If you are preparing for your first DCAA audit, you may be wondering what to expect and how to prepare.

Many new government contractors imagine DCAA auditors arriving unexpectedly and searching through every document they can find. In reality, a DCAA audit is generally much more organized than that. The auditors will explain what information they need and will request specific records related to the audit. Your job is to provide complete, accurate, and well-organized documentation.

The best time to prepare for a DCAA audit is long before the auditors contact you.

Here are seven practical steps that can help you prepare.

1. Understand Why the Audit Is Being Performed

Not every DCAA audit has the same purpose. Before gathering documents, understand what type of audit is being performed. For example, the records requested during a pre-award accounting system review may be very different from those requested during an incurred cost audit.

Understanding the purpose of the audit helps you focus on providing the information that is actually relevant.

2. Keep Your Accounting Records Organized

One of the biggest challenges during an audit is simply locating the requested documents.

Your accounting records should be complete, organized, and easy to locate. General ledger reports, invoices, payroll records, labor records, bank statements, contracts, and supporting documentation should be maintained in an orderly manner.

Disorganized records often result in delays and unnecessary questions.

3. Review Your Timekeeping Procedures

For many government contractors, labor costs represent a significant portion of contract costs.

Employees should understand your company’s timekeeping procedures and accurately record the time they work. Supervisors should also understand their responsibilities for reviewing and approving timesheets according to company policy.

Consistent timekeeping procedures are an important part of maintaining an adequate accounting system.

4. Make Sure Costs Are Properly Recorded

Your accounting system should consistently record costs according to your established procedures.

Government contractors generally need to distinguish between direct costs and indirect costs and properly account for expenses that may be unallowable under applicable regulations.

Recording transactions accurately throughout the year is much easier than trying to correct problems after an audit begins.

5. Maintain Supporting Documentation

The numbers in your accounting records should be supported by documentation.

Invoices, receipts, payroll records, contracts, purchase orders, subcontractor invoices, and other supporting documents should be retained and organized.

Even if a transaction was legitimate, it may become an audit issue if you cannot support it with proper documentation.

6. Follow Your Written Policies

Many contractors develop written accounting policies and procedures, but they do not always follow them consistently.

During an audit, DCAA may compare what your written procedures say with what actually happens in your business.

Well-written policies are valuable only if employees consistently follow them.

7. Ask Questions Before Problems Develop

If you are unsure whether your accounting system meets government contracting requirements, it is often less expensive and less stressful to identify potential issues before an audit rather than after findings are issued.

Preparing early gives you time to identify and correct weaknesses before they become audit findings.

Preparing for a DCAA audit does not require a perfect accounting system. It requires an accounting system that is well designed, consistently followed, and supported by accurate documentation.

Most audit findings are not the result of fraud or intentional wrongdoing. As discussed in the previous article in this series, many findings occur because procedures are incomplete, records are missing, or employees simply do not understand the requirements.

Good preparation reduces surprises. More importantly, it allows you to approach the audit with confidence rather than uncertainty.

Next in the DCAA Audit Series: What Government Contractors Should Do Before DCAA Arrives. We will discuss practical steps you can take now to strengthen your accounting system and be better prepared long before DCAA ever contacts your company.

Disclaimer: This article provides general educational information and is not intended as legal, accounting, or government contracting advice. Every contractor’s circumstances are different. Government contracting requirements vary depending on the contract, applicable regulations, and the scope of the audit.