This article is part of a series sponsored by the guarantor of the Old Republic.
Construction accounting is complicated. The expected time and capital investment must be directed, as well as a clear understanding of the role of the CPA in preparing for compilation, review or audit statements. In Part 2 of this three-part blog, Kelly Kimmel, branch manager of the Old Republic Guarantee Company, and Halli Williams, PC, CCIFP, PC, CCIFP, CCIFP, CCIFP, CCIFP, PC, CCIFP, provides insights into the types of financial statements that construction accountants can use. Provide and when it may be needed.
What level of declaration do I need?
compilation
This is the lowest level financial statement that the CPA will prepare. For assembly, the CPA will not test or query the data in detail unless it determines that the initial response is questionable. The CPA does not guarantee the accuracy of the financial information provided. Generally speaking, the guarantor weighs little on the information contained in the compilation statement, treating them like internal statements or tax returns.
Review
When conducting a review, the CPA will query the provided numbers and analyze the data to ensure that the information is accurately linked. During the review period, they identify and discuss the required adjustments with the contractor when necessary to create a statement of compliance GAAP. Since the review requires only analysis procedures and queries of the data without detailed testing, this is only a small part of the audit requirements, the CPA provides limited assurance that the financial statements are not materially misunderstood.
Depending on the area, the statement of review and a full disclosure and timetable review by the CPA experienced in construction accounting will cover the bond requirements of most medium-sized construction companies. The scale of work, comprehensive open work, organizational complexity and growth expectations may also affect whether the guarantor accepts such financial statement levels in addition to revenue and total backlog.
To provide a review, the CPA should have an understanding of your industry, including the accounting principles and practices required to obtain limited guaranteed financial statements without substantial misunderstanding. Accountants should make inquiries so they can understand your organization, including:
- Organizational structure and type of business conduct.
- Operational characteristics, including the nature of assets, liabilities, income and expenses.
- Accounting principles and practices, including how you measure, identify, record and disclose any important accounts; and
- Any unusual accounting principles and practices implemented by the company in the company.
After knowing the company, the accountant will determine the analytical procedures required to review your internal financial data so that they can provide limited guarantees of accuracy based on GAAP. In other words, outline the plan and the information they need to conduct the review.
The analysis procedure involves comparing recorded amounts and ratios with reasonable expectations based on known customer operations (e.g., previous fiscal year statements) and industry standards (e.g., expected gross margin). CPAs should focus on areas where their previously identified risks of misunderstandings are increased. The CPA’s investigation area will focus on fluctuations and inconsistencies in the internal financial information provided by the contractor. Since the review is only a “limited guarantee”, the investigation is an inquiry conducted by management and individuals in other key companies. For example, comments often do not require additional information to confirm your company’s response, for example, checking receipts based on work expenses.
Since the review requires much less research than the review, the guaranteed level of data accuracy is limited. However, it does provide a standardized introduction to financial information formatted using the GAAP standard. It should provide a complete disclosure, including notes, a timeline outlining accounting principles and procedures, general and administrative (G&A) expenses, cash flows, breakdown of debts, timelines for carrying out work and completing work. These schedules should be consistent with your balance sheet and profit and loss statement.
audit
The audited financial statements of the CPA provide reasonable assurance that the company’s financial status is not misunderstood. This is the highest guarantee that CPA can provide. During the audit, the CPA must conduct a more in-depth investigation into the data provided by the construction company. Many factors may contribute to the guarantor’s need for audit statements, including complex entity organizational structures (such as developers with building entities) or ownership structures (such as ESOP), growing work complexity, size, backlog of projects or long-term Project duration.
During the audit period, the CPA should verify management’s claims by collecting evidence to assess the accuracy of financial claims between the owner and the company’s management. The CPA begins this process by developing an overall audit plan, so audits can be carried out effectively.
The CPA shall determine the expected scope, time and scope of resources required to perform an audit by using its prior knowledge and expertise and the complexity of the company’s business and its accounting standards. CPAs should also use their preliminary identification of company-specific factors, such as:
- Legal requirements, construction companies are subject to restrictions
- The complexity of internal control of the company,
- Their accounting and project management systems, and
- Simplify the availability of information transmission.
Company-specific information is often collected by reviewing initial questionnaires, interviewing and observing owners, management and key employees, and conducting advanced reviews of the financial information provided. This process helps the CPA understand the company’s business and the systems, policies and procedures it has implemented to collect data and prepare its internal financial reports. This initial analysis and risk assessment procedure allows the CPA to identify areas with potential for material misunderstanding.
These investigations and the determination of potential risks of misstatements can allow auditors to evaluate and design audit procedures required for audit strategies. This strategy outlines the quality (appropriateness) and the amount (adequacy) of audit evidence required to determine the reliability of financial performance. They can also assist in providing feedback on control best practices when understanding your company’s policies and procedures as they review internal practices implemented by the company.
From here, the auditor will collect and test evidence to confirm the accuracy of previously determined substance transactions, account balances, presentations and disclosures. They can do this in several ways: For example:
- Check tangible evidence through physical examinations,
- Observe the process of counting inventory,
- Obtain formal written answers to well-worded questions and evaluate their answers,
- Receive third-party confirmation of the transaction,
- Check the mathematical calculation of information,
- Analyze exceptions in the ledger or transaction list.
They will provide data analysis, assess the health of construction companies, and will perform fraud and internal control tests. Please note that audits are not designed specifically for fraud detection, so don’t rely solely on CPA to protect your company from this.
Once the evidence is analyzed and any necessary adjustments required for GAAP compliance are confirmed, the CPA will communicate its findings to the organization’s management team. This communication should include discussions on any issues identified, suggestions for improvement and other important factors.
Continue reading:
Part 13
Part 33
Written with Halli Williams, CPA, CCIFP, Senior Manager of CBIZ CPA, PC
The blog was originally published on the Old Republic Guarantee website. It is allowed to copy here.
resource
https://www.ispartnersllc.com/blog/five-types-testing-methods-used-audits/
https://us.aicpa.org/content/dam/aicpa/research/standards/compilationreview/downloadabledablecuments/ar–00090.pdf
https://www.procore.com/library/construction-financial-audit
https://us.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledabledocuments/au-00326.pdf
https://us.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledabledocuments/AU-C–00300.pdf
theme
Underwriting
