Term Paper: Awarding Audit Contracts by U.S

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[. . .] Chapter 3 - LITERATURE/DESKTOP RESEARCH

3.1 Summary

The information available for researching this project was based on a cross-section of materials. Although this was an immense task because of all the government guides available on the subject, not to mention non-government materials, most of it was readily available on the Internet.

Some of the major websites that provided basic information included the following.

Non-Government Sites

American Bar Association Section of Public Contract Law. It is organized into six divisions that have links on the home page.

NASPO-National Association of Procurement Officials. Has a section on contract information and auditing procedures.

Fedmarket.com, The Federal Marketplace

Government Sites

Defense Contract Audit Agency. Provides audits, reports and financial advisory services.

CBDnet, which is Commerce Business Daily. Provides information on contracts and allows you to search formidable research that has been done.

Defense Acquisition Deskbook

Defense Procurement Homepage

Defense Contract Audit Agency

US Dept. Of Commerce Office of General Consul, Contract Law Division

General Services Administration

Office of Federal Procurement Policy

Small Business Administration's Procurement and Contracting Page

FebBizOpps

GSA Advantage

Federal Procurement Data System

GSA Acquisition Manual

Federal Acquisition Regulation (FAR)

Guides

Practitioners Research Guide: Researching Government Contracts Law

Government Contracts Research Guide (1999) Burns Law Library

Law about Government Contracts (LII)

Metasites

ARNet: Acquisition Reform Network

Federal Acquisition Jumpstation

Where in Federal Contracting?

NASA Acquisition Internet Service (NAIS)

Courts

US Court of Federal Claims

US Court of Appeals for Federal Circuit

GAO Comptroller General Decisions

Chapter 4 - ANALYSIS AND RESULTS

4.1 Summary

The purpose of an audit according to the Department of Labor is not to rehash past mistakes but to look at past events with a new view toward improving future performance. Findings from an audit can be used as the basis for adjusting policies, priorities, structure or procedures in order to make operations as efficient, economical and effective as possible (U.S. Dept. Of Labor, 2003).

But before discussing the purpose of an audit, let's define what constitutes and audit. The term audit is used in particular by the Federal government to not only examine a supplier's financials but also to determine compliance with applicable laws and regulations, the economy and efficiency of the operation and the effectiveness in achieving results. Therefore, the audit process becomes more of a management process by assessing more than just a company's financial statement.

The two most common types of audits are the financial audit and the performance audit. A performance audit reviews the past performance of an entity, program or function to assess whether funds and property were appropriately administered or if the program or project fell short of expectations and if so, why.

Financial audits include anything that is financially-related to determine whether the financial statements of an audited entity accurately and fairly present audits of contracts, grants, internal controls, computer-based systems, financial systems, indirect costs, pre-awards and program fraud (U.S. Dept. Of Labor, 2003).

At all levels of the government, auditors are becoming more involved in how performance is defined and measured, which is consistent with a trend toward broader scope audits. For example, in 1992, the Austin, Texas City Auditor's Office drafted a performance reporting resolution, which passed the City Council, requiring all city departments to implement performance measurement systems and periodically report on their findings. (Grifel, Morgan & Epstein, 2002)

As we begin to look at the framework and implications of the contracts audit process, we will consider the cost issues and justification for implementing large-scale audits; discuss the evolving role of government auditors; consider an audit contract model and review current best practices.

Justification for Audits

According to Mark Funkhouse in the Journal of Government Financial Management (Winter 2002), the Government Auditing Standards state, "the audit of government reporting is an essential element of public control and accountability. Auditing provides credibility to the information reported by or obtained from management through objectively acquiring and evaluating evidence. The importance and comprehensive mature of auditing place a special responsibility on public officials or others entrusted with public resources who authorize or arrange audits to be done in accordance with these standards."

The Federal government has to implement a system of checks and balances because of the broad range of responsibility that is involved in the contract process. Funkhouse reports on a local government auditing study that was conducted in large U.S. cities. A mail survey was sent to the head of each audit organization, followed be additional mailings and email and phone contact. The main outcome was that the audit directors clearly saw the value of the audit process in identifying problems in their jurisdictions. They were also proactive in initiating audits beyond those that were mandated and believed that in the long run, this would result in cost savings. The article further states that local government auditing will continue to get stronger and will eventually filter down to smaller municipalities.

Justifying the audit process is not as difficult as it might seem. An effective audit process provides a "check and balance" function that limits an abuse of power and prevents potential program problems. From a government perspective, the contract audit is a necessary evil.

Since the government awards over $300 billion in contracts, it is imperative that measures are taken to insure the reputation, reliability and quality of the vendors who are selected to provide goods and services to the government. Audits are an essential part of the contract award process and often result in considerable cost savings for the government.

An audit finding may question associated program costs and disallowed by government regulations. This could result in the auditee having to refund the disallowed amount resulting in a cost savings. The objective of an audit finding is to insure that there is no fraudulent activity or misrepresentation that would end up costing the government money.

The Office of Management and Budgets issued a Circular in June 1997 pursuant to the Single Audit Act Amendments of 1996, which outlines the standards for Federal audits of awards for state and local governments, as well as non-profit organizations. The basic premise is to establish guidelines and consistency in obtaining information. The bottom line is that the Federal government is awarding monies and must protect its investment. So are audits justified? Without a doubt. No taxpayer would want the government to award monies and not insure that these funds were being used by state and local government agencies and non-profit organizations for a greater good.

But not everyone agrees with using external auditors. Independent external auditors can be swayed and attest to management's assertions in accordance with generally accepted auditing standards. Consider what the Standards for the Professional Practice of Internal Auditing (The IIA's Standards) state: "The internal auditing department is an integral part of the organization and functions under the policies established by senior management and the board." The internal auditing function is an inherent part of the internal control system. In fact, in most large organizations, the internal auditing function performs a significant, if not primary, role in providing independent appraisals upon which management's assessment of internal control is based. If external auditors perform internal auditing and attest to management's assertions about the internal control system, they essentially are attesting to an activity in which they have directly supported management's assertions. This is a direct impairment of their independence. (Institute of Internal Auditors 2002)

No matter what, everyone in an organization has some responsibility for internal control and that includes external auditors. However, it is eventually management ultimate responsibility for an entity's internal control system. They must take final ownership. Financial and accounting officers are central in the way management exercises control, though all management play important roles and are accountable for controlling their unit's activities. External auditors often contribute to the achievement of an organization's objectives and provide information useful in managing control. However, they are not responsible for the effectiveness of, nor are they a part of, the organization's internal control system."

Other institutions have published statements supporting this position:

The Securities and Exchange Commission (SEC) Rule 2-01 of Regulation S-X.

The U.S. Government's FDIC Improvement Act of l991

The Office of the Comptroller of the Currency, FDIC, Federal Reserve Board, and Office of Thrift Supervision's Draft Interagei7ey Policy Statement on Internal Audit Outsourcing.

The FDIC Improvement Act of 1991, Section 36, requires management to provide an assessment of the effectiveness of the internal control structure and of compliance with the laws and regulations relating to safety and soundness. A recent survey of the "Group of 25," chief internal auditors from large U.S. financial institutions, indicates that in most cases, management worked closely with the internal auditors to complete the assessment process. Most organizations extended COSO guidelines beyond the financial reporting objective to include operating objectives. The focus was on the overall internal control structure over financial reporting, operations, and regulatory compliance. With regard to FDICIA-required attestations of management's assertions, the independent public accountants either performed the attest function in full or reviewed the work of… [END OF PREVIEW]

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