What Do You Know… About Accounting Systems?

Put on your “administrative operations” thinking cap. Test your reasoning and logic skills from a federal government reviewer’s viewpoint. Ponder these!

1. The billing for last month’s CPFF contract does not match the general ledger total Job costs for last month due to:

a. Payment for a fixed (depreciable) asset, for use (only) on this contract
b. A subcontractor’s pre-paid retainer
c. Unallowable costs specific to this contract
d. Pay period overlap through the 3rd of this month

2. The person, who approves/signs supplier payments, may not also:

a. Issue subcontract payment terms for those invoices
b. Document verification that the goods and/or services were received
c. Approve employee reimbursement requests for those payments
d. Reconcile bank statements to the General Ledger (G/L)

Accounting Systems

3. $6,600 of the premium for group health insurance applies to labor on the CPFF contract. Paid last month, the premium covered even amounts for last month, this month, and next month. The employee-paid portion from payroll deductions sums to $600. The customer billing for last month’s CPFF contract should be:

a. $2,000
b. $2,200
c. $6,000
d. $6,600

4. The person, who signs paychecks, or approves outsourced processing of payroll, may also be – without documented approval from another employee or officer – the person who:

a. Adds new hires to the payroll process
b. Timely transfers money to the Payroll bank account
c. Inactivates payroll for terminated employees
d. Increases pay rates, when employees get raises

5. Timesheets, time cards, or similar employee-worked time-tracking shows:

a. One signature or approval, only
b. White-out or electronic erasure of errors
c. Employee signature to certify accuracy plus supervisor signature to certify reasonableness
d. Hours charged to the regularly-assigned contract/Job, during attendance at a company-wide staff meeting

6. Timesheets, time cards, or similar employee-worked time-tracking can be:

a. Submitted the day before the end of the pay period
b. Approved by Human Resources before processing by Accounting
c. Completed after Accounting records the General Ledger labor charges
d. The source document initiating/supporting both payroll and General Ledger labor charges

7. Relocation expenses reimbursed to a new-hire are reclassified from allowable to unallowable, when:

a. Employment of the new-hire is terminated for cause, 10 months after the start-work date
b. Company management transfers the new-hire to a satellite office and pays subsequent relocation expenses (for that transfer), 10 months after the start-work date
c. Employment of the new-hire is terminated by the employee, 13 months after the start-work date
d. Management promotes the new-hire, 8 months after the start-work date, which requires the employee relocate

8. The Accounts Payable Aging Report shows that five, high-dollar supplier invoices are past-due. A finding from a customer review or audit will likely result, if:

a. The Aging Report documents a valid reason for rejecting, and actions taken to follow up, each past-due invoice – plus the monthly Aging Report is signed and dated by both Accounts Payable and management (such as the CFO)
b. The five unpaid invoices have N/30 payment terms and are from small businesses
c. For each of the five invoices, the Aging Report is supported by a Hold Payment form from the Buyer or Subcontract Administrator, describing the reason for the hold (e.g., faulty deliverables, late/missing deliverables, non-compliance with Terms and Conditions) and reasonable follow-up
d. For each, the amounts invoiced do not match the Purchase Order or Subcontract – plus the monthly Aging Report is signed and dated by both Accounts Payable and management (such as the CFO)

9. An Standard Form (SF) 1408 is likely required for:

a. A competitively-bid Firm Fixed Price award
b. A Labor Hour contract, using a GSA Schedule
c. Significant Material costs (including Travel) on a Time and Material contract
d. Significant Time costs (including all burdens) on a Time and Material contract

10. A travel advance to an employee or pre-payment (to hotel, airline, etc.) last month – for up-coming travel in this month – is recorded:

a. As an expense in the month paid
b. As an expense in the month of travel, before source documentation is received
c. As an expense in the following month, when a Travel Expense form and supporting receipts are received
d. As a pre-paid asset in the month paid

To better understand the importance of an adequate Accounting System, before basing Actual Incurred Cost billings on General Ledger data, verify your answers, below. Expand your view of the Accounting System (way) beyond which computer program is used. How did you do?

ANSWERS:

1. c. – An asset that benefits one contract, only, is an expense of that contract or Job – and not depreciated as Company asset with a useful life. Receipt of a pre-paid retainer and the resulting increase in cash, both affect the balance sheet – but not costs or expenses. A pay-period overlap pushes labor cost for the overlap-portion into the next fiscal month; only a portion of the last pay period (of the billed) month is accrued for the company-liability when worked. Unallowable direct costs (and their absorbed indirect expenses) are recorded in “unallowable” or “unbillable” accounts (as actual Company costs), but are not included in the customer bill.

2. d. – Subcontract terms originate from outside of Accounting – so can be matched with supplier invoices by Accounting, and retain segregation of duties for strong internal controls. Receipt of supplier-invoiced goods/services by the Buyer or Requisitioner (or dock worker, etc.) is matched to the supplier invoice by Accounting, and retains segregation of duties. Verifying approval of expenses (actually) incurred for one (or more) Job is documented by someone other than the approver of cash payment for those expenses – to improve internal controls over potential fraud.

3. a. – The three-month premium of $6,600 minus the sum of employee-paid portions of $600 leaves $6,000 as a Company expense. The expense covers three months. The cost for the customer-billing month is $2,000.

4. b. – Human Resources responsibilities (answers a., c., and d.) are not compatible with Accounting Department responsibilities. Any person that can change pay amounts, or create/delete employees for payroll – cannot also oversee payroll processing. Payroll is not issued for fictitious or terminated employees or for higher than (documented as) approved amounts.

5. c. – Two certifications, both from representatives of the company, are required on every timesheet. These form the basis of labor charges on billings to the customer and, therefore, a legal claim for money. The responsibility for accuracy and reasonableness of billings claimed, is the burden of the contractor certifying the claims. The audit trail allows tracing corrected errors and evaluating their reasons. Time is always charged to the Job that causes or benefits from the time invested; time attending a company-wide staff meeting benefits the company as a whole, and is charged to General and Administrative.

6. d. – The distribution of time worked determines payroll dollars and categories (such as Paid Time Off) plus labor dollars charged among Jobs and accounts in the General Ledger. Because an employee could – theoretically – die, quit, or otherwise terminate employment near the end of the pay period – no circumstances allow recorded time be certified before (all of) that time lapses. The Human Resources functions of adding/removing an employee from payroll plus changing an employee pay rate or salary – is not compatible with access to alter timesheets. Timesheets are the basis of payroll. Recording labor is a function of (only) Accounting.

7. a. – Relocation expenses are specifically unallowable, per FAR 31.205, if the new-hire does not remain employed with the company for at least 12 consecutive months. (The reason for termination is not relevant.) Relocation expenses are allowable for a transfer of any employee from one company-location to another. (The reason for relocation, while still employed by the company, is not relevant.)

8. b. – Small businesses have a legal right to have payment issued within 30 days of invoice acceptance. (See OMB Memorandum M-12-16, Providing Prompt Payment to Small Business Subcontractors, as extended by OMB Memorandum M-13-15 and M-14-10, Extension of Policy to Provide Accelerated Payment to Small Business Subcontractors.) Adequate Internal Controls require segregation of duties; Accounts Payable plus another party (e.g., CFO, Buyer, Purchase Order issued by Buyer) meets segregation requirements; each invoice rejection is adequately supported as reasonable.

9. c. – The Material on a Time and Material contract is cost-reimbursable – or billed at Actual Incurred Costs; therefore, the adequacy of the Accounting System, described by the SF 1408, is relevant. Other answers relate to pre-negotiated, fixed billings; these do not change, if General Ledger transactions are not accurate or complete.

10. d. – Generally Accepted Accounting Principles require that accrued expenses reflect the date that actual (company) liability is incurred. A pre-paid asset does not affect (billable) expenses (or customer billings). The source document – the Travel Expense form with adequate receipts – initiates/supports the amounts, accounts, and Jobs for expenses. Approved (segregation of duties) Travel Expense forms are accurate, complete, and recorded as of the date the company incurred the liability to pay them; prompt receipt of documentation allows timely recording of the transaction – and quick issuance of cost-reimbursable billings to the customer.