Construction accounting is critical to ensure that projects are completed on time and within a budget. When it comes time for an audit, a construction CPA firm relies on a Work in Progress (WIP) schedule to track the progress of construction projects and the financial records associated with them. But revenue tracking errors can happen. To avoid costly mistakes, you should be aware of the common audit problems with a WIP schedule and how you prevent them from affecting your audit.
Your WIP Schedule Is A Vital Tool for A Construction CPA Firm
Construction companies have unique financial statements compared to other businesses. What makes construction accounting different?
Construction projects are often long-term and complex, requiring different accounting methods. Construction projects rely on estimates and can be challenging to track. This is where a WIP schedule comes in—a well-functioning WIP schedule is necessary to produce accurate financial statements.
How Does A Construction CPA Firm Use Your WIP Schedule?
A WIP schedule helps CPA auditors understand how a company manages its projects and the revenue and expenses associated with each job. The WIP schedule shows the revenue earned but not yet invoiced, which can help a company estimate the profitability of incomplete contracts. By reviewing the WIP schedule, your accountant can assess your construction company’s internal control and verify the accuracy of your financial statements.
Common Problems with WIP Schedules
Accurate WIP schedules are essential for construction businesses to obtain an unqualified audit opinion. Unfortunately, many construction businesses face typical problems with their WIP schedules. Let’s discuss some of the most frequent dilemmas:
Incomplete or Outdated Information
A successful construction audit requires accurate and up-to-date information. WIP schedules must be updated regularly to reflect the latest project information. When multiple people are working on the WIP schedule, it’s essential to have a transparent process for updating and approving changes. Without a system to track and update project information, this can lead to incomplete or outdated data on the WIP schedule.
Exaggerated Profit Margins
A well-documented and accurate WIP schedule will help accountants assess a company’s construction projects and identify potential risks. Contractors often want to show elevated earnings on their WIP schedule to impress potential clients. However, this can be a red flag in construction accounting. While WIP profit exaggeration is often due to misplaced optimism or oblivious management, it can also signify fraud. A construction accountant will likely want to investigate further if a construction company shows an unusually high-profit margin.
Failure to Monitor Field Progress Accurately
Cost overruns often occur when contractors do not monitor field progress accurately. If a contractor does not clearly understand the project status, this can lead to cost overruns and schedule delays. Auditors will review the WIP schedule to verify that project milestones are tracked appropriately. The WIP schedule should demonstrate where the costs will likely end up in the future.
Accounting Rule ASC Topic 606 Provides Guidance
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, is an industry-wide revenue recognition guidance. This construction accounting rule provides construction accountants guidance in accounting for revenue from construction contracts. ASC 606 presents a five-step method for revenue recognition:
- Identify the contract with a customer.
- Establish the performance obligations in the contract.
- Determine the transaction price.
- Allocate the price to the performance obligations.
- Recognize revenue as performance obligations are satisfied.
This five-step approach delivers principles-based guidance that construction companies can use to account for revenue from construction contracts.
Prepare Your WIP Schedule For Your Construction CPA Firm
While ASC 606 guides revenue recognition, it does not explicitly address WIP schedules. However, the new revenue recognition guidance can impact how construction companies account for WIP on their financial statements. For example, construction companies may need to reassess when recognizing revenue for construction projects that span multiple accounting periods.
To best prepare for your construction industry accounting audit, it is vital to have an accurate and up-to-date WIP schedule. Your construction auditor will use the WIP schedule to verify construction project profitability and identify potential risks. To avoid problems with WIP schedules, work with a construction CPA firm experienced with construction accounting and can help you stay compliant with the latest industry standards.
Do you need construction audit and assurance services? Contact us today to learn more about how our experienced team can help you with your next audit.
