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Washington State Department of Transportation Audit Guide for Consultants Augus

Washington State Department of Transportation Audit Guide for Consultants August 1999 Washington State Department of Transportation Audit Office Audit Guide for Consultants August 1999 Foreword Audit Guide for Consultants August 1999 i Foreword This second edition of the Audit Guide for Consultants has been prepared for use by consulting organizations as a basic primer to better understand the Washington State Department of Transportation (WSDOT) external audit process. Communication of rules, regulations, policies, and procedures used by WSDOT management and the Audit Office can assist firms in understanding the role of the audit organization and how costs are viewed by the auditors. While much of what is included in the manual is directed toward engineering and architecture firms doing business with WSDOT, the concepts discussed can be used by other types of organizations. Updating the guide is a continuing process and revisions will be issued periodically. Questions, observations, and recommendations are invited. For clarification of the content of the manual, contact the WSDOT Audit Office, External Audit Branch. ______________________________ Wayne H. Donaldson Audit Director WSDOT Audit Office 3:P65:DP/AG Audit Guide for Consultants ii August 1999 Contents Audit Guide for Consultants August 1999 iii Contents Page Foreword i Chapter 1 Introduction 1-1 About This Manual 1-1 Success and Words of Wisdom 1-1 Chapter 2 Definition 2-1 Chapter 3 Audit Involvement in the Agreement Process 3-1 Why Audit 3-1 What is Auditing 3-1 Audit and the Consultant Process 3-1 What Triggers an Audit 3-2 Interim Audits 3-2 Post Audits 3-2 Preaward Audits 3-3 Agreements Closed Without Audit 3-3 Chapter 4 Using This Guide 4-1 Chapter 5 Labor Costs 5-1 Labor Costs in General 5-1 Impact of Business Structure on Labor 5-1 Supporting Labor Costs 5-2 Example of a Time Sheet 5-2 Sole Proprietors’ Wage Rate and Billing Rates 5-2 Billing Rates 5-3 Chapter 6 Overhead Costs 6-1 Overhead Costs in General 6-1 Words of Wisdom 6-2 Development of an Overhead Schedule 6-2 Cost Categories Normally Included in a Firm’s Overhead Schedule 6-5 Types of Unallowable Costs Often Included in Overhead 6-6 Establishment of a Direct Labor Base When Developing Overhead Rates 6-9 Overhead Rate Development — General Summary 6-10 Contents Audit Guide for Consultants iv August 1999 Page Chapter 7 Direct Nonsalary Costs 7-1 Types of Direct Nonsalary Costs 7-1 Recording Direct Nonsalary Costs 7-1 Audit of Nonsalary Costs 7-2 Developing Charge-Out Rates for Selected Direct Nonsalary Costs 7-2 Chapter 8 Fixed Fee 8-1 Fee Including Profit 8-1 Chapter 9 Subconsultants 9-1 Chapter 10 Record Retention for Consultants 10-1 Summary 10-1 Chapter 11 Task Assignment Agreements 11-1 Labor Costs 11-1 Direct Nonsalary Costs 11-1 Chapter 12 Invoicing WSDOT 12-1 Chapter 13 Development of Charge-Out Rates 13-1 Basic Requirements 13-1 Market Rates Are Not Acceptable 13-1 Costs Not Allowed by Agreement (Contracts) or Clients 13-2 FARs Discussion on Equipment Use Rates and Costs 13-2 Summary 13-4 Chapter 14 Related Party Transactions 14-1 Common Problems 14-1 When Common Control is Found 14-1 Summary 14-2 Chapter 15 Single Audit Act 15-1 Single Audit Act 15-1 Purpose 15-1 Washington State 15-2 Actual Implication 15-2 Chapter 16 Auditor’s Review of Internal Control 16-1 Chapter 17 WSDOT Standard Agreements 17-1 Contents Audit Guide for Consultants August 1999 v Page Chapter 18 Conflict of Interest — Who Me? 18-1 Basic Definition 18-1 Arm’s Length Transactions 18-2 Chapter 19 Sole Proprietorships — Wage and Billing Rates 19-1 Sole Proprietor’s Billing Rate 19-1 Overhead Rate 19-1 Sole Proprietorships With No Employees 19-1 Sole Proprietorships With Employees 19-2 Establishing the Sole Proprietorship All-Inclusive Hourly Rate 19-2 Summary 19-3 Chapter 20 Billing Rates — Sole Proprietor and Partnerships 20-1 General 20-1 Sole Proprietors’ Wage Rates and Billing Rates 20-2 Chapter 21 Field Office Overhead Rates 21-1 Computation of Field Allocation Rates 21-4 Summary 21-4 Chapter 22 Advance Agreement on Costs 22-1 Chapter 23 Resolution Procedures 23-1 Audit Resolution 23-1 Chapter 24 Examples of Forms 24-1 Chapter 25 Audit Criteria 25-1 1992 WSDOT Bonus Policy 25-1 Chapter 26 FARs Subpart 31 — Contract Cost Principles and Procedures 26-1 4:P65:DP/AG Audit Guide for Consultants vi August 1999 Chapter 1 Introduction Introduction Audit Guide for Consultants August 1999 1-1 Chapter 1 Introduction WSDOT uses the services of consultants to assist in program delivery. An area that often raises questions for people in the consultant community, and management within the Washington State Department of Transportation (WSDOT), is the area of AUDIT. Communication of rules, regulations, policy, and procedures can assist individuals in understanding the role of an organization. Providing information relating to audit issues is the primary purpose of this document. About This Manual This manual is intended to be a basic primer for understanding the WSDOT external audit process. To the extent possible, accounting and auditing theory will not be discussed. Numerous books are available which the reader can obtain to learn about those two subjects. Success and Words of Wisdom Success can be measured in a number of ways. For the WSDOT Audit Office, success may be measured by the impact this manual will have on the readers. While we cannot say that a firm will be always be successful in dealing with and understanding audit groups, we offer these words: • Record business income and expenditures in a hand-posted or computerized accounting system. • Keep time sheets, original invoices, rental agreements, and all source (original) documentation used as a basis for any billing to WSDOT. • Read and understand the agreement entered into with WSDOT and the implications of the method of payment identified in the agreement and the federal and state criteria cited in the agreement. • Just because an item of cost is an acceptable business expense by the Internal Revenue Service, doesn’t mean it is allowable for reimbursement purposes. For instance, the IRS rate for vehicle mileage is usually higher than the rate allowed by the Federal Acquisition Regulation System (FARS). • WSDOT uses FARS as a primary basis for determining the allowability, allocability, and reasonableness of incurred costs. Note: By definition, a WSDOT auditor cannot tell an organization how to compile information, or in what specific format. In other words, WSDOT cannot create or establish a firm’s accounting system. In theory and practice, the auditors are an objective third party, conducting audits of agreements or contracts entered into between WSDOT management, and public or private organizations. Introduction Audit Guide for Consultants 1-2 August 1999 The information contained in this guide is based on the knowledge and experience of the auditors, the most often asked questions by someone being audited, and the observations of the auditors made while conducting their work. Included in this guide are examples of schedules, time sheets, ledger sheets, and other accounting type records or documents. These examples are for discussion purposes only. The use of the same format or type of document does not guarantee the acceptance or eligibility of costs. The following is a summary of topical areas included in this guide. Chapter 1 Introduction Chapter 2 Definitions Chapter 3 Audit Involvement in the Agreement Process Chapter 4 Using This Guide Chapter 5 Labor Costs Chapter 6 Overhead Costs Chapter 7 Direct Nonsalary Costs Chapter 8 Fixed Fee Chapter 9 Subconsultants Chapter 10 Record Retention for Consultants Chapter 11 Task Assignment Agreements Chapter 12 Invoicing WSDOT Chapter 13 Development of Charge-Out Rates Chapter 14 Related Party Transactions Chapter 15 Single Audit Act Chapter 16 Auditor’s Review of Internal Control Chapter 17 WSDOT Standard Agreements Chapter 18 Conflict of Interest — Who Me? Chapter 19 Sole Proprietorships — Wage and Billing Rates Chapter 20 Billing Rates — AIHR, Sole Proprietor, Partnerships Chapter 21 Field Office Overhead Rates Chapter 22 Advance Agreement on Costs Chapter 23 Resolution Procedures Chapter 24 Examples of Forms Chapter 25 Audit Criteria Chapter 26 FARs Subpart 31 — Contract Cost Principles and Procedures 5:P65:DP/AG Chapter 2 Definitions Audit Guide for Consultants August 1999 2-1 Chapter 2 Definitions The following terms are used throughout this guide. We suggest that the reader become familiar with these terms and the associated WSDOT Audit Office definition. Actual Cost Agreement The name Actual Cost Agreement does not mean that a consultant will be reimbursed for all actual costs incurred for performing a job. Costs are reimbursed subject to the limitations described in the agreement, contract, or specified criteria. These limitations can be very restrictive. An example is interest on borrowed money. This is a cost of doing business, yet it is not reimbursable as an actual cost of doing business. Actual Costs Amounts determined on the basis of costs incurred and supported by original source documentation, as compared to forecasted costs, or costs thought to have been incurred, or costs based on historical averages. Administrative Expenses Costs which are not directly identified with any one item of work, but when taken as a whole, support or contribute to all activities of a firm. Advance Agreement An understanding included in an agreement by the contracting officer and the consultant as to the treatment of special or unusual costs not already included in FARs. The agreement must be in writing, uploads/Management/ audit-guide.pdf