point will always be reached when the total of the item remaining in the "remainder of cost" does not justify the time required to make a full and complete audit of each and every small item. A careful test audit of a number of the individual items is sufficient to discover any irregularity. GENERAL. In the examination conducted at the contractor's office, particular attention should be paid to check indorsements, entry of checks on the cash book, and to any quantity rebates which the contractor may have secured, or may be entitled to secure, at some future date. These debates may arise in whole or in part because of materials supplied to the particular job being audited. The proper return of and credit for empty cement bags, drums, reels, etc., should be checked. Losses do occur due to the impossibility of returning all containers, but the proportion of those lost should be determined. Excess costs resulting from default by material dealers should be investigated. Any statement of cost submitted by the contractor must, of course, agree with the schedules prepared by the auditor. When a difference exists between the auditor and the contractor as to interpretation of clauses in the contract, a separate schedule should be prepared showing details and total involved. Field Audit for Owner If the audit is conducted during the progress of the job, a field check should also be made. This field check requires men experienced in construction work to verify workmen's time and to check deliveries of material, etc. This type of audit is not often adopted but is recommended. The auditor's representative should then approve both the contractor's payrolls when prepared and his reports of material deliveries and obtain copies for his files. No checking procedure should be established which will interfere with the payment of wages to workmen or the payment of invoices to vendors or create the im pression on the job that it is "percentage work." Delays may compel the contractor to pay waiting time to the workmen, or cause him to lose cash discounts. The field work can be done in part by the owner's or by the architect's representative in the absence of an auditing staff to check every item of detail. Audit for the Contractor If the auditor is engaged by the contractor to examine his books and is required to make a detailed audit, he should verify all receipts and disbursements, trial balances, etc. The steps covering these do not materially differ from any other audit. The first step in the audit, of course, is the verification of cash and securities on hand and the obtaining of trial balances, balance sheets, and inventories. Detail procedure mentioned in connection with an audit for an owner should be followed in so far as it refers to proof of payments, etc. In the verification of cash, particular attention should be paid to the indorsements on canceled checks returned by the bank and the dates and reasons for outstanding checks. The correctness of disbursements to subcontractors is mainly determined by an examination of the subcontractors' accounts. The contracts with them should be examined and the basis and the amounts to be paid them ascertained. The auditor must see that payments made to any individual subcontractor are strictly in accordance with the terms of the contract, particularly when surety bonds have been furnished. He should see that contractor has definite protection against risks resulting from the work being done by subcontractors. Attention should be given also to the steps taken prior to making final payments to subcontractors. These steps depend upon the clauses in the contracts with subcontractors and any special requirements of the architect or owner or the contractor and upon the lien laws. Consideration must be given to claims against the subcontractors for unpaid accounts owing by them for labor, material, and services furnished by others. Payments to material dealers for bulk material should be verified by an examination of the purchase agreements with them. Care should be taken to ascertain whether any material dealers defaulted in deliveries at any time, requiring the contractor to purchase the material from someone else at a higher price. If such instances exist, the question of whether the material dealer who defaulted should be charged for the excess should be determined. The auditor should examine the condition of accounts receivable to ascertain which may be doubtful of collection. He should assure himself that the accounts payable are properly stated, with particular reference to any claims by subcontractors, material dealers, etc., which may not appear in the accounting records and files. Failure to do this might result in amounts not included in auditor's schedules being sufficient seriously to impair and perhaps offset the profit shown by him for the period. The contractor may have unadjusted claims against an owner. A thorough investigation should be made to determine the amount which can safely be included as an asset. All inventories should be verified. Before arriving at the profit and loss figures, the auditor should consult a technical man in the contractor's organization who is familiar with the condition of the field work of all contracts. He should furnish the auditor with a detailed statement, listing and valuing the work still to be performed on each contract. This schedule should be examined and verified by the contractor. The auditor's report should possibly include a reference to the schedule. Errors in the valuation of work still to be performed may wipe out the entire profit figured by the auditor. The intelligent and accurate preparation of this information requires the experience of a technical man. It is not an auditor's function. |