The following guidelines should be considered when developing specific audit procedures for consultant overhead rate audits.
In the majority of consultant contracts labor is the largest single component of cost.
This component is made up of direct labor charges to the contract and indirect
labor charges allocated to the contract through a factor or rate.
Once this assessment has been made the auditor can determine the size and depth of the audit sample for labor testing.
1. The labor sample should be tracked from employee time records to:
• The payroll records to assure hours recorded are paid.
• The cost system to assure hours are posted properly to jobs.
• The general ledger to assure that the total posted is recorded in the financial accounting system.
2. The overall labor in general ledger accounts should be reconciled to:
• The job cost system
• The payroll reports submitted to the Internal Revenue Service (i.e. 941’s).
3. Audit procedures should also determine if the labor accounts and individual time card entries sufficiently screen labor to:
• Determine the allowability of payroll cost. (i.e. Do the records separate excess compensation and time spent on unallowable activities?)
• Determine the proper allocation of labor. (i.e. Do the records charge all labor performed on similar tasks the same way?)
• Determine if labor is posted in a manner from which the labor base can be computed. (i.e. If the base is direct labor without premium overtime do the records accumulate direct labor and direct premium overtime?)
Cost centers are developed to capture costs associated with a single purpose. The
costs are assigned to objectives based on unit charges. Examples of categories for
individual cost centers are printing, computers and vehicles. The over/under
allocation of costs is usually handled as an adjustment to the overhead pool, which
is where the cost would have been charged if it had not been directed to the cost
center. If the over/under allocation is significant, consideration should be given to
adjusting the contract charges.
Some accounting systems will attempt to adjust the unit charge rate for the
over/under allocation of the cost centers. The goal of any cost center is to
minimize the over/under allocation by the application of a properly estimated unit