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Financial reviews and audits are more than just regulatory compliance for the construction industry. They are a cornerstone of bonding success. In addition, understanding the process is crucial for any construction business looking to secure bonds.
Bond surety provides financial assurance that a construction contractor will fulfill their obligations under the contract. It protects the project owner from financial loss if the contractor defaults. Consequently, a third-party company guarantees the contractor’s work and payment. They ensure the project is completed, and the subcontractors and suppliers are paid.
Construction CPA Services
A certified public accountant (CPA) assists to ensure compliance with financial requirements. Audit offers a more in-depth examination than Construction CPA review. However, both are essential in demonstrating construction company’s reliability and stability to bonding companies.
If the stakeholders are satisfied with limited assurance and a less detailed examination, a review might suffice. However, for full assurance and a detailed examination of the financial statements, an audit is necessary. Each serves a different purpose and comes with its own set of procedures, costs, and time requirements.
Key Differences Between CPA Review and CPA Audit
| 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 Construction Accounting
The accounting method used in construction is typically the percentage of completion method. This accounting method, which recognizes revenue based on the project’s progress, offers a realistic view of financial health. It is particularly beneficial during financial reviews and audits, showcasing your company’s ongoing stability.
An accounting technique used revenue recognition and expenses on long-term contracts. It is particularly common in industries involving large projects that span over multiple accounting periods. This method provides a more accurate financial picture of the project’s progress. It does not recognize all revenue and expenses at the end of the project.
Maintaining Documentations
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.
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.