CH03: AUDIT OF CONSTRUCTION COMPANIES standards under the National Building Code (Republic

Act No. 6541).

➢ Construction industry consists of individuals and entities
engaged in constructing buildings and other assets for ~ KEY AUDIT CONSIDERATIONS ~
others.
➢ industry that includes the erection, maintenance, and  Work is performed under contractual arrangements with
repair of buildings and other immobile structures, and customers.
the building of roads and service facilities that become  Normally obtains the contracts that generate revenue or
integral parts of structures and are essential to their use. sales by bidding or negotiating for specific projects.
➢ covers the processes involved in delivering buildings,  May be exposed to significant risks in the performance
infrastructure and industrial facilities, and associated of a contract.
activities through to the end of their life.  Customers may require a contractor to post a
➢ includes structural additions and alterations but excludes performance and payment bond.
the building of mobile structures such as trailers and  Costs and revenues are typically accumulated and
ships. accounted for by individual contracts or contract
➢ recognized as a sector with great contribution to the commitments extending beyond one accounting period.
economic and social development of a country. Revenue Recognition
• CONSTRUCTION INDUSTRY SECTORS: Cost Accounting and Project Budgeting
Residential Construction Work in Progress (WIP) and Percentage of Completion
Commercial Construction Contractual Obligations and Change Orders
Industrial Construction Project Delays and Claims
Institutional and Government Construction Inventory and Equipment Valuation
• TYPES OF CONSTRUCTION PROJECTS: Compliance with Regulatory Requirements
Residential Construction Cash Flow and Working Capital Management
Commercial Construction
Civil Engineering and InfrastructureProjects ~ RISK ASSESSMENT ~
Institutional and Public Construction
Infrastructure Upgrades & Rehabilitation  Size of project - Relatively large job
 Type of project - Complex, one of a kind, Not within
[ SUBCATEGORIES ] contractor's expertise
 Timing and scheduling - Long-term project, Work is
 General Contractor - prime contractor who enters into falling behind schedule, Accelerated time frame,
a contract with the owner of a project for the construction Significant penalties for late completion.
of the project and who takes full responsibility for its  Location - New area, Remote area—materials and labor
completion. not readily available.
 Subcontractor - second-level contractor who enters into  Weather - High susceptibility to adverse weather.
a contract with a prime contractor or an upper-tier  Owner/investor - Very few previous contracts with
contractor to perform a specific part or phase of a contractor, Weak financial position.
construction project.  Subcontractors - Small portion of work performed by
 Construction Manager - contractor who enters into an subcontractors, Very few previous contracts with
agency contract with an owner of a construction project contractor, Weak financial position, Majority of
to supervise and coordinate the construction activity on significant, subcontract agreements not finalized.
the project.  Bid spread - Significant variances in bid amounts
among competing contractors.
[ TYPES OF CONTRACTS ]
 Profit fade - Significant profit fade.
 Fixed-price contract – provides for the contractor's  Underbilling - Unusual/significant underbilling.
performance of all work to be performed under the  Type of contract - Fixed-price, Cost-type difficult to
contract for a stated price. determine reimbursable costs.
 Cost-type/Cost-plus contract - provides for  Claims - Significant claims.
reimbursement of allowable or otherwise defined costs  Material costs - High susceptibility to price escalations
incurred plus a fee for the contractor's services that during performance of contract.
represents profit. Compliance Risk – The possibility that a company will
 Time-and-materials contract - provides for payments be subject to fines and other consequences for breaking
to the contractor on the basis of direct labor hours at industry rules and regulations, including material and
fixed hourly rates and cost of materials or other specified financial losses.
costs. o Environmental Concerns – If the structure is
 Unit-price contract - provides for the contractor's destroying natural habitats, utilizing hazardous
performance of a specific project at a specified price per chemicals, or disposing of hazardous waste, your
each unit of output. construction project may raise environmental
issues.
~ REGULATORS ~ o Process Risks – arises when a contractor
disregards a set protocol.
❖ Construction Industry Association of the Philippines o Workplace Health and Safety – can endanger your
(CIAP). staff by going against the rules of the Occupational
 Philippine Construction Accreditation Board Safety and Health Administration (OSHA).
(PCAB) Inaccurate Cost Estimate Risk – Inflation on the cost
 Philippine Overseas Construction Board (POCB) of materials, labor, and more equipment add to the initial
 Philippine Domestic Construction Board (PDCB) estimate can result to inaccurate cost estimate.
 Construction Manpower Development Foundation Changing The Scope Of Work Risk – The little amount
(CMDF). of accrual expenses incurred by a company during
❖ Local government units - regulate the construction and construction is often overlooked; they become apparent
renovation of buildings and structures within their only when the project is completed.
territories by ensuring compliance with minimum safety

8 | P a g e | AUD 5 – AUDIT OF CONSTRUCTION COMPANIES

 Contractual Disputes Risk – These disagreements may and past performance on
lead to payment delays, rising legal fees, and damaged contracts, experience on other
reputations. contracts, and information
Safety and Liabilities Issue Risks – Inherent dangers gained in other phases of the
that exist on construction sites are the root cause of audit.
safety and liability challenges associated with the Contract guarantees and • Rights and obligations
construction industry. cancellation or postponement Read the contracts to identify
provisions guarantees or contingencies
FS ITEM AUDIT PROCEDURES associated with a project to
Accounts Receivable • Existence determine whether the
The auditor may perform contractor has considered the
confirmation to the customers. cost of fulfilling contract
guarantees. Moreover, the
The confirmation ordinarily auditor should carefully read
contains other pertinent the contracts to identify
information, such as the cancellation and
contract price, payments postponement provisions
made, and status of the associated with a project.
contract. Income Recognition • Valuation and
Unbilled Receivables • Valuation and o Percentage-of- Allocation
Allocation Completion Method Evaluate the acceptability of
Subsequent examination of o Completed-Contract income recognition methods.
the billing and collection of Method
the receivables and evaluation Obtaining and reviewing a
of billing information on the representative sample of
basis of accumulated cost completed contracts to
data. evaluate the quality of the
Retentions • Completeness contractor's original and
Reviewing contract retentions periodic estimates of profit on
percentages those contracts.
Unapproved Change Orders, • Rights and obligations Analysis of Gross Profit • Valuation and
Extras, Claims, and Back Obtain evidence to evaluate Margins Allocation
Charges the likelihood of settlement on Analyzing gross profit
satisfactory terms and the margins on contracts and
collectability of the recorded investigating and obtaining
amounts explanations for contracts
Property, plant, and • Valuation and with unusually high or low
equipment Allocation profit margins in the light of
Perform a test of impairment. present and past experience on
similar contracts.
Perform physical verification Participation in Joint Ventures • Rights and Obligations
of fixed assets to see if they are Review joint venture
functioning well. agreements and document a
Contract Scope Changes • Rights and obligations contractor's participation.
Determine whether the costs
are reimbursable or whether
they should be absorbed by the
contractor as unreimbursable
contract costs.
Contract costs • Accuracy
Determine the accuracy of the
costs incurred to date and the
estimated completion costs,
whether the gross profit on a
contract is recognized
according to generally
accepted accounting
principles.
Costs Incurred to Date • Valuation and
Allocation
Contractor has included in
accumulated contract costs
identifiable direct and indirect
costs and an acceptable and
consistent allocation of
overhead to specific contracts.
Estimated Cost to Complete • Valuation and
Allocation
Critically review
representations of
management, obtain
explanations of apparent
disparities between estimates

9 | P a g e | AUD 5 – AUDIT OF CONSTRUCTION COMPANIES

10 | P a g e | AUD 5 – AUDIT OF CONSTRUCTION COMPANIES