CPA Reviews and Audits in Construction

Construction companies face financial scrutiny that most other businesses never deal with. Before a surety company issues a bond, before a general contractor awards a subcontract, and before a project owner signs off on a large contract, they want verified financial statements from a licensed CPA.

Understanding what they look for, and how to prepare, puts your company in a stronger position to win work and grow your bonding capacity.

Why Construction Companies Need CPA Reviews and Audits

Most industries need reviewed financials for licensing or lending. Construction companies need them for all of that plus bonding, prequalification, and contract awards.

Surety companies carry significant risk when they back a contractor. If your company defaults on a project, the surety pays. That’s why they require CPA-reviewed or audited financial statements before issuing performance bonds, payment bonds, or bid bonds. They want hard evidence that your company manages money well, recognizes revenue correctly, and has the financial depth to complete the work it takes on.

Project owners and general contractors who require prequalification go through a similar process. They review your financials before they let you bid, not after.

If your financials are not in order, you don’t get the bond. If you don’t get the bond, you don’t get the job.

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CPA Review vs. CPA Audit: Which One Does Your Construction Company Need

The level of service your surety or project owner requires depends on your contract size, bonding limits, and the specific requirements of the party asking.

CPA Review A CPA applies analytical procedures and management inquiries to provide limited assurance that your financial statements appear reasonable and follow GAAP. A review works well for contractors with modest bonding limits or those whose sureties don’t require the full scope of an audit. It costs less and takes less time while still satisfying most surety requirements at the small to mid-sized contractor level.

CPA Audit A CPA independently tests transactions, verifies account balances, confirms balances with third parties, and evaluates internal controls to provide the highest level of assurance. Sureties typically require audited financials for larger bonding programs, higher-risk projects, or contractors pursuing significant increases in their bonding capacity.

If you’re unsure which one your surety requires, ask your surety agent before engaging a CPA. Starting with the wrong service level wastes time and delays your bonding approval. You can also view a sample construction CPA review report to understand what the final deliverable looks like.

Here’s a quick comparison of the two:

Level of Assurance Review: Provides limited assurance that no material adjustments are needed. Audit: Provides reasonable assurance that financial statements are free from material misstatement.

Procedures Review: Primarily involves inquiries and analytical procedures. Audit: Involves a more in-depth examination, including tests of controls, substantive procedures, and third-party confirmations.

Report Review: Includes a conclusion that nothing has come to the CPA’s attention that causes them to believe the financial statements are not fairly presented. Audit: Includes an opinion on whether the financial statements present fairly, in all material respects, the financial position of the entity.

Internal Control Review: Does not require an understanding of internal control beyond what is necessary to perform inquiries and analytical procedures. Audit: Requires an understanding and testing of internal controls.

The Role of the Percentage of Completion Method

For construction companies seeking bonding, the percentage of completion method is the revenue recognition standard sureties expect to see.

This method recognizes revenue based on how far along each project is at the time of reporting rather than waiting until a project finishes. It gives sureties a realistic, current picture of your financial health across all active jobs. Contractors who report revenue on a cash basis or use the completed contract method often face pushback from sureties because those approaches can mask financial problems until it’s too late.

If your books don’t currently use the percentage of completion method, your CPA will need to make adjustments before the review or audit can proceed. Addressing this before the engagement begins saves time and reduces cost.

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What Surety Companies Actually Look For

Documentation

Keep detailed records of contracts, expenses, and revenues. Furthermore, it is ideal to prepare financial statements in compliance with legal and regulatory requirements.

Maintain a comprehensive filing system, both digitally and physically, for easy access to documents. Ensure that all change orders, subcontractor agreements, and client communications are well-documented and organized. This detailed information can make the audit process easier. Because auditors need these records to check financial transactions and project advancement.

Work in Progress (WIP) and Backlogs Schedules

Accurately managing and reporting WIP and backlogs is essential for a clear financial picture. WIP reports track the progress of ongoing projects, detailing costs incurred, revenue recognized, and the percentage of completion. Therefore, these reports updated regularly to reflect the current status of each project.

On the other hand, backlogs represent the value of work yet to be performed on signed contracts. Maintaining accurate backlog reports helps in forecasting future revenue and managing project timelines.

WIP and backlog reports show how well your company is running and its financial status. This information is crucial for reviews and audits. Understanding these reports is important for assessing the company’s performance. It helps in evaluating the overall health of the business.

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Preparing for a Construction CPA Audit or Review

Accurate Bookkeeping

Ensure all financial transactions are recorded accurately. This includes performing monthly reviews for all accounts, including petty cash, credit cards, and loans. Consistent and precise bookkeeping is the foundation of any successful review or audit.

Also, implement an automated accounting system to track and categorize expenses accurately. Regularly reconcile your bank statements and document all transactions properly. This practice helps prepare for a review or audit. Also, it gives insights into your company’s financial health.

Adopt the Right Accounting Methods

Utilize the percentage of completion method for a true financial picture. Also, it is recommended reporting requirement compliance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), as applicable.

This method is especially crucial for long-term contracts, where financial activities span multiple accounting periods. Additionally, ensure that your accounting practices align with industry standards and regulatory requirements to avoid any compliance issues during the review or audit.

Communication with Your CPA

Lastly, maintain open and regular communication with your CPA throughout the year. Discuss any significant financial transactions, changes in accounting policies, or potential issues that may arise. This ongoing dialogue can help address any concerns promptly and ensure that you are well-prepared for the audit. Your CPA can also provide valuable guidance on best practices and industry-specific requirements.

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Documentation That Makes or Breaks a Construction CPA Engagement

Clean, organized documentation speeds up the review or audit process and directly reduces what you pay for it. Construction companies that maintain thorough records throughout the year spend significantly less time preparing for a CPA engagement than those who scramble to gather documents at year-end.

Key documentation to keep organized and accessible includes:

• Contracts and subcontractor agreements for all active and recently completed projects
• Change orders, addendums, and client communications
• Job cost reports and cost ledgers organized by project
• Accounts receivable and accounts payable aging schedules
• Payroll records and certified payroll reports where applicable
• Equipment schedules and depreciation records
• Bank statements and loan agreements
• Prior year financial statements

The more complete and organized these records are, the smoother the CPA engagement runs and the faster your bonding company gets what it needs.

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How to Prepare for a Construction CPA Review or Audit

The contractors who move through CPA reviews and audits fastest treat financial preparation as an ongoing process rather than a year-end scramble.

Maintain accurate bookkeeping throughout the year Reconcile all accounts monthly, including bank accounts, credit cards, and loans. Catch misclassifications and errors as they happen rather than untangling months of transactions before a review.

Update your WIP schedule regularly Monthly WIP updates keep your revenue recognition current and reduce the adjustments a CPA needs to make during the review. Quarterly at minimum is better than nothing, but monthly is the standard sureties prefer.

Use the right accounting method The percentage of completion method is the standard for construction companies seeking bonding. If your books are on cash basis or completed contract method, your CPA needs to convert them before the review can proceed, which adds time and cost.

Separate business and personal finances completely Commingled accounts are one of the most common problems CPAs find in construction company engagements. Keep business finances entirely separate and document every transaction clearly.

Engage your CPA before year-end Talk to your CPA in the fourth quarter so you can address any issues before the books close and get the engagement completed on a timeline that works for your bonding needs.

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What Happens If Your Books Need Cleanup First

Some construction companies come in with books that haven’t been properly maintained, accounts that haven’t been reconciled in months, or WIP schedules that don’t reflect actual project status. Before a CPA review or audit can begin, those issues need to get resolved.

Our catch-up and clean-up accounting service corrects past errors, reconciles inconsistencies, and brings your books to the standard required for a CPA engagement. Addressing cleanup before the review begins saves time and reduces the overall cost significantly.

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Ready to Strengthen Your Bonding Position?

Your financial statements open the door to larger bonds, bigger contracts, and better prequalification outcomes. Don’t let disorganized books or outdated WIP schedules cost you work your company is qualified to do.

Want to learn more? Read our full guides on construction bonding capacity and the percentage of completion method, or visit our construction CPA services page to get started.

Schedule a call today and let’s get your financials bonding-ready.

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