Common Audit Failures - Construction Contracts

Common Audit Failures - Construction Contracts

Percentage of completion method

Auditors should exercise due care and diligence in auditing construction contracts. The basis of income recognition based on the percentage of completion method must be disclosed. The working papers must indicate that costs incurred on the contract, as opposed to progress billings are used to determine the basis of the percentage of completion of the contract. The cost incurred to date must be based on the architects’ certificate and compared to the budgeted cost of the contract to ascertain the stage of completion of the contract.

Provision for losses and liquidated ascertained damages

Ensure that for each contract, the letter of award contract and any variation order are carefully scrutinised as to the contract sum, completion date and penalties for late completion.

Based on the terms of the contract, any provision for liquidated ascertained damages should be ascertained and accrued in the financial statement. In addition, the provision for foreseeable loss for the contract should be carefully determined and provided for if deemed necessary

Common audit failure on construction contracts

  • No review reasonableness of the budgeted cost to complete the contract

  • No assessment of the need for the provision of foreseeable loss

  • No assessments of the need for the provision of liquidated ascertained damages

  • No review of the reasonableness of income recognition

  • No cut-off test for contract costs and progress billings.

  • No verify contract costs incurred during the reporting period

Source

MIA Practice Review Report 2009-2013

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