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Top 5 Areas Commonly Reviewed During a Federal Audit

February 07, 2014

What areas of business are important during a Federal Audit?

First, I hope your agency is never subjected to a Federal Inspector General (IG) audit or any government audit. It would be a disruption to your agency’s operations – sometimes for months – and cause for concern. It also might result in the need to return money spent with good intentions as a result of an innocent mistake or incorrect interpretation of the law or regulations.

When we at KLR audit you for the purpose of determining if your annual financial statements are presented fairly in accordance with generally accepted accounting principles, we also keep in mind what the federal auditors look for when they audit and we try to make recommendations to you that will help you in case of a federal audit. Here are five areas that we frequently see in the federal literature that pop up in their audit reports.

  1. Internal Controls – Without a system of controls, you’ll have difficulty assuring the auditors that transactions are recorded consistently and correctly. If you don’t have a procedures manual enumerating the controls, it is difficult to affirm that you have a system of controls in place.
  2. Payroll – The government finds it very difficult to reimburse you for your payroll costs without a payroll system that includes time sheets signed by the employee and approved by their supervisor. Allocating payroll costs based on budget or job descriptions is not going to fly with the federal auditors.
  3. Occupancy costs – This is another cost, like payroll, that is usually allocated among several program activities. It is important to have a simple, written, well thought out allocation methodology. Charging programs based on funding availability is problematic. Also, remember, if you acquire a new program in mid-year, be sure to re-do your occupancy allocation to include the new program.
  4. Fixed assets – Control over these assets purchased with federal dollars is absolutely essential. Numbered asset tag labels are now readily available over the internet at prices that are extremely low compared to just a few years ago. Technology has helped bring this control device down in price so that every organization can afford to control fixed assets the right way.
  5. Attitude – If you made a mistake, admit it and try to minimize its impact in some creative way. Although your mission is most important to you, watching out for federal dollars is most important to the federal auditor. Demonstrating that you too are concerned about spending federal money inappropriately is important. Do not try to minimize your error by noting how the inappropriate expenditure advanced the organization’s mission.

Treat federal dollars the way you hope your kids will treat the money you send to them while they are away at college! As always, our team understands the Federal Audit process and we are always here to assist you. You can contact any member of the Not-for-Profit Services team at or call 401-274-2001 for more information.

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