The auditor begins by reviewing the contracts ABC Construction has entered into. This involves understanding the terms,
Question:
The auditor begins by reviewing the contracts ABC Construction has entered into. This involves understanding the terms, conditions, and specifications outlined in the agreements.
Progress Billing Examination: As construction projects progress, ABC Construction bills its clients based on the completion of milestones or stages. The auditor verifies the accuracy of these billings by comparing them with the actual progress of the projects.
Cost Analysis: To ensure proper revenue recognition, the auditor examines the costs associated with each project. This includes labor, materials, equipment, and overhead expenses. Any discrepancies or inconsistencies are thoroughly investigated.
Percentage of Completion Method: ABC Construction recognizes revenue using the percentage of completion method, which requires estimating the degree of completion of each project. The auditor assesses the validity of these estimates and examines the methodology used by the company.
Change Orders and Variations: Throughout the construction process, clients may request changes to the original scope of work. The auditor reviews these change orders to determine their impact on revenue recognition and ensures they are properly documented and approved.
Retention and Warranty Provisions: ABC Construction often retains a portion of the contract price until the completion of the project or satisfaction of warranty obligations. The auditor examines these provisions to ensure compliance with accounting standards and assesses the likelihood of collection.
Disclosure Compliance: Finally, the auditor evaluates whether ABC Construction has disclosed all relevant information related to revenue recognition in its financial statements. This includes details about significant contracts, accounting policies, and any potential risks or uncertainties.
Objective Type Question:
Based on the case study provided, which audit procedure is essential for verifying the accuracy of progress billings in the construction industry?
A) Reviewing change orders and variations
B) Analyzing costs associated with each project
C) Examining retention and warranty provisions
D) Assessing the percentage of completion method
Financial Reporting And Analysis
ISBN: 9781260247848
8th Edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer