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Audit and Accounting Guide: Construction Contractors, 2017

Audit and Accounting Guide: Construction Contractors, 2017


ISBN: 978-1-945-49837-4

Oct 2017

352 pages



Considered the industry standard resource, this guide’s 2017 edition is packed with information on new requirements and relevant changes to the FASB Accounting Standards Codification, including a high-level look at FASB ASU Nos. 2014-09, Revenue from Contracts with Customers and 2016-02, Leases. It provides practical tips and industry specific guidance, provides value from simple accounting to joint venture creation, and takes a deep dive into industry specific auditing procedures. With two complete sets of financial statements and disclosures, it provides an industry accepted blueprint from where to start, or a reference for auditing the final product.

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1 Industry Background    01-.52

Nature and Significance of the Industry    02-.05

Features of the Business Environment     06-.37

Characteristics Common to Contractors    07-.08

Types of Contracts    09-.10

Contract Modifications and Changes    11-.12

Bonding and the Surety Underwriting Process    13-.19

Project Ownership and Rights of Lien    20-.21

Financing Considerations    22-.30

Joint Ventures         31-.34

Reporting for Financial and Income Tax Purposes     35-.37

Typical Industry Operations    38-.50

Preparing Cost Estimates and Bids     39-.45

Entering Into the Contract    46

Planning and Initiating the Project     47-.50

Variations in Size and Methods of Operation     51

Project Management    52

2 Accounting for Performance of Construction-Type Contracts    01-.36

Basic Accounting Policy for Contracts     03-.08

Percentage-of-Completion Method     04-.06

Completed-Contract Method    07-.08

Determining the Profit Center    09

Measuring the Extent of Progress Toward Completion     10-.12

Income Determination—Revenue    13-.20

Impact of Change Orders on Revenue     14-.18

Impact of Claims on Revenue    19-.20

Income Determination—Cost Elements     21-.28

Accounting for Contract Costs    22

Cost Attributable to Claims    23

Precontract Costs     24-.25

Cost Adjustments for Back Charges     26-.27

Estimated Cost to Complete     28

Computation of Earned Income    29

Revised Estimates     30

Provisions for Anticipated Losses on Contracts    31

Selecting a Measure of Extent of Progress    32

Costs of Equipment and Small Tools     33-.36

3 Accounting for and Reporting Investments in Construction Joint Ventures    01-.45

Joint Venture Accounting     03-.40

Accounting Methods     03-.08

Capital Contributions to Joint Ventures and Initial Measurement of Investments in Joint Ventures     09-.16

Sales to a Venture    17-.20

Subsequent Measurement and Presentation of Investments in Joint Ventures    21-.40

Determining Venturers’ Percentage Ownership    41

Conforming the Accounting Principles of the Venture     42

Losses in Excess of a Venturer’s Investment, Loans, and Advances    43

Disclosures in a Venturer’s Financial Statements    44-.45

4 Financial Reporting by Affiliated Entities    01-.11

Combined Financial Statements    04-.06

Presentation of Separate Financial Statements of Members of an Affiliated Group     07-.10

Presentation of Separate Financial Statements of Members of an Affiliated Group That Constitute an Economic Unit     11

5 Other Accounting Considerations    01-.138

Definition of a Public Business Entity     01

Fair Value Measurements     02-.50

Definition of Fair Value    05-.12

Valuation Techniques     13-.15

Present Value Techniques    16-.18

The Fair Value Hierarchy    19-.22

Application of Fair Value Measurements    23-.31

Additional Guidance For Fair Value Measurement in Special Circumstances    32-.36

Disclosures    37-.46

Fair Value Option    47-.50

Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps     51-.55

Disclosure    55

Service Concession Arrangements    56-.61

Discontinued Operations     62-.70

Disposal Group Classified as Held for Sale     66-.68

Disclosure    69-.70

Impairment of Long-Lived Assets    71-.104

Property, Plant, and Equipment    71-.76

Intangibles—Goodwill     77-.86

Accounting Alternative     87-.101

Intangibles—Other     102-.104

Accounting for Identifiable Intangible Assets in a Business Combination         105-.109

Accounting Alternative     105-.109

Business Combinations—Pushdown Accounting    110-.115

Asset Retirement Obligations    116-.122

Mandatorily Redeemable Stock    123-.124

Presentation of an Unrecognized Tax Benefit When a Tax Carryforward Exists    125-.126

Differences Between Financial Accounting and Income Tax Accounting     127-.134

Accounting Methods Acceptable for Income Tax Purposes     135-.138

Cash Method         136-.137

Accrual Method     138

6 Financial Statement Presentation    01-.60

Balance Sheet Classification    01-.05

Guidelines for Classified Balance Sheets     06-.18

General Guidance    07-.11

Retentions Receivable and Payable     12-.14

Investments in Construction Joint Ventures    15

Equipment    16

Liabilities    17

Deferred Income Taxes     18

Offsetting or Netting Amounts     19-.24

Disclosures in Financial Statements     25-.46

Significant Accounting Policies    26

Revised Estimates     27

Backlog on Existing Contracts    28

Receivables     29-.35

Going Concern     36-.46

Disclosures of Certain Significant Risks and Uncertainties     47-.48

Accounting for Weather Derivatives     49

Disclosures of Multiemployer Pension Plans    50-.60

Multiemployer Plans That Provide Pension Benefits     51-.58

Multiemployer Plans That Provide Postretirement Benefits Other Than Pensions    59

Sample Disclosure for Plans That Provide Pension Benefits    60

7 Auditing Within the Construction Industry    01-.08

Audit Focus    02-.07

Scope of Auditing Guidance Included in This Guide     08

8 Controls in the Construction Industry    01-.29

Project Administration and Contract Evaluation    08-.10

Job Site Accounting and Controls    11-.14

Billing Procedures     15-.18

Contract Costs     19-.21

Contract Revenues     22-.23

Construction Equipment     24-.25

Claims, Extras, and Back Charges    26

Joint Ventures    27

Internal Audit Function     28-.29

9 Planning the Audit, Assessing and Responding to Audit Risk, and Additional Auditing Considerations    01-.103

Scope of This Chapter     01-.02

Planning and Other Auditing Considerations    03-.34

Planning the Audit    04-.06

Auditor’s Communication With Those Charged With Governance     07-.21

Audit Risk    22-.26

Materiality    27-.34

Use of Assertions in Obtaining Audit Evidence    35-.36

Understanding the Entity, Its Environment, and Its Internal Control     37-.62

Risk Assessment Procedures     40-.41

Discussion Among the Audit Team     42

Understanding the Entity and Its Environment    43-.45

Understanding of Internal Control     46-.62

Assessment of Risks of Material Misstatement and the Design of Further Audit Procedures     63-.85

Assessing the Risks of Material Misstatement    64-.69

Designing and Performing Further Audit Procedures    70-.85

Evaluating Misstatements     86-.88

Audit Documentation    89-.98

Identifying and Evaluating Control Deficiencies    99-.103

10 Major Auditing Procedures for Contractors    01-.65

Job Site Visits and Interim Audit Procedures    02-.07

Accounts Receivable    08-.26

Unbilled Receivables     12

Retentions    13-.14

Unapproved Change Orders, Extras, Claims, and Back Charges     15-.18

Contract Scope Changes    19

Contract Guarantees and Cancellation or Postponement Provisions 20-.24

Collectibility     25-.26

Liabilities Related to Contracts     27-.31

Contract Costs     32-.38

Costs Incurred to Date     35

Estimated Cost to Complete     36-.38

Income Recognition     39-.59

Evaluating the Acceptability of Income Recognition Methods  42-.48

The Percentage-of-Completion Method     49-.51

The Completed-Contract Method     52-.53

Combining and Segmenting    54

Review of Earned Revenue    55-.57

Analysis of Gross Profit Margins     58-.59

Review of Backlog Information on Signed Contracts and Letters of Intent     60-.64

Management Representations     65

11 Other Audit Considerations    01-.47

Affiliated Entities     02-.11

Participation in Joint Ventures    03-.09

Auditing Affiliated Entities and Related Party Transactions    10-.11

Participation in a Group Audit     12-.14

Capitalization and Cash Flow     15-.17

Types of Auditor’s Reports on Financial Statements     18

Going Concern Considerations    19-.24

Supplementary Information in Relation to the Financial Statements as a Whole    25-.35

Additional Considerations    34-.35

Auditor’s Communications Related to Internal Control Matters     36

Legal and Regulatory Considerations     37-.47

State Statutes Affecting Construction Contractors     37

The Auditor’s Consideration of Compliance With Laws and Regulations    38-.40

Reporting of Identified or Suspected Noncompliance     41-.44

Governmental Prequalification Reporting    45-.47

12 Consideration of Fraud in a Financial Statement    01-.38

The Importance of Exercising Professional Skepticism     03

Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud    04-.09

Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud    10-.13

Considering Fraud Risk Factors    12-.13

Identifying Risks That May Result in a Material Misstatement Due to Fraud         14-.23

A Presumption That Improper Revenue Recognition Is a Fraud Risk     16-.22

Key Estimates 23

Assessing the Identified Risks After Taking Into Account an Evaluation of the Entity’s Programs and Controls That Address the Risks    24

Responding to the Results of the Assessment    25-.28

Evaluating Audit Evidence    29-.30

Responding to Misstatements That May Be the Result of Fraud    31-.34

Communicating About Possible Fraud to Management, Those Charged With Governance, and Others     35

Documenting the Auditor’s Consideration of Fraud     36-.38


A The New Revenue Recognition Standard: FASB ASC 606

B The New Leases Standard: FASB ASU No. 2016-02

C Overview of Statements on Quality Control Standards

D Illustrations of Segmenting Criteria

E Computing Income Earned Under the Percentage-of-Completion Method

F Examples of Computation of Income Earned

G Example of Change in Accounting Estimate

H Sample Financial Statements Percentage Contractors, Inc.

I Reporting on Supplementary Information in Relation to the Financial Statements as a Whole

J Sample Financial Statements Completed Contractor, Inc.

K The Auditor’s Report

L Information Sources

M Schedule of Changes Made to the Text From the Previous Edition


Index of Pronouncements andOther Technical Guidance

Subject Index