Construction accounting is a complex area that can be difficult to audit. The goal of an audit is to ensure that all transactions are properly recorded and that the company has enough funds to complete its projects. To verify that your company is maintaining its financial and legal obligations, your auditor must thoroughly examine your contractor’s records and your company’s internal documents. Here are important construction industry accounting tips to prepare for your next audit.
Review the General Ledger
A critical component of your construction industry accounting audit will be your general ledger. This is where all transactions are posted and recorded. Your auditor will review the general ledger and the trial balance.
The work-in-progress (WIP) schedule should be reconciled to the contract revenue and contract cost accounts in the trial balance. In addition, the WIP schedule should also tie to total costs in excess of billings and total billings in excess of costs on the balance sheet. The WIP schedule should also be able to support the company’s backlog.
The reconciliation of these financial documents will allow your auditor to validate that the WIP schedule and general ledger are accurate and complete.
Ensure the WIP Schedule Is Up to Date
When your audit begins, ensure your WIP schedule is current and includes all signed contracts. Include any recently approved change orders on the WIP schedule. Note if the change order has not been approved yet, as this will be discussed with the CPA auditors. If any jobs have losses already, you will need to accrue for all of the losses in the current year.
To avoid delay and stay organized, designate one location to keep all contracts and change orders. Also, keep a log of both to reconcile them to the WIP schedule. This type of planning can lead to less confusion during the audit and keep your team properly recognizing revenue year-round.
Inspect the WIP Schedule With Project Managers
The auditor will be interested in changes in the gross profit of the company and the profitability of individual jobs, especially if there has been a significant increase or decrease. To ensure the WIP schedule is accurate, reach out to your project managers to review the WIP schedule. Your project managers are in the field and have frequent communications with the owner of the job. Their project-specific knowledge is vital to determine the percent completion of each job accurately. If there are considerable changes in estimated costs, these will need to be amended to provide proper revenue recognition.
Construction Industry Accounting Expertise
Aspects of audits and accounting for construction companies can be both challenging and complex. Utilize an experienced construction CPA firm as part of the audit process to provide greater assurance, comfort, and risk mitigation over large construction projects.
At Assurance Dimensions, we can help you stay on top of the latest accounting, auditing, and tax changes in the construction industry. Contact us today to help with your next construction industry audit.
