Construction Internal Controls and Financial Reporting Flashcards

An 'overbilled' condition on a construction WIP schedule indicates that:

Answer: The contractor has billed more than the value of work earned based on completion

Overbilling, also called 'billings in excess of costs and estimated earnings,' occurs when a contractor has invoiced the owner for more than the revenue earned based on actual work progress.

In construction auditing, 'retainage' refers to:

Answer: A portion of each progress payment withheld by the owner until project completion

Retainage is a percentage (typically 5–10%) of each progress payment withheld by the owner until the project reaches substantial completion, providing performance assurance.

A 'Schedule of Values' in a construction contract primarily serves as:

Answer: A breakdown of the contract price by work components used as the basis for progress billing

A Schedule of Values allocates the total contract sum across individual work components and serves as the agreed basis for calculating each progress payment application submitted by the contractor.

When auditing construction disbursements, 'joint checks' are primarily used to:

Answer: Ensure material suppliers are paid directly alongside the subcontractor from the same payment

Joint checks are made payable to both the subcontractor and their material supplier, ensuring the supplier receives payment and reducing the risk of mechanic's lien claims against the project.

Which metric best measures a construction company's efficiency in converting project billings into cash receipts?

Answer: Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) measures the average number of days it takes to collect payment after billing, directly indicating how efficiently the company manages its accounts receivable.

The 'underbilled' condition in a WIP schedule, also known as 'costs in excess of billings,' is classified on the balance sheet as:

Answer: A current asset

Costs in excess of billings (underbilling) represents revenue earned but not yet billed to the owner, and is classified as a current asset because the owner owes the contractor for work already performed.

When auditing a construction company's financial statements, the auditor identifies that estimated costs to complete a project have significantly increased. The primary audit concern is:

Answer: Whether contract revenue and gross profit have been appropriately revised under the percentage-of-completion method

Under the percentage-of-completion method, changes in estimated total costs require the auditor to verify that cumulative revenue, gross profit, and WIP balances have been recalculated to reflect the revised estimate.