Client Alerts & Newsletters

DCAA Materiality Standards for Incurred Cost Audits

August 1, 2019

On July 19, 2019, the DCAA issued a memo implementing new materiality standards and guidance for their use in incurred cost audits initiated after July 19, 2019. This policy was implemented in response to FY 2018 NDAA, Section 803, which required DCAA to adopt commercially accepted standards of materiality for incurred cost audits, and aims to facilitate a “consistent approach that helps an auditor determine the nature, timing, and extent” of audit procedures on cost elements and accounts that are “significant, or material, to the audit opinion.” Specifically, the memo recommends that auditors first calculate the quantitative materiality threshold by determining the total subject matter of the audit (generally, Auditable Dollar Volume (ADV) plus assist audit amount(s)). Thereafter, the auditor should calculate the quantified materiality amount using one of two formulas, which are based on the aforementioned subject matter amount and reflect the same formulas set forth in the Section 809 Panel’s Professional Practice Guide (discussed here). The result of such calculation is a threshold that is inversely related to the subject matter amount (i.e., as the amount of subject matter cost increases, the materiality threshold decreases). Numbers aside, the memo emphasizes the importance of considering qualitative factors (e.g., customer concerns and prior findings) in determining materiality, the relative importance of which is subject to the auditor’s professional judgment.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Nicole Owren-Wiest
Partner – Washington, D.C.
Phone: +1.202.624.2863
Email: nowrenwiest@crowell.com

Charles Baek
Counsel – Washington, D.C.
Phone: +1.202.624.2894
Email: cbaek@crowell.com

Catherine O. Shames
Associate – Washington, D.C.
Phone: +1.202.688.3446
Email: cshames@crowell.com

Crowell & Moring LLP is an international law firm with offices in the United States, Europe, MENA, and Asia that represents clients in litigation and arbitration, regulatory and policy, and transactional and corporate matters. The firm is internationally recognized for its representation of Fortune 500 companies in high-stakes litigation and government-facing matters, as well as its ongoing commitment to pro bono service and diversity, equity, and inclusion.

View Desktop Site | Mobile Sitemap |

Contact | Subscribe | Terms of Use | Privacy Statement | Alumni

© Crowell & Moring LLP 2022
Attorney advertising - prior results do not guarantee a similar outcome.