(Editor’s Note.  We are encountering more and more state auditors developing their own audit positions, in spite of the fact that their incurred cost proposals were already audited by either independent CPA firms or DCAA. State agencies (e.g. departments of transportation, environmental protection, housing) that are partially funded by the federal government are increasingly using flexible type contracting vehicles and like their federal counterparts, require submissions of incurred cost proposals. Though their regulations provide for acceptance of  audit determined rates when they have been audited either by an independent CPA firm (we frequently provide that service to clients) or DCAA, state auditors are more frequently taking it upon themselves to independently audit some of the proposed costs, often with rather unusual audit positions. The following response is a compressed version of what we prepared for a client to some of these unusual audit findings. The costs that were questioned seem fairly typical of what we have been seeing. I have left out the name of the state agency (called DOT here) and name of the contractor (referred to as Contractor.) 

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