OUR THOUGHTS ON:

5 Mistakes in a Contractor Audit

Audit|Construction

By Theodore Pettko

Annually, most companies have an audit completed by their CPA for banking, bonding and other users of their financial statements.  For most CFOs and controllers, this is just another thing they have to do in addition to their current workload.  They have been subjected to audits many times before and they are experienced in the way it works.  However, following the dangerous road of last year has potential for continuation of the same mistakes.  Here are some things to consider in the upcoming year’s audit.

  1. Timeliness – too often, the audit begins and the company is still closing their books.  Not being ready only creates inefficiencies and greater chances of errors rushing to complete the work.  Not to mention the stress and unhappiness it causes to the auditors.  No donuts or bagels on the second day of the audit!
  2. Job schedule completion – too frequently, audits get underway and the company’s job schedule is still a work in progress.  Impress upon PMs that their billings, cost estimates and change orders need their attention.  Blame the auditors to get this schedule completed.
  3. Unapproved change orders/claims – now, here’s a favorite for auditors to scrutinize.  Companies record billings based on estimates for this area from facts and circumstances.  However, documentation as to your basis for the amount needs to be memorialized in a memo; not the quantitative, but the qualitative information.
  4. AP cutoff – most contractors use cost as their measurement of percent of completion.  Missing an invoice has a rippling effect on the financial statements.
  5. Receivables – auditors look for the risk, and valuation is a concern here – not so much in the current AR, but the ones over 90 days old.  Most companies are fully aware of the outstanding balances, but too often don’t document what they have done and when in their attempts to collect it.  The push is to record an allowance, and most companies end up spending more time and effort justifying why it’s collectable.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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