Preparing for Your Financial Statement Audit With This Checklist for Government Contractors

At a glance:

• Financial statement audits require meticulous attention to detail and ensure eligibility for future contract awards and loans. Keeping detailed records of financial transactions throughout the year is critical.
• Conduct a thorough internal review to identify and rectify potential issues, and prevent delays during an audit.
• Use Aprio’s financial statement audit checklist for government contractors to prepare for an audit and help it run as smoothly as possible.

The full story:

For federal contractors, preparing for a financial statement audit can feel overwhelming. This process requires meticulous attention to detail and ensures your eligibility for future contracts and loans. Banks and investors may request audits to verify that the information in your financial statements is materially correct and complies with Generally Accepted Accounting Principles (GAAP). These audits are also required by the Small Business Administration (SBA) if a participant exceeds $10 million in gross receipts in the first year.

Keeping detailed records of your financial transactions throughout the year is key to a smooth and swift audit because audits are not just about cleaning up your books at year-end.

As you prepare for your audit, conducting a thorough internal review can h elp you to identify and rectify any potential issues and prevent delays in the audit process. To help you effectively prepare, Aprio has compiled a comprehensive checklist tailored to the specific needs of federal contractors.

Financial Statement Audit Checklist for Government Contractors

Before getting to specific steps, there are several best practices government contractors can adopt to ensure any financial audits they encounter run as smoothly as possible.

• Perform an internal review during the last quarter of year-end to identify and remedy any potential issues or areas of weakness.
• Use your audit to gain insight and improve your financial management processes.
• Compare account balances as of the beginning of the year with prior year audited financials and record any missing prior year audit journal entries or tax journal entries.
• Prepare account reconciliations to support trial balance account balances as of period and fiscal year-end.
• Make available all new agreements to auditors, entered during the year.
• Make sure your entity’s policies and procedures are being followed in compliance with Federal Acquisition Regulation (FAR) and Generally Accepted Accounting Principles (GAAP).

Areas of Special Focus:

Revenue and Direct Expenses (Cost of Goods Sold)

Fixed Price Projects

– Fixed price projects: Perform Estimate to Complete (ETC), Estimate at Completion (EAC), milestone or other required analysis to ensure year-end revenue cutoff is appropriate and in compliance with revenue guidance ASC 606, commonly referred to as “Revenue Recognition.” Prepare supporting documentation that is auditable.

Time and Materials (T&M) Projects
– Perform review of time sheet completion and posting for the pay period at fiscal year-end. Account for any partial pay periods if you pay bi-weekly.
– Accrue revenue and costs in the correct year as appropriate.

Cost Plus Fixed Fee Projects
– Accrue revenue and costs in the correct fiscal year as applicable.
– Consider indirect rate variance for additional revenue or liability accrual as of fiscal year-end.

Other Year-End Considerations

Cost and Expenses Year-End Cut-Off Review
– Review all cash disbursements from the end of the fiscal year through the audit field workday to ensure no costs are improperly attributed to the prior year.

Payroll Accrual
– Review payroll accruals at year-end.
– Ensure bonus accruals are recorded as applicable.

401(k) Match
– Accrue any missing 401(k) match contributions at year-end.

Distributions
– Verify that distributions are recorded in the proper year.

Year-End Scrub of Unallowable Costs
– Scrutinize costs to identify and reclassify any unallowable expenses.

Pass-Through Entity Tax Payment
– Ensure timely payment of pass-through entity taxes on behalf of owners and tax payments are recorded correctly as distributions in compliance with GAAP.

Leases
– Locate any missing long-term lease agreements, especially those starting in the second half of the year with 6-9 months of initial free rent. Understand the requirements of the new lease standard ASC 842 (effective 1/1/2022) and prepare schedules accordingly.

Journal Entries
– Ensure all journal entries have supporting documentation and management approval, ready for auditor review.

Legal Fees
– Inquire about any missing or late legal fee invoices for the year end.
– Be vigilant about unallowable legal costs.

Tax Journal Entries
– If applicable, record tax journal entries.
– Close the prior year in accounting system after the issuance of prior year audited financials. Check that your prior year equity balances roll forward correctly.

Billing Subsequent to Year-End
– Distinguish between billed and unbilled amounts for services rendered before year-end and document reasons for unbilled amounts.

Adjusting Journal Entries (JEs) or Other Subsequent Entries
– Keep track of any adjusting or subsequent posting made after the trial balance has been provided to auditors.

A final thought
Financial statement audits play a crucial role in enhancing your company’s credibility and can bolster stakeholder confidence, leading to more robust opportunities in the future. Aside from the benefits for stakeholders, financial statement audits can provide useful insights and help you identify areas where financial management practices can be enhanced.

By following the steps outlined above you can ensure that your organization is well prepared for its audit and position yourself for greater success in the government contracting world.

For additional guidance on audit readiness, reach out to Aprio’s government contracting team.

Abdul Raoof, CPA
As a director, Abdul puts the knowledge and expertise he’s accumulated over 20 years of experience in government contracting accounting, auditing and advisory services to work every day. CEOs and CFOs of new and established federal contractors rely on his wide-ranging expertise for everything from GovCon outsourced accounting to establishing sound internal financial systems and developing key financial metrics. Versatile, skilled and dedicated to ensuring his clients’ success, Abdul is an ideal partner for a whole range of federal contractors.