FAR 42.101—Contract audit responsibilities.
Plain-English Summary
FAR 42.101 explains who performs contract audit work and what that audit function is supposed to cover. It addresses three core audit responsibilities: providing information and advice on the acceptability of incurred and estimated costs, reviewing the financial and accounting aspects of a contractor’s cost control systems, and performing other analyses and reviews that require access to financial and accounting records supporting proposed and incurred costs. It also identifies the normal Government audit cognizance rule for most contractors, which is DCAA, while recognizing that another agency may sometimes take cognizance if the agencies agree on the most efficient and economical approach. Finally, it carves out educational institutions and nonprofit organizations, whose audit cognizance is determined under the OMB Uniform Guidance at 2 CFR part 200, subpart F. In practice, this section matters because it tells contracting personnel and contractors where audit questions go, who has authority to review cost data, and which audit framework applies depending on the type of contractor.
Key Rules
Auditor advises on cost acceptability
The auditor must analyze the contractor’s financial and accounting records, or related data, and provide information and advice to the requesting activity on whether incurred and estimated costs are acceptable. This is the core audit support function for cost allowability, reasonableness, and related pricing or payment decisions.
Auditor reviews cost control systems
The auditor is responsible for reviewing the financial and accounting aspects of the contractor’s cost control systems. This means the audit function is not limited to individual cost items; it also examines whether the contractor’s systems support reliable cost accumulation and control.
Auditor performs supporting analyses
The auditor must conduct other analyses and reviews that require access to financial and accounting records supporting proposed and incurred costs. This gives the audit function broad authority to examine records needed to validate cost proposals, incurred cost submissions, and related support.
DCAA is normally cognizant
For contractors other than educational institutions and nonprofit organizations, DCAA is normally the responsible Government audit agency. This establishes the default audit cognizance for most defense-related contractor audit work.
Agencies may agree on another cognizant auditor
If another agency wants cognizance of a particular contractor, the agencies must agree on the most efficient and economical way to meet contract audit requirements. The rule is coordination-based, not unilateral, and is intended to avoid duplication and inefficiency.
Special rule for educational and nonprofit entities
For educational institutions and nonprofit organizations, audit cognizance is determined under the OMB Uniform Guidance at 2 CFR part 200, subpart F. These entities are not governed by the default DCAA cognizance rule in the same way as other contractors.
Responsibilities
Auditor
Analyze contractor financial and accounting records and provide information and advice on the acceptability of incurred and estimated costs; review financial and accounting aspects of cost control systems; and perform other analyses and reviews requiring access to records supporting proposed and incurred costs.
Requesting activity
Request and use audit support from the auditor when evaluating cost acceptability, cost proposals, incurred cost submissions, or related financial matters.
Defense Contract Audit Agency (DCAA)
Serve as the normal Government audit agency for contractors other than educational institutions and nonprofit organizations, unless another agency is assigned cognizance through agreement.
Other Government agencies
If seeking cognizance over a particular contractor, coordinate with DCAA or the relevant audit agency and agree on the most efficient and economical approach to satisfy audit requirements.
Contracting officer / acquisition personnel
Identify the correct audit cognizance path, route audit requests appropriately, and rely on the proper audit framework when dealing with contractor cost issues.
Educational institutions and nonprofit organizations
Follow the audit cognizance rules in the OMB Uniform Guidance at 2 CFR part 200, subpart F, rather than the default DCAA cognizance rule.
Practical Implications
This section determines who contractors should expect to interact with on audit matters, which affects timing, document requests, and the path for resolving cost questions.
Contractors should maintain records that support both proposed and incurred costs, because the auditor’s role expressly includes reviewing records tied to both types of costs.
A common pitfall is assuming DCAA is always the audit authority; educational institutions and nonprofits are handled under a different framework, and some other agencies may have cognizance by agreement.
Another practical issue is that audit work is broader than checking invoices or incurred costs alone; it can include system reviews and other analyses of financial and accounting records.
Contracting officers and contractors should confirm cognizance early to avoid delays, duplicate requests, or misdirected submissions when audit support is needed.
Official Regulatory Text
(a) The auditor is responsible for- (1) Submitting information and advice to the requesting activity, based on the auditor’s analysis of the contractor’s financial and accounting records or other related data as to the acceptability of the contractor’s incurred and estimated costs; (2) Reviewing the financial and accounting aspects of the contractor’s cost control systems; and (3) Performing other analyses and reviews that require access to the contractor’s financial and accounting records supporting proposed and incurred costs. (b) Normally, for contractors other than educational institutions and nonprofit organizations, the Defense Contract Audit Agency (DCAA) is the responsible Government audit agency. However, there may be instances where an agency other than DCAA desires cognizance of a particular contractor. In those instances, the two agencies shall agree on the most efficient and economical approach to meet contract audit requirements. For educational institutions (defined as institutions of higher education in the OMB Uniform Guidance at 2 CFR part 200 , subpart A, and 20 U .S.C. 1001) and nonprofit organizations (as defined in the OMB Uniform Guidance at 2 CFR part 200 ), audit cognizance will be determined according to the provisions of the OMB Uniform Guidance at 2 CFR part 200 , subpart F.