What Is a Federal Acquisition Regulation (FAR) Audit?

A Federal Acquisition Regulation (FAR) audit determines if a business complies with the accounting and financial requirements set forth by the federal government. These audits evaluate a contractor’s accounting system, cost allocations, and practices to confirm adherence to federal standards, ensuring accountability and proper use of taxpayer funds.

Federal Acquisition Regulation Overview

The Federal Acquisition Regulation (FAR) represents the principal set of rules guiding the United States government’s procurement process. It serves as the comprehensive framework for how federal agencies acquire goods and services using appropriated funds, establishing consistent policies and procedures across all executive agencies to promote uniformity and efficiency in federal contracting.

The FAR originated from a 1979 statute and was officially issued in 1983. It is codified in Chapter 1 of Title 48 of the Code of Federal Regulations.

The FAR standardizes procurement, ensures fair pricing, and fosters competition among contractors. It also protects taxpayer interests. While the FAR applies broadly to most federal agency acquisitions, individual agencies like the Department of Defense (DoD) or NASA may issue supplements, such as the Defense Federal Acquisition Regulation Supplement (DFARS), to meet unique agency needs.

Entities Subject to FAR Audits

Organizations or individuals typically subject to FAR audits primarily include government contractors and, in some instances, subcontractors. The obligation to undergo a FAR audit often depends on factors such as the contract’s size, its specific type, or the inclusion of certain clauses within the agreement.

Contracts that are cost-reimbursement or time-and-materials, or those subject to Cost Accounting Standards (CAS), frequently trigger FAR audit requirements. For example, architectural and engineering firms with government contracts exceeding $500,000 generally need an independent audit of their overhead rates.

Key agencies responsible for conducting these audits include the Defense Contract Audit Agency (DCAA) and other agency-specific audit functions. The DCAA provides audit and financial advisory services to the DoD and other federal entities involved in acquisition, ensuring taxpayer money is used responsibly and contractors meet required standards.

The DCAA’s influence is present throughout a contract’s lifecycle, from pre-award assessments to post-award compliance reviews. A contracting officer typically requests these audits or reviews, and the burden of proof for FAR compliance rests with the contractor.

Common FAR Audit Types and Focus Areas

Contractors might encounter various types of FAR audits, each with a specific purpose. Pre-award audits assess a contractor’s proposed costs and the adequacy of their accounting system before a contract is awarded. Post-award accounting system audits verify that the accounting system continues to comply with standards after a contract has begun.

Another common type is the incurred cost audit, which verifies actual costs after contract performance, particularly for contracts where the price is not fixed. Specific system audits, such as those for accounting, estimating, or purchasing systems, evaluate whether a contractor’s internal controls and processes meet federal requirements.

Across these audit types, auditors commonly examine the allowability, allocability, and reasonableness of costs. A cost is considered “allowable” if it complies with all FAR requirements, contract terms, and applicable accounting standards. For a cost to be “reasonable,” it must not exceed what a prudent person would incur in a competitive business. “Allocability” means the cost can be assigned to a particular contract or cost objective, providing a direct benefit to that project.

The FAR outlines specific unallowable costs, such as entertainment, lobbying, or fines and penalties, which cannot be billed to the government. For larger contractors, compliance with Cost Accounting Standards (CAS) may also be a focus. While CAS focuses on cost measurement and allocation, the FAR cost principles guide allowability.

The FAR Audit Lifecycle

The FAR audit process generally follows a structured sequence, beginning with notification to the contractor. This initial communication typically outlines the scope and nature of the audit.

Following notification, an entrance conference occurs, where the auditors and the contractor discuss the audit’s objectives, scope, and anticipated timeline. During this phase, the contractor may be asked to provide an overview of their accounting systems and relevant documentation.

The fieldwork phase involves auditors examining the contractor’s records, financial statements, and internal controls in detail. This stage often includes reviewing cost submissions, invoices, timekeeping records, and other financial documents. Auditors may also conduct interviews with key personnel to gain further insight into the contractor’s operations and accounting practices.

After fieldwork, the auditors prepare preliminary findings or a draft audit report, detailing any identified discrepancies or areas of non-compliance. The contractor is then given an opportunity to formally respond to these findings, providing explanations, additional documentation, or corrective action plans, allowing them to address concerns and potentially resolve issues before the final report.

An exit conference is typically held to discuss the draft findings and the contractor’s response. Subsequently, the auditing agency issues the final audit report, which includes a definitive statement of findings and recommendations. The resolution process then begins, often involving negotiation with the contracting officer regarding any questioned costs or required system changes.