DCAA Materiality Standards for Incurred Cost Audits

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.