CCA CCA Subcontractor and Vendor Management Auditing 1 — Questions and Answers
Question 1: When auditing a general contractor's subcontractor selection process on a public construction project, which practice would most likely constitute a compliance violation?
- Awarding a subcontract to a related-party firm without competitive bidding or disclosed relationship (Correct answer)
- Requiring subcontractors to carry at least $2 million in general liability insurance
- Conducting a pre-bid conference to clarify scope before subcontractor bids are received
- Requiring subcontractors to submit certified payroll records
Correct answer: Awarding a subcontract to a related-party firm without competitive bidding or disclosed relationship
Awarding subcontracts to related parties without disclosure and competitive process violates most public procurement integrity requirements and creates a conflict of interest.
Question 2: A CCA auditor reviewing subcontractor invoices finds that the GC consistently approves and pays subcontractor invoices within 48 hours without any field verification. This practice most likely indicates:
- Absence of required receiving, inspection, and verification controls over subcontractor payments (Correct answer)
- An efficient payment process that improves subcontractor cash flow
- Compliance with prompt payment statutes requiring rapid payment
- A valid waiver of inspection rights negotiated in the subcontract
Correct answer: Absence of required receiving, inspection, and verification controls over subcontractor payments
Immediate payment without field verification bypasses the controls designed to confirm that work was actually performed before payment is authorized, creating significant overpayment risk.
Question 3: Which document is most critical for an auditor verifying that a subcontractor performed the work they were paid for on a unit price subcontract?
- Field-measured quantity take-off reports signed by the owner's inspector (Correct answer)
- Subcontractor's own quantity summary submitted with the invoice
- GC's project manager approval email
- Subcontractor's certified payroll for the billing period
Correct answer: Field-measured quantity take-off reports signed by the owner's inspector
On unit price subcontracts, independent field quantity measurements by the owner's inspector are the only reliable evidence that the billed quantities were actually installed or constructed.
Question 4: What is pass-through billing in the context of construction subcontractor auditing, and why is it a concern?
- A GC billing the owner for subcontractor costs plus unauthorized markups beyond contract-permitted rates (Correct answer)
- A subcontractor invoicing the GC directly instead of through the prime contract
- An owner paying subcontractors directly to bypass the general contractor
- A cost-plus arrangement where all subcontractor costs are passed to the owner at cost
Correct answer: A GC billing the owner for subcontractor costs plus unauthorized markups beyond contract-permitted rates
Pass-through billing fraud involves the GC applying unauthorized overhead and profit markups to subcontractor invoices before billing the owner, exceeding the markup rates allowed by the prime contract.
Question 5: During a subcontractor audit, an auditor discovers that 30% of payments to a key subcontractor were made by checks payable to the subcontractor's owner personally rather than to the subcontractor entity. This finding suggests:
- Potential diversion of project funds and tax reporting irregularities (Correct answer)
- Compliance with the subcontractor's preferred payment method
- Proper handling of owner draws from a sole proprietorship
- A valid retainage release procedure
Correct answer: Potential diversion of project funds and tax reporting irregularities
Payments to an individual rather than the corporate entity create risk of fund diversion, complicate lien waiver enforcement, and suggest potential tax evasion or fraud.
Question 6: An auditor reviewing subcontractor lien waiver practices should verify that conditional waivers are obtained at which point in the payment process?
- At the time of payment, before the check clears, conditioned on the payment being received (Correct answer)
- After the project reaches substantial completion
- Before the subcontractor begins work on the project
- When the general contractor submits the prime contract pay application
Correct answer: At the time of payment, before the check clears, conditioned on the payment being received
Conditional lien waivers are effective only upon receipt of the specified payment and protect the owner from lien exposure while the check is in transit.
CCA CCA Subcontractor and Vendor Management Auditing 1
When auditing a general contractor's subcontractor selection process on a public construction project, which practice would most likely constitute a compliance violation?