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FHWA Resource Center
INNOVATIVE FINANCE TEAM
Publications
American
Association of State Highway and transportation officials
A Guide for Auditing Transportation Programs
Internal
audit Guide
A Guide for Performing
Department of Transportation Internal Audits
Prepared by the American
Association of State Highway and Transportation Officials (AASHTO) Audit
Subcommittee and the Federal
Highway Administration (FHWA) Resource Center Finance Technical Service
Team July
2004
Credits
AASHTO Representatives
Arkansas State Highway
and DOT, Leonard E. Grinstead
Delaware Department
of Transportation, External Audit Team
Florida Department
of Transportation, Ronnie Atkins, CPA
Kentucky Transportation
Cabinet, External Audit Unit
Michigan Department
of Transportation, Frank G. Morway, C.P.A.
South Carolina Department
of Transportation, J. Darrin Player
Texas Department of
Transportation, Paula M. Bishir, CIA, CGAP
Utah Department of
Transportation, Stephen C. Reitz
Virginia Department
of Transportation, Alex Sabo, CIA, CFE, CBM
West Virginia Department
of Transportation, Melissa A. Wood, C.P.A
Federal Highway Administration
Representatives
Resource Center at
Atlanta, Finance Technical Service Team
John P. Jeffers, CGFM,
Taskforce Chair
Gina P. Laney, CPA
Table of Contents
Chapter 1
- Introduction
Why a Guide?
Chapter 2- Types of
Audits
Financial Audits
Attestation Engagements
Performance Audits
Chapter 3-Essentials
Laws and Regulations
Contract Terms
Defining an Eligible
Cost
Chapter 4
– Project Cost Distribution
Project Cost Distribution
APPENDIX A –
PROJECT COST DISTRIBUTION FLOWCHART
APPENDIX B –
GLOSSARY
APPENDIX C –
INTERNAL CONTROL ASSESSMENT
APPENDIX D –
GENERAL AUDIT PROGRAM
APPENDIX E –
ITEMS OF CONSIDERATION 24
Federal-aid Billing
Project Funds Management
Project Cost Estimation
Project Planning
Consultant Project
Selection and Payment
Construction
Change Orders &
Supplemental Agreements 37 - 38
Chapter
1
Chapter One – Introduction
This guide was developed
by an American Association of State Highway and Transportation Officials
(AASHTO) Audit Subcommittee task force of State transportation auditors
and Federal Highway Administration (FHWA) Technical Service Team specialists.
Incorporated into the Guide is both the State Transportation Agencies
(STA) best practices and recommended audit practices developed by the
task force team.
Why a Guide?
An essential role of government is the stewardship and oversight of public
expenditures. The FHWA and STAs provide the stewardship and oversight
of Federal-aid and State-funded transportation programs. Through the growth
in government transportation expenditures, there is a recognized need
to enhance the stewardship and oversight process for transportation programs.
The purpose of the audit guide is to provide a tool that can be used by
individual state internal auditors and public accounting firms that perform
audits of transportation programs.
This guide is intended
to assist individuals in understanding processes, terminology, policies,
audit techniques and sources for regulations and specific procedures.
The objective of the Guide is to provide a focused audit program to identify
and report on the following:
· Internal
controls
· Adequate
support of costs
· Compliance
with laws and regulations
· Effective
use of resources
The Guide includes
an Internal Control Assessment, General Audit Program and Items of Consideration
as Appendixes. These tools will assist auditors in developing audit programs
to perform their oversight responsibilities.
Auditing Standards
Different organizations
follow different audit standards; therefore, they should apply the appropriate
standards for their organization. (For example, GAGAS, IIA, etc.).
Chapter 2
Chapter Two – Types of Audits
For purposes of this
Guide, the terms of review and audit are often used interchangeably when
discussing attestation engagements and performance audits. The practical
difference between audits and reviews is the scope of work. A review may
not have the depth of transaction testing, but still may provide assurances
that the operation was performing properly.
This section describes
the three types of audits. These are: financial audits, attestation engagements,
and performance audits. The primary differences among the three are the
respective objectives.
Financial Audits
Financial audits are
primarily concerned with providing reasonable assurance about whether
financial statements are presented fairly in all material respects in
conformity with generally accepted accounting principles (GAAP) or with
a comprehensive basis of accounting other than GAAP. Other objectives
of financial audits, which provide for different levels of assurance and
entail various scopes of work, may include:
· Providing
special reports for specified elements, accounts, or items of a financial
statement
· Reviewing
interim financial information
· Issuing letters
for underwriters and certain other requesting parties
· Reporting
on the processing of transactions by service organizations
· Auditing
compliance with regulations relating to federal award expenditures and
other governmental financial assistance in conjunction with or as a by-product
of a financial statement audit.
Financial Audits are
generally performed through the Single Audit process.
Attestation Engagements
Attestation engagements
concern examining, reviewing, or performing agreed-upon procedures on
a subject matter and reporting on the results. The subject matter of an
attestation engagement may take many forms, including historical or prospective
performance or condition, physical characteristics, historical events,
analyses, systems processes and behavior. Attestation engagements can
cover a broad range of financial or non-financial subjects and can be
part of a performance review. Possible subjects of attestation engagements
could include reporting on:
· An entity’s
internal control over financial reporting
· An entity’s
compliance with requirements of specified laws, regulations, rules, contracts,
or grants
· The effectiveness
of an entity’s internal control over compliance with specified requirements,
such as those governing the bidding for, accounting for, and reporting
on grants and contracts
· Management’s
discussion and analysis presentation
· Prospective
financial statements or pro-forma financial information
· The reliability
of performance measures
· Final contract
cost
· Allowability
and reasonableness of proposed contract amounts and specific procedures
performed on a subject matter (agreed-upon procedures)
Performance Audits
Performance audits
entail an objective and systematic examination of evidence to provide
an independent assessment of the performance and management of a program
against objective criteria. The Performance Auditor will make assessments
that provide a prospective focus or that synthesize information on best
practices or cross-cutting issues. Performance audits provide information
to improve program operations. They facilitate decision-making by parties
with responsibility to oversee or initiate corrective action. Performance
audits also improve public accountability.
Performance audits
encompass a wide variety of objectives, including objectives related to
assessing program effectiveness and results; economy and efficiency; internal
control; compliance with legal or other requirements; and objectives related
to providing prospective analyses, guidance, or summary information. These
audits may entail a broad or narrow scope of work and apply a variety
of methodologies; involve various levels of analysis, research, or evaluation;
generally provide findings, conclusions, and recommendations; and result
in the issuance of a report.
Effectiveness and
results audits typically measure the extent to which a program is achieving
its goals and objectives. Economy and efficiency audits determine whether
an entity is acquiring, protecting, and using its resources in the most
productive manner to achieve program objectives. Program effectiveness
and results audits and economy and efficiency audits are often interrelated
and may be concurrently addressed in performance audits. Examples of program
effectiveness and results, and economy and efficiency audits include assessing:
· The extent
to which legislative, regulatory, or organizational goals and objectives
are being achieved
· The relative
ability of alternative approaches to yield better program performance
or eliminate factors that inhibit program effectiveness
· The relative
cost and benefits or cost effectiveness of program performance
· Whether a
program produces results or effects not intended by the objectives
· The extent
to which programs duplicate, overlap, or conflict with other programs
· Whether the
audited entity is following sound procurement practices
· The validity
and reliability of performance measures concerning program effectiveness
and results, or economy and efficiency
· The reliability,
validity, or relevance of financial information related to the performance
of a program
Internal control audit
objectives relate to management’s plans, methods, and procedures
used to meet its mission, goals, and objectives. Internal control includes
the processes and procedures for planning, organizing, directing, and
controlling program operations, and the system put in place for measuring,
reporting, and monitoring program performance. Examples of audit objectives
related to internal control include the extent a program provides reasonable
assurance that:
· Organizational
missions, goals, and objectives are achieved effectively and efficiently
· Resources
are used in compliance with laws, regulations, or other requirements
· Resources
are safeguarded against unauthorized acquisition, use, or disposition
· Management
information and public reports that are produced, such as performance
measures, are complete, accurate, and consistent to support performance
and decision-making
· Security
over computerized information systems will prevent or detect unauthorized
access
· Contingency
planning for information systems provides essential back-up to prevent
unwarranted disruption of activities and functions the systems support
Compliance objectives
relate to criteria established by laws, regulations, and other requirements
that could affect the entity’s operations. Non-compliance could
affect the acquisition, protection, and use of the entity’s resources.
Compliance objectives also concern the purpose of the program, manner
in which it is conducted, and services delivered.
Audit organizations
also undertake work that provides a prospective focus or may provide guidance,
best practices, and information that cuts across program or organizational
lines. Examples of objectives pertaining to this work include:
· Assessing
program or policy alternatives, including forecasting program outcomes
under various assumptions
· Assessing
the advantages and disadvantages of legislative proposals
· Analyzing
views of stakeholders on policy proposals for decision-makers
· Analyzing
budget proposals or budget requests to assist legislatures in the budget
process
· Identifying
best practices for users in evaluating program or management system approaches,
including financial and information management systems
· Producing
a high-level summary or a report that affects multiple programs or entities
on issues studied or under study
The reviews performed
by internal auditors and/or financial specialists will be both attestation
engagements and performance reviews.
Chapter
3
Chapter Three –
Essentials
Laws and Regulations
The FHWA –
STA transportation program operates on a cost-reimbursement basis. STAs
incur costs on approved projects and are reimbursed by FHWA for the eligible
amounts. The funds are expended following State and Federal laws, regulations
and guidance. The specific regulatory information pertaining to Federal-aid
transportation and highway programs are listed below.
Law - 23 United States
Code, Highways (23 U.S.C.)
23 U.S.C. is the law
governing the Federal-aid Highway Program. Section 302 of the law requires
that States should have a suitably equipped STA to receive Federal-aid
funds. Section 106 establishes the requirements for project approval and
oversight.
Regulation –
23 Code of Federal Regulation, (23 CFR, Highways)
23 CFR is the codification
of the general and permanent rules published in the Federal Register.
The regulations are derived from the law. The CFR contains criteria relating
to the eligibility of cost reimbursement of Federal funds.
Regulation –
49 CFR Transportation (Part 18 “common rule”)
The Common Rule prescribes
uniform administrative requirements for grants and cooperative agreements
to state and local governments. Allowable costs are established in section
18.22. State and local governments are required to follow OMB Circular
A-87. For-profit organizations are required to follow 48 CFR Part 31.
Section 18.36 provides for states to use their own procurement procedures
Contract Terms
In order for a project
to be reimbursed, the contract terms must be fulfilled. The contract should
clearly identify what the terms are and what is reimbursable.
Defining an Eligible
Cost
In addition to the
laws, regulations, and contract terms, a reimbursable cost must meet certain
factors. A cost must be:
· Allowable
- The most easily defined cost factor. If the laws, regulations and contract
allow the cost, it passes the allowability test.
· Allocable
– A cost has to be properly assigned to a project.
· Reasonable
– While a definition of reasonable is provided in both OMB Circular
A-87 and Part 31 of the FARs (see glossary), the application to reimbursable
costs is still the most subjective of the three criteria.
A discussion on eligible
costs follows in Chapter 4 (Project Cost Distribution).
Internal Controls
This review Guide
follows the internal control direction provided by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Internal control is defined
as a process, effected by an entity’s people, designed to accomplish
specified objectives. The definition is broad, encompassing all aspects
of controlling an organization, yet facilitates a directed focus on specific
objectives. The internal control process objective is to achieve the following:
· Effectiveness
and efficiency of operations
· Reliability
of financial reporting
· Compliance
with applicable laws and regulations
An audit is to determine
if the entity is achieving the above objectives.
The COSO developed
five interrelated components to achieve internal control within an organization.
These internal control components are listed below.
· Control Environment
· Risk Assessment
· Control Activities
· Information
and Communication
· Monitoring
Control Environment
is the core of the entity. The individual values, ethics, integrity and
competence are part of the entities environment. This is the most important
of the internal control components. The control environment reflects the
tone of an organization, influencing the control consciousness of its
people. It is the foundation for all other components of internal control,
providing discipline and structure.
Risk Assessment is
the process for identifying factors or conditions that can affect your
ability to accomplish your mission. Risks can come from both internal
and external sources. Risk assessment is the identification and analysis
of relevant risks to achievement of established objectives, forming a
basis for determining how the risks should be managed. Risk assessment
should identify areas where controls are needed.
Control Activities
are the policies and procedures that help ensure management directives
are carried out. They help ensure that necessary actions are taken to
address risks to achievement of the entity's objectives.
Information and Communication
are the forms and methods enabling people to carry out their responsibilities.
Appropriate information must be available to measure whether operations
are efficient, financial reporting is accurate and compliance with laws
and regulations is achieved. The information must be communicated throughout
the organization to permit personnel to carry out their responsibilities
with regard to achieving efficiency, accuracy and compliance.
Monitoring is necessary
to maintain the quality of performance over time. Once a system of internal
controls is established it must be monitored to ensure that the components
of the system are operating as designed.
Chapter
4
Chapter Four –
Project Cost Distribution
Project
cost distribution is the application of allocability, allowability and
reasonableness. It is important that a cost not lose its identity when
distributed to the applicable function.
A cost is allocable
if it is assignable or chargeable to one or more cost objectives or cost
centers on the basis of relative benefits received or some other equitable
relationship. A cost must benefit both the project and other work of the
entity and has to be distributed in some reasonable proportion to the
benefits of incurring that cost. A cost is allocable to a project if it:
· is incurred
specifically for the project
· benefits
both the project and other work, and can be distributed to them in reasonable
proportion to the benefits received
· is necessary
to the overall operation of the entity, although a direct relationship
to any particular cost objective cannot be shown
Costs that are expressly
or mutually agreed to be unallowable, including directly associated costs,
must be identified and excluded from any billings. A directly associated
cost is any cost which is generated solely as a result of incurring another
cost, and which would not have been incurred had the other cost not been
incurred. When an unallowable cost is incurred, its directly associated
costs are also unallowable.
In evaluating a program,
an auditor must consider direct as well as indirect costs. Direct and
indirect costs should be consistently applied. A direct cost is any cost
that can be identified specifically with a particular contract or project,
while an indirect cost is applicable to more than one cost objective.
Costs identified specifically with a contract or project are direct costs
and are to be charged directly to the contract or project. All costs specifically
identified with a project are direct costs of that project and cannot
be charged to another project, either directly or indirectly. Finally,
a cost cannot be charged as direct and also be included in any indirect
cost pool. For reasons of practicality, any small dollar-direct cost may
be treated as an indirect cost if the accounting treatment is consistently
applied to all projects and produces substantially the same results as
treating the cost as a direct cost.
A cost is reasonable
if, in its nature and amount, it does not exceed that which would be incurred
by a prudent person in the conduct of government business. The reasonableness
of specific costs is not always easy to determine since such a determination
depends to some extent on judgment and interpretation of the applicable
regulations.
Reasonableness depends
upon a variety of considerations and circumstances, including the following:
· Whether the
cost is generally recognized as ordinary and necessary for the project
· Generally
accepted sound business practices and federal and state laws and regulations
· The entity’s
responsibilities to the public
· Any significant
deviations from the entity’s established practices
Costs as they enter
into a STA system go through iterations as part of the project cost-distribution
process. Please see the flow chart listed in Appendix A.
Appendix
A
Text version of the
Project Cost Distribution flow chart.
Start with any eligible
cost in the STA system
1. Are the costs eligible for Federal-aid participation?
a. If no, costs are assigned to an ineligible cost account.
b. If yes, costs are determined to be either Indirect or Direct costs.
2. If it is an Indirect or Administrative cost, does the STA have an approved
OMB Circular A-87 Indirect Cost Plan?
a. If yes, the Indirect Costs are distributed to projects on an equitable
basis.
b. If no, the costs are assigned to the Ineligible cost account.
3. If it is a Direct Cost, the cost is charged to the respective project.
Appendix
B
Glossary
The following terms
are used throughout this guide. We suggest that the reader become familiar
with these terms.
Actual Costs
Amounts determined
on the basis of costs incurred and supported by original source documentation,
as compared to forecasted costs, or costs thought to have been incurred,
or costs based on historical averages.
Administrative
Expenses
Costs that are not
directly identified with any one item of work, but when taken as a whole,
support or contribute to all activities of a firm.
Agreement
A contract. A binding,
legal, document which identifies the deliverable goods and services being
provided, under what conditions, and the method of payment for such services.
The document may include Federal criteria and State requirements, which
will have to be adhered to by the recipient. The document will usually
indicate start and finish dates, record-retention requirements, and other
pertinent information relative to the actual work to be performed.
Agreement (Federal-aid)
See Project Agreement
and Authorization.
Allocable
A cost is allocable
(to an agreement or cost of work being performed for the government) if
it benefits both the agreement and other work of the firm and the cost
can be distributed in reasonable proportion to the benefits of incurring
that cost.
Allowable (Cost)
A cost that can be
billed either directly to a project, or indirectly as overhead by the
recipient. See text for more explanation.
Cost Center
A grouping of incurred
costs identified with a specific final cost objective.
Cost Principles
The underlying basis
for determining how costs should be recorded when they are allowable or
unallowable, and the specific basis for treating various costs as either
allowable or unallowable. Office of Management and Budget (OMB) Circular
A-87 establishes the cost principles for State, Local and Indian Tribal
Governments. 48 CFR Part 31 is the applicable regulation for third party
contracts.
Direct Cost
Any cost that can be
identified specifically with a particular final cost objective, i.e.,
a project-related cost. Direct costs would include labor, materials, and
reimbursables incurred specifically for an agreement. It is irrelevant whether
the costs are actually billed.
Entrance Conference
A meeting between
the auditor and the reviewer, at which time the purpose and scope of the
review are discussed.
Exit Conference
A meeting held after
the auditor completes fieldwork at the recipient’s place of business.
Topics of discussion are preliminary findings of the review, which are
subject to change and revision during the supervisory work paper review
process, and/or a formal request for the recipients’ response to
the draft audit report.
Federal Acquisition
Regulations (FARs) Code of Federal Regulations No. 48 Part 31 –
Cost Principles for Commercial Organizations
Sets the criteria
for allowable and unallowable costs for federally funded third- party
agreements.
Finding
A statement of noncompliance
with the terms of an agreement. A finding includes the condition, criteria,
cause, effect, and a recommendation for correction.
General Administrative
Expenses
Any management, financial,
and other expense, which is incurred by or allocated to a business unit,
and which is for the general management and administration of the recipient
as a whole.
Indirect Cost
Any cost not directly
identified with a single, final cost objective, but identified with two
or more final cost objectives or an intermediate cost objective. Recipients
recover their indirect costs in their overhead rate.
Ineligible Cost
An item of cost, which
cannot be billed directly or indirectly by a recipient. These types of
costs, if found during an audit, will be purged from the costs billed
directly, or from those billed indirectly via an overhead rate or cost
center. When an ineligible cost is incurred, its directly associated costs
are also ineligible.
Internal Control
The plan of organization
and methods and procedures adopted by management to ensure that its goals
and objectives are met; that resources are used consistent with laws,
regulations, and policies; that resources are safeguarded against waste,
loss, and misuse; and that reliable data are obtained, maintained, and
fairly disclosed in reports.
Overhead Expenses
All allowable general
administrative expenses and fringe benefit costs (sometimes called
payroll additives). Depending on the size of the firm, these costs may
or may not
be separately identified on a schedule of overhead costs (Chapter 6).
Overhead Rate
A computed rate developed
by adding all of recipient’s general and administrative costs, plus
fringe benefit costs together, then dividing by a base value, usually
direct labor, to get a percentage. This rate is applied to direct labor
to allow a recipient to recover the share of indirect costs allowable
to the agreement.
Project Authorization
and Agreement (Federal-aid)
A contractual obligation
of the Federal Government for the payment of the Federal share of project
costs. The agreement will include a description of the project, the Federal-aid
(FA) project number, the work covered, total cost and amount of FA funds,
the Federal share of funds, signature of State and Federal officials and
any other provision set out by 23 U. S. C. 106 and/or 23 CFR.
Reasonable Cost
A cost, in its nature
and amount which does not exceed that which would be incurred by a prudent
person in the conduct of competitive business.
Resolution Process
The process used to
resolve review findings. It may involve negotiation of a corrective action,
reimbursement of funds and improving procedures.
Audit Trail
The record left by
a transaction in accounting records from original source document into
subsidiary ledgers through the general ledger and into the billing system.
Single Audit
In theory, an audit
which satisfies the needs of all parties involved with funding or doing
business with an organization, either private or public. In reality, this
is rarely the case because funding agencies still request that their audit
groups obtain specific information peculiar to their operations policies
and procedures.
Source Documentation
Original documents,
including but not limited to time sheets, invoices, room receipts, rental
slips, gasoline tickets, canceled checks, tax returns, insurance policies,
etc., which support the costs recorded in the recipient accounting ledgers
and which may be used for billing purposes.
Verify
The act of tracing
a transaction from a ledger to the original supporting document.
Appendix
C
Internal Control Assessment
Control Environment
1. Is there evidence
of management’s respect for and adherence to program compliance
requirements and/or control procedures?
2. Are responsibilities
clearly defined for key personnel?
3. Do key personnel
have adequate knowledge and experience to discharge their responsibilities?
4. Are personnel knowledgeable
about compliance requirements and being given responsibility to communicate
all instances of noncompliance to management?
5. Does management’s
commitment to competence ensure that staff receives adequate training
to perform their duties?
6. Does management
support an adequate information and reporting system?
7. Is management responsive
to prior recommendations?
Risk Assessment
1. Are key personnel
given the responsibility to identify and communicate changes?
2. Are employees who
require close supervision (e.g. inexperience) identified?
3. Is management aware
of the results of monitoring, audits and reviews and considers related
risk of noncompliance?
Control Activities
1. Are operating policies
and procedures clearly written and communicated?
2. Is adequate segregation
of duties provided between performance, review and record keeping of a
task?
3. Do computer
and program controls include:
A. Data entry controls,
C. Access controls?
D. Computer general
controls and security controls?
4. Is supervision
of employees commensurate with their level of competence?
5. Are assets safeguarded
and periodically counted and compared to recorded amounts?
Information and Communication
1. Does adequate source
documentation exist to support amounts and items reported?
2. Is accurate information
accessible to those who need it?
3. Do reconciliation
and reviews ensure accuracy of reports?
4. Are employees’
duties and control responsibilities effectively communicated?
5. Are actions taken
as a result of communications received?
Monitoring
1. Are reviews performed
to determine whether procedures are being followed as intended?
2. Does management
review the results of internal reviews and audits and follow up on discrepancies?
3. Does management
meet with program monitors; auditors, and reviewers to evaluate the condition
of the program and controls?
Appendix
D
General Audit Program
Purpose and Scope
The major objectives
of this program are:
Understanding the
Organizations Operations
Preliminary Analytical Procedures
Identifying Relevant Risk Factors
Identifying significant compliance requirements.
Documentation of the Internal Control Assessment
A. Research & Planning:
1. Arrange for a meeting with organization personnel. Discuss the entity’s
activities and any changes in policies and procedures.
Inquire with management
if they aware of any fraud, waste and abuse.
2. Review previous
reports and work papers, issued by internal audit, legislative auditors,
external auditors, or federal auditors. Document the findings in those
reports for appropriate follow-up. Identify previously reported weaknesses
that have not been corrected.
3. Review background material to become familiar with the accounting and
administrative activities of the organization. For example:
Legislative rules
Administrative Code
State Policies and Procedures
Entity Rules and Regulations
· Entity Manuals
Federal Highway Regulations
· Other Auditor Reports
4. Obtain current organization chart.
5. Identify transactions and functions that are handled through the entity.
Use plans, budgets or discussions with department personnel to identify
basic functions.
6. Prepare preliminary documentation of the organizations operations including:
Management and organization
Factors affecting operations
· Internal factors affecting operations
Accounting policies
and issues
EDP systems used in carrying out functions and activities
7. Obtain policies and procedures related to the major functions of the
organization. Note any changes in rules, regs or laws since the last audit.
8. Develop a program step for each area of the organization that has compliance
requirements. Summarize the requirements for testing and evaluation of
controls over compliance.
9. Identify the functions
or operations in the organization . Perform documentation of processes
activities and internal control assessment.
B. Survey Phase
Gain an understanding of the processes in the review area through interviews
with appropriate personnel and/or on-site observation. Document systems
through flowcharts and/or narratives.
Identify control
strengths and weaknesses. Develop conclusion as to adequacy of the system
of internal controls. See Appendix C, Internal Control Assessment.
Write scope and specific audit objectives and document any walk thrus.
Develop specific audit
procedures and sampling plans for audit objectives. See Appendix E for
Items of Consideration.
Consider the strengths
and weaknesses identified in the evaluation of the system.
C. Fieldwork Phase
Complete audit tests and write up management comments/tracking forms identified
during testing. Work papers should include, at a minimum, a purpose, source,
scope, and conclusion.
Relay comments to the entity management on any identified problems.
Assess the effectiveness of the controls established.
D. Conclusion
Exit Conference with entity
Prepare and issue audit report
Consider management comments
Track findings
Appendix
E
Items of Consideration
Listed below are
seven essential areas in which to perform review and/or audits
· Federal-aid
Billing
· Project Funds
Management
· Project Cost
Estimation
· Project Planning
· Consultant
Project Selection and Payment
· Construction
Billing Process
· Change Orders
and Supplemental Agreements (Construction and Consultant Projects)
Ultimately, the areas
above lead to State payments to highway construction contractors and consultants.
A review program has
been designed for each area noted above in. The program is composed of
a list of questions/program steps that are a guide for the reviewer. The
objective will be to identify internal control weaknesses and inefficiencies
that could be improved through the implementation of best practices related
to the respective area.
The level of work
carried out in each area can vary depending on the final objective of
the individual auditor/reviewer. In general the guidance provided for
each area will be designed to assist the reviewer in carrying out the
audit.
Auditors should document
their work by completing each program/questionnaire, supplementing responses
with appropriate supporting work papers, and preparing a report that encompasses
the areas of concern noted and suggestions for improvement.
Federal aid Billing
Is there a current
organization chart for the federal-aid billing process? Do current position
descriptions exist for the personnel involved in this process?
What written procedures
are available?
Do the DOT employees involved in processing the federal-aid current billing
have the experience and training to properly oversee the federal-aid billing
process?
Is there an appropriate
segregation of duties within the federal-aid billing process to prevent
inappropriate activity without collusion among employees?
Who reviews charges
on the Current bill for approval and appropriateness of charges? Are the
personnel assigned knowledgeable about the project and able to evaluate
the appropriateness of the charges to the project?
What types of charges
are accumulated for Billing on Federal Aid Projects?
Negotiated Design
Agreements – consultant invoices? ____
Negotiated Inspection
Agreements for construction inspection? ____
Bid construction contracts
– construction estimates? ____
Work carried out under
construction change orders – construction estimates? ____
Direct payroll charges
of STA personnel? ____
Payroll additive charges?
____
Other direct invoice
charges? ____
Allocations of overhead/prorate
amounts? ____
State owned equipment
charges (rental rate)? ____
What controls are
in place to ensure that charges incurred prior to the Federal Authorization
date are accumulated as nonparticipating charges?
What controls are
in place to ensure that the amounts billed for each type of project charge
are properly limited to amounts under contract and the total federal agreement
amount? (describe how limits are set on total project, contract payments,
agreement payments)
Are there controls
to assure that only allowable administrative and indirect costs are allowed
to enter the current billing?
Is proper supporting
documentation maintained to for the costs included in the federal-aid
current billing?
Does the STA have
a method of segregating participating and non-participating charges on
Federal Aid projects?
How does the system
monitor participating charges that are unbilled due to costs in excess
of federal agreement limits?
Are there controls
to assure removal of costs determined to be ineligible for federal participation?
What controls exist
to ensure the accuracy of the coding for charges entering the federal-aid
billing system (including front end edits and secondary reviews)?
Are there internal
processing edits, which flag questionable items found during the processing
of the federal-aid billing?
What costs are included
in amounts prorated to projects? Are there any edits to ensure only charges
that would be allocable to Federal Aid projects are included in the pools?
Project Funds Management
Is there a reconciliation
process between the state’s records and the feds records?
Is there a process
in place to consider de-obligating funds for projects that have had no
activity in a specified time frame?
Is incremental obligation
being used on large dollar projects? Incremental obligation allows projects
to be obligated by phase so large amounts of dollars are not sitting idle
for long periods of time.
Is there a process
in place to monitor the impact of the future 100% state match for projects
using tapered match? Tapered match allows projects to be funded 100% federal
until 80% of the cost of the project has been completed.
Is there a process
in place to track that funding is correctly allocated for projects funded
by multiple fund sources?
For debt/toll projects
that involve federal funding is there a monitoring process in place to
ensure compliance with bond covenants and federal requirements? e.g. Bond
debt must be separated from state and federal funds. Annual financial
audits by independent accountants are required for toll funds.
Is there a process
in place to ensure that any local agreements are executed prior to obligating
federal funds?
Is there a process
in place to ensure that final project payments trigger project closeout
in a timely manner? (should be in the state and federal system)
Has the responsibility
for analyzing federal unbillables been assigned?
Does obligation get
increased when change orders occur that increase project cost? Or is there
a threshold dollar amount established in which the obligation gets increased
when large change orders occur?
Is there a process
in place to identify and utilize toll credits?
Are there performance
measures in place to help manage the federal funds? eg. Goals for: federal
unbillables; total amount of federal funds obligated
Analyze the following:
Projects under agreement
–no expenditure activity for excessive
period of time.
Projects authorized
– not placed under agreement within a reasonable
period of time.
PE projects not yet
advanced to ROW acquisition or construction.
ROW projects not
yet advanced to construction.
Projects completed
but not closed.
Projects with expenditures
equal to or exceeding the project
agreement limitation.
Projects with substantial
unexpended balances but little or no activity.
Project Cost Estimation
Are any State laws
or regulation in effect regarding release or protection of the engineer’s
estimate?
Are any State laws
or administrative regulations in effect for determination of whether a
contract award is proper, based on estimate overrun, competition, or other
factors?
Review and attach
any copies of any procedures or instructions the State may have pertaining
to preparation, revision, checking, and use of the engineer’s estimate?
Briefly describe the
intended process for preparation of estimates. Verify the actual method
used in comparison with intended process and note any differences?
Does the State have
an estimating section? Which other portions of the agency become involved
in preparing, checking, or approving the estimate?
Briefly describe the
personnel resources available for preparing, etc., estimates and note
any workload changes vs. personnel available over the past 3 years.
What is the primary basis for establishing estimated unit prices?
What methods are used
to identify and incorporate anticipated changes in cost of labor, equipment,
and material?
Are upcoming labor
negotiations considered in the process?
Are material suppliers
contacted for anticipated material costs?
Are adjustments made
for individual project conditions? In what way?
What other factors
are used to adjust the primary basis to determine the estimated prices
for the project?
How is ROW estimated?
What is the process
for utility adjustments?
In typical
cases, how far in advance of the letting date is the estimate prepared?
How often is the estimate
revised during the advertising period?
Discounting addenda
and quantity changes, what are the usual reasons
for revising estimated prices?
Is every estimate
routinely evaluated by anyone other than preparer?
If so, when?
If possible, determine
how often further study and/or revision is believed desirable but not
accomplished due to workload restriction.
Is any information
released publicly, which may indicate the actual or approximate value
of the estimate prior to opening bids? Is the estimate released after
opening bids?
a. When?
b. Is it published
and where?
c. Who receives copies,
if published?
d. In detail or only
giving total cost?
Is any other information
regarding the estimate available to contractor on request?
Review the Contracting
agency’s procedure for evaluating bids received prior to recommending
award or rejection.
a. Is there an established
policy on, or apparent pattern of, awards or rejections of bids at a set
level above the engineer’s estimate?
b. In the case of
poor competition or excessive difference between the estimate and the
low bid, does the Contracting agency contact the bidders and non-bidders
who checked out proposal forms?
c. Are there any “ground
rules” for adjusting estimates after receipt of bids? Is such action
taken on its own merits or may it be prompted by pressure to award an
apparently excessive bid?
Does the State have
a process to monitor estimated costs? Look for large amounts of change
orders?
Feedback and evaluation
of the engineer’s estimate and final project cost?
Project Planning
Does the State utilize
a cash-forecasting plan in preparing the State Transportation Improvement
Plan (STIP)?
What is the basis
for the forecast? Is there a multi-year plan? Does the forecast consider
tapered match?
How are revenues forecast?
Is there a revenue model?
What is the basis
for the fiscal plan? (Commitments or Cash)
Is the revenue estimate
integrated with the cash forecast?
What is the basis
for determining how funds are to be used?
Are assumptions in
the Fiscal Plan related to a Program of Projects for multiple years? Are
there fiscal constraints? How are the systems integrated?
Is project specific
data used to develop the plan? How far out are projects projected?
How are projects prioritized?
How are the environmental
issues identified in the EIS coordinated with ROW and followed through
in the construction phase?
Is the Work Program
based on a complete, balanced financial plan for the State Transportation
Trust Fund and the other funds managed by the Department?
Is the total amount
of the liabilities accruing in each fiscal year of the Work Program equal
to or less than the revenues available for expenditure during the respective
fiscal year based on the cash forecast for that respective fiscal year?
Does the Department's
Work Program provide for a minimum variance between contract lettings?
Has the Department
stabilized the work program to ensure the timely and systematic completion
of projects?
Does the Work Program
maintain a minimum required cash balance? What is the minimum required
cash balance?
Determine by fiscal
year, the amount contained in the Work Program for highway projects demonstrating
innovative techniques of highway construction and finance.
Determine the dollar
amount that is contained in the Work Program for right-of-way, construction,
and product support for the State IHS compared to the total capacity improvement
program for each fiscal year?
What is the acceptable
maintenance standard planned to be achieved on the State Highway System
in each fiscal year?
Does the Work Program
implement the Interstate Highway System Program Development Policy? If
not, please explain.
Please provide the
total dollar amount allocated to ITS projects for each year of the work
program by?
Consultant Project Selection & Payment
What laws or regulations
are you subject to regarding professional services procurement? Are they
dictated by federal, state or the agency? Who is responsible for insuring
that they are met and followed?
Are consultants required
to pre-register? What information is required? How often are the consultants
required to submit updated registration information?
Who maintains the
consultants registration information? Who has access to this information?
Are there procedures
in place for checking debarment status at initial registration, when submitting
updated information and at time of being short-listed?
Is debarment checked
at a federal, state or department level?
How are consultants
notified of request for professional services (i.e. advertising, letter
of solicitation)?
Do you have short
list and/or selection committees? How are members of the short list committee
selected? How are members of the selection committee selected?
Ensure there is adequate
control over the consultant selection process.
Do you have standard
criteria for consultant selection? Are there exceptions to the standard?
What are the exceptions?
Does the STA enter
into contracts with Consultants that clearly describe the scope of work,
basis for payment, retention of records, and provide for audit? Is a change
in the scope of work monitored?
How does the STA estimate
consultant project costs?
How does the STA determine
costs proposed by the Consultant are fair and reasonable?
Is the consultant’s
prior service considered during selection process? How is this service
reviewed (i.e. written evaluations)?
Is the consultant’s
ability to provide services considered during selection?
When is the consultant
required to submit proposed sub-consultant work? Is there a requirement
for sub-consultants to be registered?
Is there a limitation
on the amount of sub-contracted work? If so, what is the limitation?
Are there Disadvantaged
Business Enterprise (DBE) requirements on consultant selection? What are
the DBE requirements? How are these requirements monitored?
Who is responsible
for monitoring that DBE goals are met? Who is responsible for monitoring
DBE eligibility?
Who maintains the
DBE information? Who has access to this information?
How does the STA determine
that the work billed is properly accomplished in a timely manner?
Review the following
types of supporting documents:
Consultant agreements
Consultant’s
work products (reports, briefings, etc.) and billings
Travel vouchers and
trip reports
Any other documents
which provide evidence of the nature and scope of services furnished and
the reasonableness of the amounts charged.
Construction
For selected projects
review the plans to determine if they have the proper approvals.
Review completed plans
to determine if they were completed to include quantities, etc.
What is the process
for addressing environmental considerations?
For selected projects
– determine if ROW, relocation, Utility and Railroad Certifications
are properly maintained. Is there evidence of review of the files?
Are there Disadvantaged
Business Enterprise (DBE) requirements on construction projects? What
are the DBE requirements? How are these requirements monitored?
Who is responsible
for monitoring that DBE goals are met? Who is responsible for monitoring
DBE eligibility?
Who maintains the
DBE information? Who has access to this information?
Evaluate the procedures
exercised in submitting, receiving and safegarding of bids, making public
disclosure, tabulating bids, reviewing and analyzing bids, rejecting bids
and if necessary – readvertising.
--Review low bids
to determine if they were properly prepared.
--Perform an analysis
of bids submitted at various lettings to determine if bid
patterns or irregularities exist.
Evaluate procedures
and controls in computing extended contract time, assessing adequacy of
progress of work, extending and adjusting contract time as necessary.
Look at project time
charges to make sure they are calculated in the method specified in the
contract – fixed date or working days. Look at the resident engineer’s
diary for adequate support of all time charges.
Evaluate test reports—determine
that the Materials Engineer compared test report for each project with
final contract quantities and testing frequency requirements have been
met. Are the evaluators qualified? What control do auditors have over
the testing?
Look for required
documentation relating to sources of material, spec requirements, bills
of lading, delivery tickets. Who does the inspector receive delivery tickets
from?
Does the Materials
Certificate for each project have proper signature and authorization?
Contract Pay items
– Check that proper recording procedures were followed and methods
and units of measurement have been documented in accordance with the specs.
Review, test and evaluate
compliance with required contract provisions of determining the project
is ready for final inspection and notification of project inspection.
Determine that the resident engineer completed a walk through with the
contractor to determine what must be completed before final inspection.
Check that the notice of acceptance was prepared and properly approved.
How do project and
financial managers track construction contract performance and progress?
What reports are produced and provided to construction and financial managers?
How often are these reports produced? Is there evidence that district
and headquarters project and financial managers use these reports?
Is there timeliness
between project completion and the final estimate?
If the inspection
is performed by consultants, is their work monitored?
How are sub-contractors
monitored?
Is any of the construction
performed as a result of Public Private Partnerships (PPP).
If Design Build or
PPP, is the inspection also performed by the contractor? Is there a STA
follow-up on the inspection for quality assurance?
Change Orders & Supplemental Agreements
Is there an area in
which change orders are most prevalent?
Are change orders
more heavily concentrated on a relatively few projects?
Change orders amounted
to what percentage of all construction and/or consultant projects for
the last two fiscal years?
Is the number of change
orders fairly evenly distributed across the state or where they concentrated
in a relatively small number of areas?
Is there a significant
statistical relationship between the number of change orders and the engineers/consultants
estimate?
Are design errors
appropriately identified? If consultant related, are the consultants billed
(errors and omissions)?
Does the cabinet/agency
maintain information documenting the cause of change orders?
Does the cabinet/agency
maintain strong record keeping in regard to change orders?
Is there a strong
link between preconstruction and construction in regard to change order
and scope management?
What levels of authorization
are required for the approval of change orders?
Is there a standard
format for the change order documents?
Are there instances
when change orders are approved after the initial work has been started
or completed?
Is there evidence
that change orders are used to circumvent the bid process, such as lowballing
a bid then issuing subsequent change orders to raise the project cost?
Are change orders
adequately supported with documentation and explanation?
Are change orders
used as balancing changer orders that is to simply raise the contract
amount when it has been exceeded even though the scope of work has not
changed?
Do change orders trigger
supplemental bills?
Are change orders
allowed after final payment has been made?
Do change orders have
to be approved by an authority outside of the cabinet such the state legislature?
If change order is
an engineering change, does the engineer seal it or how is it controlled?
Does the state or
entity have clearly established regulations or policy to govern the issuance
of change orders?
Is the process for
supplemental billing different from that of regular bill payments?
Are supplemental bill
payments and changer orders tied closely with progress reports?
At what level must
supplemental payments be approved?
Is construction/consultant
work delivered on schedule and within budget?
Are consultant/construction
projects performed on schedule?
Consultant/construction
costs are delivered within what percentage of authorized costs?
Does the state have
a multi-year road plan?
Are increased project
costs related to change orders compared to original estimates?
Do they look for trends
to learn the cause of the error?
Published by: The
Federal Highway Administration Resource Center Publication N0: FHWA-RC-ATL-04-004
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