environmental Protection Agency
Any City, U.S.A.
We have examined the statement of costs claimed (Exhibit A) by the ABC Company, Inc.
under EPA Contract No. XXXX for the period (month, day, year) to (month, day, year).
Our examination was made in accordance with the "Standards for Audit of Governmen-
tal Organizations, Programs, Activities, and Functions" the "Audit Guide for EPA
Contracts" issued February 1976 by EPA, and accordingly included such tests of the
^ accounting records and such other auditing procedures as we considered necessary in the
8 circumstances.
Cfl
""" As part of our examination, the allowability of costs claimed under the contract was
determined in accordance with the provisions of the contract and applicable Federal
regulations. Schedule A-I sets forth the costs which we questioned in this regard and
includes an explanation of the reason such costs were questioned.
In our opinion subject to the effects, if any, on Exhibit A of the ultimate resolution by the
'g Environmental Protection Agency of the questionable expenditures referred to in the
g preceding paragraph, Exhibit A presents fairly the financial information contained
'a therein in accordance with the financial provisions of the contract and generally accepted
, accounting principles.
g 2 In addition, in connection with our examination of the statement of costs claimed, we
S t« nave reviewed the Contractor's system of internal control and compliance with provisions
g & of the contract and applicable Federal regulations. Our report thereon appears as Exhibit
a & f>
^ This report is intended for use in connection with the contract to which it refers and
should not be used for any other purpose.
DATE
SIGNATURE
9.13
-------
EXHIBIT A
ABC COMPANY, INC.
EPA CONTRACT NO. XXXXXX
STATEMENT OF COSTS CLAIMED
FOR THE PERIOD (MONTH, DAY, YEAR) THROUGH (MONTH, DAY, YEAR)
COSTS
CLAIMED
Personnel $ 937,562
Equipment 46,462
Supplies 31,813
Travel 14,099
Consultation & Services 48,984
Alteration & Renovations 4,241
Data Processing 1,262
Indirect Costs 56,261
Total Costs $1,140,684
Federal Share $1,140,684
9.14
-------
Schedule A-l
ABC Company, Inc.
EPA Contract No. XXXXXX
Statement of Costs Claimed, Accepted, and Questioned
For the Period (month, day, year) Thru (month, day, year)
Auditor's Recommendations
Description
Costs
Claimed
$ 937,562
46,462
31,813
14,099
48,984
4,241
1,262
56,261
$1,140,684
$1,140,684
Costs
Accepted
$ 937,562
46,462
31,813
13,199
48,984
4,241
1,262
56,261
$1,139,784
$1,137,500
Costs
Questioned
$ 900
$ 900
$3,184
$1,137,500
Reference
Notes
Personnel
Equipment
Supplies
Travel
Consultation & Services
Alteration & Renovations
Data Processing
Indirect Costs
Total Costs
Federal Share
Funds Provided
REFERENCE NOTES:
1. Costs questioned represent the cost of a trip to Montreal, Canada. While contract
provisions require approval of foreign travel, we could find no evidence that such approval
was obtained.
2. Contract No. XXXXXX contained a ceiling of $1,137,500. Our review disclosed,
however, that the contractor incurred $1,139,784 of acceptable contract costs. The
contractor is not entitled to the $2,284 overrun without approval of the Contracting Office
and amendment of the contract.
9.15
-------
EXHIBIT B
COMMENTS ON COMPLIANCE, PERFORMANCE,
AND INTERNAL CONTROLS
As part of our examination, we reviewed and tested the contractor's system of internal
accounting controls to the extent we considered necessary to evaluate the system as
required by generally accepted auditing standards. Under these standards the purpose of
such evaluation is to establish a basis for reliance thereon in determining the nature,
timing, and extent of other auditing procedures that are necessary for expressing an
opinion on financial reports.
The objective of internal accounting control is to provide reasonable, but not absolute,
assurance as to the safeguarding of assets against loss from unauthorized use or
disposition, and the reliability of financial records for preparing financial statements and
maintaining accountability for assets. The concept of reasonable assurance recognizes
that the costs of a system of internal accounting controls should not exceed the benefits
derived and also recognizes that the evaluation of these factors necessarily requires
estimates and judgements by management.
There are inherent limitations that should be recognized in considering the potential
effectiveness of any system of internal accounting controls. In the performance of most
control procedures, errors can result from misunderstanding of instructions, mistakes of
judgment, carelessness, or other personal factors. Control procedures whose effectiveness
depends upon segregation of duties can be circumvented by collusion. Similarly, control
procedures can be circumvented intentionally by management either with respect to the
estimates and judgments required in the preparation of financial statements. Further,
projection of any evaluation of internal accounting controls to future periods is subject to
the risk that the procedures may become inadequate because of changes in conditions and
that the degree of compliance with the procedures may deteriorate.
The "Audit Guide for EPA Contracts" issued February 1976, by the Environmental
Protection Agency requires a review and evaluation of the adequacy of the accounting
system and internal controls to safeguard its assets, check the accuracy and reliability of
the accounting data, promote operating efficiency, and encourage compliance with
prescribed management policies and such additional fiscal, accounting, and administra-
tive requirements as EPA may establish. We understand that procedures in conformity
with the criteria referred to in the aforementioned Audit Guide are considered by EPA to
be adequate for its purposes in accordance with the Audit Guide and that procedures that
are not in conformity therewith indicate some inadequacy for such purposes. Based on
this understanding and on our study, we believe that the company's procedures were
adequate for the purposes of EPA except for the conditions described below, which we
believe are material weaknesses in relation to the contract to which this report refers. In
addition, to such weaknesses, other conditions which we believe are not in conformity
with the criteria referred to above are described on the following pages.
PERFORMANCE
According to Program Officials' evaluation of the contract, the Company has one of the
best air pollution control devices in the country. No significant weaknesses were discussed
in the EPA evaluation report.
ACCOUNTING SYSTEM
Based upon our review, we have determined that the Company's accounting system is
adequate to account for costs incurred under the EPA contract.
9.1 6
-------
PROCUREMENT
The procurements made under the contract were handled in accordance with the
Company's normal procurement practices and such practices were found to be acceptable.
PROPERTY MANAGEMENT
In reviewing the Company's property management, we found that the Company's
procedures were in accordance with EPA regulations. Our tests indicated that these
procedures were being followed.
9.17
-------
APPENDIX A
SURVEY OF CONTRACTOR'S
MANAGEMENT SYSTEMS
A-l
-------
Survey of Contractor's
Management Systems
System
Accounting
1. Has the contractor established project accounting
records to record the costs applicable to EPA
contracts?
2. Are all costs of a project recorded on these
records?
3. Are the costs in these record^ used as the basis for
the contractor's financial status reports or
vouchers?
4. Are the costs recorded on these records reflected
on and reconciled with control accounts con-
tained in the contractor's general ledger?
5. Are project accounts broken into subaccounts by
cost element?
6. Are comparisons made between budgeted and
expended amounts to provide an early indication
of overruns?
7. Is appropriate documentation maintained to
support the costs of:
a. personnel?
b. consultants?
c. fringe benefits?
d. purchases of material, supplies, and equip-
ment?
e. travel?
f. other costs?
8. Before being recorded, are the costs contained in
the project accounting records subjected to review
as to their reasonableness, allowability, and
allocability to the EPA contracts?
9. Are controls established to segregate costs in-
curred prior to or subsequent to the established
contract period?
Yes
No
N/A
W/P Ref.
A-2
-------
System
Accounting (continued)
10. Are the controls or procedures exercised in
administering federal expenditures the same as
those utilized in the expenditure of the contrac-
tor's funds? (When the contractor's requirements
are more stringent than EPA requirements, it is
expected that the contractor will treat federal
funds as he would treat his own.)
11. Are the contractor's accounting records subjected
to an independent audit at least every two years?
Cash
12. Are appropriate controls in effect to determine
that vouchers or requests for advances are based
on actual expenditures recorded on the contrac-
tor's project accounting records?
Personnel '
13. Are procedures established to determine that
employees working under federal contracts are
paid at rates comparable to the rates paid other
employees?
14. Do the personnel and/ or payroll records provide
support for time and attendance, leave, and
earnings for all employees?
15. Are time distribution records maintained to show
the amount of time spent on federal contracts as
well as the time spent on other activities?
16. Are controls in effect which provide for personnel
costs to be distributed in accordance with the time
reflected on time distribution records, i.e.,
reconciliation of labor distribution and payroll
records?
17. Have controls been established to assure that
overtime is appropriate for the project approved
in accordance with company policies, and accept-
able under the terms of the contract?
18. When personnel are working on projects other
than that sponsored by the federal grant, do
procedures provide for the cost of overtime to be:
a. charged to the federal project on which the
overtime was spent?
b. allocated over the individual's total work
during that period?
c. treated as an indirect cost?
d. other?
Yes
No
N/A
W/P Ref.
A-3
-------
System
Personnel (continued)
19. Have procedures been established governing the
charges of personnel time related to partners or
principles in closely held corporations?
. 20. Are formal procedures established with respect to
bonuses, retirement plans, and/ or profit sharing?
Procurement
21. Are procedures established to determine wheth-
er professional services, equipment, material,
and/ or supplies requested are really needed?
22. Are existing supplies or inventories reviewed
determine whether items requested are not
already available?;
23. Are fprmal procurement procedures established to
require that equipment, material, and supplies are
obtained on a competitive basis?
24. Are solicitations obtained from several sources so
that the contractor obtains the most qualified
party to perform needed professional services?
25. Are quotations obtained and reviewed to deter-
mine whether the price proposed is reasonable to
the contractor and EPA?
26. Are procedures established to determine whether
the type of contract utilized is appropriate for the
procurement being undertaken?
27. Are procedures established which prohibit the
contractor from utilizing types of contracts
unacceptable to the Federal Government?
28. Are internal controls utilized to determine wheth-
er contracts contain all required clauses:
a. access to records?
b. ownership of data?
c. termination?
d. applicable cost principles?
e. defective pricing (fixed price contracts)?
29. Are procedures in effect which provide for the
contractor to request and obtain all required
approvals:
a. subcontracts?
b. equipment purchases?
c. other capital expenditures?
Yes
No
N/A
W/P Ref.
A-4
-------
System
Travel
30. Does the contractor have adequate established
policies governing reimbursement for travel?
31. Do these policies:
a. require the submission of travel vouchers
showing the time and purpose of travel?
b. clearly indicate the nature of expenses being
claimed?
c. require the submission of supporting documen-
tation?
Obligations
32. Are procedures established to require that obliga-
tions reported are supported by appropriate
purchase orders, contracts, etc?
33. Do these procedures require that obligations are
periodically reviewed with regard to their validi-
ty?
34. Do the procedures require the timely liquidation
of the obligations and the updating of informa-
tion contained on financial status reports?
Indirect Costs
35. Has the contractor established procedures indi-
cating which costs are considered direct costs as
opposed to indirect costs?
36. Is the contractor claiming indirect costs under
federal grants and contracts?
37. Has the contractor been submitting the required
indirect cost proposals to the federal agencies or
retaining them for review during audit?
38. Have these proposals been audited and negoti-
ated?
Property Management
39. Has the contractor established an equipment
inventory system for controlling property ob-
tained under federal contracts?
40. Does this inventory system show:
a. a description of the item?
b. a related property tag number?
c. the federal equity in the equipment?
d. the location of the equipment?
e. the condition of the equipment?
41. Are periodic inventories made to validate inven-
tory information?
Yes
No
N/A
W/P Ref.
A-5
-------
System
42. Was receipt of government property reported to
EPA Property Administrator?
43. Are procedures established governing the use of
government property? Do these procedures re-
quire that such property be used only in connec-
tion with performance of under the contract on
which it was provided?
44. Do these procedures require that prior EPA
approval be obtained for any changes in use or
disposition of government property?
Refunds, Rebates, and Credits
45. Have procedures been established which require
that any refunds, rebates, and credits generated
under the contract be identified and that EPA
receive appropriate credit for such amounts?
Yes
No
N/A
W/P Ref.
A-6
-------
APPENDIX B
EPA AREA AUDIT OFFICES AND
COGNIZANT GEOGRAPHIC AREAS
Address of Cognizant
EPA Area Audit Office
Mr. Juan Soto, Jr.
Area Audit Manager
Environmental Protection Agency
Mid-Atlantic Area Audit Group
401 M Street, S.W., Rm. 3704
Washington, B.C. 20460
(202) 755-0953
Mr. Joseph J. DeRosa
Area Audit Manager
Environmental Protection Agency
Eastern Area Audit Group
90 Churtfh Street - Rm. 802
New York, NY 10007
(212) 264-5730
Mr. Roger Smith
Area Audit Manager
Environmental Protection Agency
Northern Area Audit Group
1 North Wacker Drive
Chicago, Illinois 60606
(312) 353-7910
Mr. Truman R. Beeler
Area Audit Manager
Environmental Protection Agency
Western Area Audit Group
100 California Street
San Francisco, California 94111
(415) 556-1954
Mr. Leslie M. Buie
Area Audit Manager
Environmental Protection Agency
Southern Area Audit Group
Suite 921
1720 Peachtree Road, N.W.
Atlanta, Georgia 30309
(404) 526-3623
Geographic Area
Pennsylvania, Delaware, Maryland, Vir-
ginia, West Virginia, and Washington,
D.C.
Maine, Connecticut, New York, Massa-
chusetts, Rhode Island, Vermont, New
Hampshire, New Jersey, Puerto Rico, and
Virgin Islands
Ohio, Michigan, Wisconsin, Minnesota,
Indiana, Illinois, Iowa, Nebraska, Missou-
ri, and Kansas
Colorado, Utah, Nevada, Hawaii, Wash-
ington, Oregon, California, Idaho, Mon-
tana, Wyoming, Arizona, North Dakota,
Alaska and South Dakota
Alabama, North Carolina, South Caroli-
na, Florida, Georgia, Mississippi, Texas,
Arkansas, Tennessee, Kentucky, Oklaho-
ma, New Mexico, and Louisiana
B-l
-------
APPENDIX C
REFERENCES
1. GAO "Standards for the Audit of Government Organizations, Programs, Activities,
and Functions"
2. Code of Federal Regulations, Title 41, Public Contracts and Property Management,
Titles 1 and 2 (of special interest are):
Parts Description
1-2 Advertised Procurement
1-3 Negotiated Procurement
1-7 Contract Clauses
1-8 Terminations
1-15 Cost Principles for Contracts with Various Types of
Organizations
3. Guide for Control of Government Property by Contractors, EPA Facilities, and
Support Services Division, September 1973
Environmental Protection Agency'
Region V, Library
230 South Dearborn Street
Chicago, Illinois 60804
------- |