Managing the intricate financial details of a construction company can make preparing for an external audit a challenge. However, with the right strategies in place, you can ensure your company is audit-ready.
Key Financial Records and Documents
The foundation of a successful audit is having all crucial documents well-organized. Essential records include:
- Financial statements: balance sheet, income statement, and cash flow statement
- Detailed contract and change order records, project budgets, and cost estimates
- Supporting documents like requisitions, invoices, receipts, payroll records, and bank statements
- Documentation related to joint ventures and other legal agreements
It’s also essential to maintain a comprehensive contract schedule that lists every contract the company has worked on each year. This schedule should reconcile with the trial balance, directly correlating to revenue, cost of revenue, overbillings, and underbillings.
Think of it like a formula:
Actual Costs + Estimated Costs + Time = Contract Value / Revenue
Key Takeaway: A well-organized contract schedule is crucial. It must reconcile with the trial balance and accurately reflect contract value, total estimated costs, actual costs, and billings to determine revenue, cost of revenue, overbillings, and underbillings.
Accurate Reporting
Accurate project cost reporting and revenue recognition are vital to the audit process. Using the cost-to-cost method (percentage-of-completion) ensures that revenue aligns with project progress. To avoid discrepancies, project budgets and financial records should be updated and reconciled regularly.
Tip: Implement a monthly review process to ensure:
- Contract values and estimates are current
- Change orders are signed before work begins, or, at a minimum, the company has authorization to proceed
- All documentation, including labor costs and subcontractor invoices, is completed promptly
Key Takeaway: Regular contract reviews minimize the need for last-minute corrections and ensure accurate cost allocation.
Common Audit Preparation Mistakes
The work-in-progress (WIP) schedule plays a critical role in the audit, and common mistakes can disrupt the process. These include:
- Overlooking detailed records, especially for change orders and subcontractor agreements
- Misallocating overhead costs
- Closing year-end payables too early
- Omitting estimate revisions and change orders from contract schedules
Tip: Keep the year-end payables cycle open longer to ensure all payables are recorded before audit testing begins.
Key Takeaway: Effective audit preparation requires detailed records and thorough financial reviews for accuracy.
Internal Controls and Their Impact on Audits
Strong internal controls are essential for accurate financial reporting and reducing the risk of errors or fraud. In smaller construction companies, segregating duties in finance can be challenging, making internal controls even more critical.
Tip: Prepare process documentation for “what if” scenarios, such as unexpected employee absences or rapid company growth.
Key Takeaway: As your company grows, ensure your back-office staffing evolves to support accurate financial management.
Maintaining Audit Readiness Year-Round
To ensure audit readiness throughout the year, consider adopting these best practices:
- Establish an effective monthly and quarterly close process
- Review WIP reports regularly
- Evaluate and document your internal control environment
- Keep financial records up to date
- Ensure all transactions are properly documented
- Address complex transactions and changes in accounting standards promptly
- Implement a structured year-end close process
- Maintain open communication with your accountant throughout the year
By following these steps, your construction company will be well-prepared for external audits, ensuring financial accuracy and compliance.
Contact our experienced accounting team today for personalized advice on preparing for an external audit.
