and containing complete directions for the execution of all details of the system. When new conditions arise requiring modification of prior instructions, the changes should be issued in writing to all whose work is affected thereby. Each employee should have for his direct guidance instructions affecting the particular work to be performed by him. He will be assisted in more thoroughly understanding work he has to do if given an opportunity to read the general accounting scheme and most of the detailed instructions. He will then appreciate the various steps and channels through which work passes before it reaches him and what occurs after it leaves his desk.

A chart subdividing the accounting system into sections and showing in condensed form different duties assigned to each section is useful when prominently displayed in the accounting department. It aids accounting employees in becoming familiar with the character of the work handled by other employees and saves time whenever it is necessary to consult them.

Retention of Records

Very little will be written about transfer ledgers and files to which complete ledger sheets and old papers should be transferred. Inactive accounts and old papers should be promptly separated from active accounts and papers to avoid loss of time through needless daily handling. The accounts and papers should then be filed, properly labeled and indexed before being placed on shelves or in other filing compartments.

Careful attention should be given to the preparation of a schedule showing the length of time different classes of records and papers are to be retained and the periods which must elapse before they can be destroyed. In preparing the schedule, consideration should be given to any necessity for preserving papers until the expiration of the Statutes of Limitation.

CHAPTER XX

AUDITING CONSTRUCTION ACCOUNTS

Controlling Factors

The method of conducting an audit of construction accounts depends upon the time the accountant is engaged and by whom he is employed. If employed by or for the owner, the date of his employment has an important bearing on whether he can conduct a field audit during the progress of the work or whether the audit must be limited to an examination of the contractor's accounts after the work has been completed. The scope of the audit is determined also by the instructions of the owner employing the accountant.

If the contractor requests the audit, the examination and audit would cover all the accounts and records in the contractor's main and branch offices, subject to any limitation placed upon the scope of the audit by the contractor.

Limited Audit for Owner

The type of audit, which will be first discussed, will be based on the employment of the auditor by the owner and will assume that the request for the audit is either made after the work has been completed, or, if during the progress of the work, is limited to an examination of the contractor's accounts.

The construction of a job involves a great number of small detail items. The cost of making an audit that is complete in every detail and checks and verifies every item of disbursement is not always justified by the results obtained. A practical audit that would unearth any irregularities or conditions which would result in a reduction in the amount to be paid by the owner as the cost of construction would begin with obtaining the contract and any additional orders in the possession

of the owner or the architect, together with any memoranda either or both had of particular matters which had developed during the progress of the work.

After digesting the contract, additional orders, memoranda, etc., the auditor should schedule and analyze the cost shown by the contractor's books. A first analysis would divide the total cost into:

1. The amounts charged for weekly payrolls of laborers and mechanics.

2. The amounts included in the cost for work done by sub

contractors.

3. The amount charged for bulk material, such as brick, sand, cement, lumber, etc.

4. The amount charged for plant rental.

5. Remainder of cost.

6. The amount charged as the contractor's profit.

The total of these six items should equal the contractor's cost, plus his fee, and also be the total of his bill to the owner for the completed work. Separate schedules should be prepared for each of the six classifications.

PAYROLLS. The amounts of the payroll charges on the payroll schedule (taken from the books of account) should be verified, first, by comparison with the time sheets themselves, and, second, with the net withdrawals from the bank to pay them. The term "net withdrawals" means the sum originally drawn on pay-day, less any amounts returned as "overpayments," or wages never called for. "Overpayment" means such errors in figuring or entering time on a payroll as are developed before the wages are actually handed to workmen.

When the amounts scheduled are in agreement with the time sheets, and the payment of the payrolls is supported by actual withdrawals from the bank, very little further remains for an auditor to do under instructions limiting his work to an examination of the contractor's accounts. He should secure

a list of unclaimed wages for which no credit has been given to the owner. He should examine the time sheets for any wages which seem excessive, either because the rates paid are not in accordance with those prevailing in the locality in which the work is performed, or because of very large amounts paid as overtime, or because large individual salaries have been paid. None of these, however, is necessarily a basis of reducing a bill rendered by the contractor. The unclaimed wages may be a liability the contractor may have to discharge some day. If he has paid higher rates than those prevailing in the locality, or if considerable overtime has been allowed to workmen, his action may have resulted from unavoidable conditions. It may have been caused by delays for which the owner is responsible. It may represent good judgment when the element of time for completing the work is considered. The real check on payrolls is whether the time was actually earned by workmen and represents wages actually paid to them. These checks, however, can only be applied in a field audit that is continuous from the start to the completion of the work.

SUBCONTRACT WORK. An additional schedule should be prepared from an examination of all subcontracts entered into by the contractor, and should include the extra orders or deduction orders issued to them. This schedule should be verified for total charges for work done by subcontractors, first, with the contractor's accounts with subcontractors, second, with final statements prepared and submitted by the subcontractors, and third, with the total of the schedule representing amounts charged to cost of construction on general books. The payment of the amounts shown for each subcontractor should then be proved by an examination of the checks given the subcontractors by the contractor. Any differences between the total of such checks and the total of contract and extras should be investigated. A difference may consist of contra charges against a subcontractor for work done for him at the site.

The owner may have been charged for this work either on the weekly payrolls, or on material bills, and should therefore receive credit for the amount charged the subcontractor.

BULK MATERIAL. "Bulk material" is intended to cover the larger items of material purchases, such as brick, sand, cement, broken stone, certain sized lumber, etc. The outline of the schedule should be prepared prior to analyzing ledger cost and should be based on the purchase orders or agreements with the material dealers. When completed, it should show the total quantity of each class of material delivered by a material dealer and its value, as taken from the invoices. The same steps for verification of payment should be taken as were indicated above to be followed in vouching work done by subcontractors.

PLANT RENTAL. Plant rental is a charge which may be specifically covered in the contract with the owner. The schedule should show the amount included in the cost. The total charge should be verified in such manner as to determine definitely that it is in accordance with the terms of the con

tract.

REMAINDER OF COST. Whether there should be an exhaustive examination of the items on the schedule for the "remainder of the cost" depends upon what proportion of the total cost of the work is represented by the amount of this schedule. This statement is made, of course, subject to the auditor's not having discovered any irregularities to this stage of the audit.

If the outline, as above indicated, leaves a considerable relative balance for the "remainder," further lists of sufficient of the larger items therein should be prepared to reduce the "remainder" to a small relative figure. Any additional schedules prepared would have to be verified and payment proved, as indicated above for bulk material and subcontractors. A