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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 12667
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a client required an audit cost report years period

Customer Question

I have a client required an audit cost report for three years period in order to claim tax credit as per Department of Revenue required. I experienced audit financial statement as whole but not sure that we can audit only expenditure account and express an opinion on the cost report. Would you please explain for me 1. can we audit a project only cost report for three years? what is the related standard guidance?
Submitted: 1 year ago.
Category: Finance
Expert:  Lane replied 1 year ago.

I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial, retirement plan, Social Security & Medicare, estate, corporate & tax advice since 1986

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I can help here - But you'll have to tell me more about the issue here.

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What Kind of tax credit? (for example,historical renovation credits will have different criteria than, say, an enterprize zone credit)

What type of property; not just grade, (as in commercial vs residential) but the specific property use ?

Taxing authority?

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​Depending on the type of credit, much of your guidance would typically come from the criteria FOR the credit.

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And of course, generally, so as not to overstate the amount of the credit, taxing authorities are generally concerned with uncovering potential overcharges and generating the documentation necessary to seek cost recoveries.

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Generally, the objective of a construction audit is to determine if:

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  • Costs incurred have been billed to the owner/developer in accordance with the construction contract.
  • Change orders are appropriate based on the supporting documentation.

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Typically, audits focus on a tailored review of construction documents, including correspondence, bids, billings and change order documentation.

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But again, if you'll answer those first three questions, we can go from there.

Expert:  Lane replied 1 year ago.

Again,...

  • What Kind of tax credit?
  • What type of property; not just grade, (but intended use)
  • Taxing authority?
Customer: replied 1 year ago.
my questions is related to audit not for the tax issue. I need an audit expert to answer my question. Thanks!
Expert:  Lane replied 1 year ago.

I might not be making myself clear ... my answer assumed that you had a basic understanding of a cost audit.

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The criteria for the tax credit itself (unless you've mis-stated the catalyst for this cost audit) will determine the way that the results of the cost audit are used ...The BEST answer here will be tied to the credit's criteria.

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But if you want the GENERAL guidance it follows here:

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Cost Audit is the verification of the cost accounts and of the adherence to the cost accounting plan. That's to say, it not only involves the examination of cost accounts but also the fact that plan prepared in this connection has been duly executed (here's where the credit criteria becomes applicable)

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The formal definition is " "the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures and the continuing relevance of such procedures."

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To compare a financial audit to a cost audit might help:

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The financial audit covers all the financial transactions recorded in financial books and financial records. Where, again, the cost audit covers only cost records and cost accounts.

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In the financial audit Financial aspect of the accounts is a matter of concern. Where Cost aspect of account is of main concern in the cost audit.

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And where the financial audit aims to examine that the business transactions have been recorded correctly, the cost audit aims to verify cost accounts and ensures the plan prepared in this connection has been duly executed.

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And finally (most important - although again it would help if you would provide the tax credit target here) while financial audits are historical in nature, and scrutinizes for purposes of the reliability of transactions, Cost Audits done with a forward looking approach, and is concerned with the is concerned with the propriety and efficiency of the transactions.

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Now, in terms of the specific objectives (or purpose)? ... generally two

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(1) Protective Purpose: Under protective purpose, it aims to examine that there is no undue wastage or losses and costing system brings out the correct and realistic cost of production or processing, again likely a desired objective for purposes of the tax credit)

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(2) But more generally, a constructive Purpose: Cost Audit has a constructive purpose as well. Cost Audit plays a constructive role by providing management with information useful in regulating production, choosing economical methods of operation, reducing operation costs and reformulating plans etc. on the basis of his findings during the course of Cost Audit.

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Taxing authority will want to see this having been an ongoing process for the three years AND see plans looking forward to execute this objective.

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For a tax statutory audit the taxing authority wants to ascertain the relationship of costs and prices.

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The areas of activity, (in terms of which cost accounting records are to be maintained) under Cost Accounting Record Rules are as follows:

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(1) Raw Materials, Components, Stores and Spare Parts

(2) Salaries and Wages

(3) Service Department Expenses

(4) Utilities

(5) Depreciation

(6) Other Overheads

(7) Conversion Cost

(8) Research and Development Expenses

(9) Interest

(10) Joint Products and By-products

(11) Work in Progress and Finished Goods Stock

(12) Cost Statements

(13) Records of Physical Verification

(14) Packing

(15) Production Records

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Specifically the usefulness and focus for a statutorily required cost audit such as this will differ from those uses by management and shareholders (I'll not list those, for the purpose of adding focus to a government required audit such as this)

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  • Cost Audit helps in fixing contract price in cost plus contracts.
  • Helps in fixing of selling price for essential commodities.
  • Enables Government to focus attention on inefficient work.
  • Enables Government to give protection to certain industries.
  • Facilitates settlement of trade disputes, and
  • imposes an automatic check on inflation.

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Hope this helps to clarify

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Here's a US sample

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http://www.pioneercement.com/cost/0809/pclcost300609.pdf

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But your disclosure of the taxing authority will allow a MUCH more specific answer

Customer: replied 1 year ago.
Thanks Lane.
I am an auditor. I understand above information. My questions are :1. Can we audit a project only cost report for three years? what is the related standard guidance? (I need the standard code number that I can refer to). Again, I need an audit expert to discussion. Thanks!
Customer: replied 1 year ago.
Could you please re-open this question and let the audit expert to answer my question? Thanks!
Expert:  Lane replied 1 year ago.

Will do ... didn't understand the specificity of your original question ... we have a large audience here

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In case it helps

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8-406 Cost Accounting Standard 406 --- Cost Accounting Period

The purpose of this standard is to provide criteria for selecting the time periods to be used as cost accounting periods for contract cost estimating, accumulating, and reporting. It will reduce the effects of variations in the flow of costs within each cost accounting period. It will also enhance objectivity, consistency, and verifiability and promote uniformity and comparability in contract cost measurements. The standard was effective July 1, 1974 and must be applied in the next fiscal year after receipt of a CAS-covered contract.

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8-406.1 General

a. The cost accounting period used by a contractor must be either (1) its fiscal year or (2) a fixed annual period other than its fiscal year if agreed to by the Government. Where a contractor's cost accounting period is different from the reporting period used for Federal income tax reporting purposes, the latter may be used for such reporting. All rates used for estimating, accumulating, and reporting (including public vouchers and progress payment billings) must be based on the contractor cost accounting period.

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b. A transitional cost accounting period other than a year shall be used whenever a change of fiscal year occurs. It may be a period more or less than a year, but not more than 15 months. DCAA Contract Audit Manual 848 February 5, 2016 8-407

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c. Costs of an indirect function which exist for only a part of a cost accounting period may be allocated to cost objectives of that same part of the period. However, such cost must be material, accumulated in a separate indirect cost pool, and allocated on the basis of an appropriate direct measure of the activity or output of the function during that part of the period.

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d. The same cost accounting period shall be used for accumulating costs in an indirect cost pool as for establishing its allocation base. However, in the prefatory comments the Cost Accounting Standards Board stated that although as a matter of principle it does not agree that mismatched periods are proper, it recognizes the value of appropriate expedients where cost allocations are not expected to be materially affected.

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Therefore, the standard provides for the use of a different period for establishing an allocation base when agreed to by the parties if:

(1) the practice is necessary to obtain significant administrative convenience,

(2) the practice is consistently followed by the contractor,

(3) the annual period used is representative of the activity of the cost accounting period for which the indirect costs to be allocated are accumulated, and

(4) the practice can reasonably be expected to provide a distribution to cost objectives of the cost accounting period not materially different from that which otherwise would be obtained.

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e. Contractors shall follow consistent practices in selecting the cost accounting period or periods in which any types of expense and any types of adjustment to expense (including prior period adjustments) are accumulated and allocated.

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f. Indirect cost allocation rates, based on estimates, which are used for the purpose of expediting the closing of contracts which are terminated or completed prior to the end of a cost accounting period need not be those finally determined or negotiated for that cost accounting period (see 6-711.1 and 6-711.2). They shall, however, be developed to represent a full cost accounting period, except as provided in c. above.

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g. If noncompliances are found, the auditor must ascertain their significance and make the appropriate recommendations as outlined in 8-302.7.

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Lane

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Customer: replied 1 year ago.
Mr. Lane:I appreciated with your respond. Again, my question is for the audit cost report in relating to the audit practice. For the cost accounting principle, I know that. I am a CPA too. I really need to discuss with an experienced CPA who has audit experiences. Please re-open my question to get the right professor to answer my question. Thanks!
Expert:  Lane replied 1 year ago.

It has been for some time now... people are not picking this up, my guess, because you are not articulating what you want well.

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First you mention this 3 year time period as if it is relevant... It is not.. Now it looks almost as if you are looking for information about the Cost OF the audit

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You haven't been able to state what standards you are looking for GAAP, FASB, CAS (within OFPP) , DCAA Your question seems to change at every iteration. As you should know standards change as the objective, region of the world, and purpose FOR the audit changes.

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I only offer this so that you might articulate exactly what you're looking for. The nebulousness of your question here is likely why no one else is picking this up.

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Best of luck to you