4
Financial Reporting Services at a Glance
Financial Statement Preparation
Metric
Compilation
Review
Audit
CPA provides no assurance that there are no material modifications needed. To prepare financial statements pursuant to a specified reporting framework.
CPA provides no assurance that there are no material modifications needed.
CPA obtains limited assurance that there are no material modifications needed. To report whether the CPA is aware of any material modifications needed, primarily through inquiry and analytical procedures.
CPA provides reasonable (high, but not absolute) assurance that statements are free of material misstatement. To express an opinion on whether the financial statements are presented fairly in accordance with the reporting framework.
Level of Assurance
To assist management in the presentation of financial statements.
Objective
No
No (but lack of independence must be disclosed)
Yes
Yes
CPA Independence Required?
firm organize and prepare all necessary documentation and schedules before the audit. Key components include: ■ AASHTO Internal Control Questionnaire (ICQ) preparation. The ICQ is a required document that outlines your firm’s accounting policies, timekeeping procedures, and internal controls. It is reviewed by auditors and DOTs to assess risk and compliance. ■ Indirect cost rate schedule preparation. Your firm’s version of the Statement of Direct Labor, Fringe Benefits, and General Overhead must be prepared in accordance with the AASHTO Guide. This includes segregation of direct and indirect costs, identification of unallowable costs (FAR 31.205), and proper allocation of expenses. ■ Supporting documentation. Auditors will require access to payroll registers, timesheets, invoices, receipts, the general ledger, and executive compensation analysis. ■ Review of high-risk accounts. Certain accounts, such as travel, meals, advertising, and professional fees, are frequently scrutinized. A readiness review ensures these are properly classified and supported. ■ Reconciliation to financial statements. The overhead schedule must reconcile to your firm’s financial statements and tax filings. Discrepancies can trigger audit findings or rate disallowances. GET YOUR FIRM AUDIT-READY. Now that you understand the critical differences between a FAR overhead compilation and audit, the next step is to put that knowledge into action. In our 90-minute on-demand webinar , I personally walk you through a step-by-step guide to building a compliant and defensible indirect cost rate. My goal is to help you move from theory to practice. Learn how to assemble the right documentation, complete the AASHTO ICQ, and avoid the common pitfalls I’ve seen delay approvals and increase costs for firms like yours. This is the perfect next step toward FAR overhead audit readiness. Watch the webinar here . Robert Jones, CPA, CPCM is director of Outsourced Accounting Services – GovCon at Stambaugh Ness. Connect with him on LinkedIn .
ROBERT JONES, from page 3
The audit includes testing of labor distribution, unallowable costs, internal controls, and the accuracy of the indirect cost rate schedule. It results in an audit opinion and is often required for firms with larger contracts or those seeking a cognizant approval of their rate. The chart above demonstrates the key differences between various levels of financial reporting. Each level offers a different degree of scrutiny. WHEN IS A COMPILATION ACCEPTABLE? While each state DOT has its own policies, a compilation may be accepted when:
The firm is new to government contracting.
■
The firm is exiting a Safe Harbor program.
■
■ The firm’s contract volume is below a certain threshold.
■ The DOT has not designated the firm as high-risk.
However, even when a compilation is accepted, the firm must still comply with FAR Part 31 and be prepared for a future audit. That’s where audit readiness becomes essential. WHY AUDIT READINESS MATTERS. Whether your firm is preparing a compilation or an audit, the accuracy and completeness of your indirect cost rate schedule are critical. Auditors are prohibited from preparing the same financial statements they audit, due to independence rules under GAGAS. This means that if your CPA auditor has to assist in preparing your indirect cost rate schedule, it can:
Delay the audit
■
Increase audit costs
■
Disrupt the auditor’s schedule
■
■ Cause missed DOT submission deadlines To avoid these issues, many firms engage in a FAR Overhead Audit Readiness project before the audit begins. WHAT’S INCLUDED IN A FAR OVERHEAD AUDIT READINESS PROJECT? A FAR overhead audit readiness project helps your
© Copyright 2025. Zweig Group. All rights reserved.
THE ZWEIG LETTER OCTOBER 6, 2025, ISSUE 1604
Made with FlippingBook flipbook maker