Auditing Contracts: Everything You Need to Know
Auditing contracts involves evaluating and verifying the accuracy of the contractor's policies, controls, and systems by completing a close inspection of documents such as transaction records, operations logs, and account books.3 min read
What is a Contract Audit?
Auditing contracts involves evaluating and verifying the accuracy of the contractor's policies, controls, and systems by completing a close inspection of documents such as transaction records, operations logs, and account books.
Contract audits are often associated with maintenance and construction contracts. Scheme audits are particularly important and are generally financed by capital expenditures.
Consider the Scope of the Audit
Ideally, you would have the vast resources at your disposal to hire an external consultant team or an attorney to help you conduct an audit of your contracts. The primary benefit of having a consultant or attorney perform the audit is that this team or individual would have seen many contracts similar to yours and would be able to use their experience in the area to zero in on any problematic features of your contract.
Having an outside perspective can also help you identify any terms in your contract that your partners may be unable to follow. One of the goals you should keep in mind when auditing a contract is to have your own interests balanced with your partner's in order to maintain a productive professional relationship. If you do not have the resources to hire an external consultant team or attorney, you should make an effort to base the contract on past experiences with other partners.
Consider Your Objectives
Before auditing a contract, it is vital to identify your objectives. Performing a contract audit has many perks and benefits. These benefits include deterring fraudulent activity, recovering expenditures, managing your risk, and improving your business' processes. To obtain the maximum benefit of the audit, make sure that you are identifying specific areas of potential exposure.
Consider Your Timing
Timing is important when choosing to perform a contract audit. The optimal time to initiate an audit is when you have leverage to recover any potential overpayments or change processes. The ability to perform these actions can be influenced by your relationship with your distributor, among other factors.
It is also important to consider whether your distributor has the liquidity available to fix any overpayments. From a practical standpoint, you will want to take the time to consider when you have the upper hand in each financial quarter and choose to execute the audit when it is most beneficial to you.
There is no need for a contract compliance audit to be presented in a hostile or combative manner. Rather, when you present the idea to your partner, it should be framed as a necessary collaboration. Although one of your objectives is to determine if your partner isn't delivering as needed, keep in mind that you need to keep a professional relationship in order to continue working together.
How to Audit for Contract Compliance
In order to successfully audit a contract, there are certain steps that should be followed.
- Establish Audit Objectives
- Assemble an Audit Team
- Create a Follow-up Report
Establishing Audit Objectives
Your audit objectives will depend on when the review happens during the contract's life cycle. A control audit is an audit that occurs early in the contract's life cycle and focuses on the contractor's internal controls and processes. The primary goal for a control audit is to identify and streamline any processes that may be at risk for overspending. Another goal is to improve all communications. A recovery audit occurs either monthly or shortly before a final contract payment is due. A recovery audit searches for billing discrepancies. The primary goal is to uncover any billing mistakes and to recover any overpayments.
Assembling an Audit Team
Typically, recovery and control audit teams should include a representative from the accounting department, the contract manager, and also a neutral third-party. When you are auditing a complex contract, additional team members may be necessary.
Create a Follow-up Report
After an audit has been completed, a final report is then prepared and submitted to the business owner and contractor. Though the information within the report is dependent on the findings, the focus of the report is to explain and provide recommendations for resolving discrepancies and making any problematic procedures more efficient.
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