Table of Contents
1 Industry Background 01–.52
Nature and Significance of the Industry 02–.05
Features of the Business Environment 06–.37
Characteristics Common to Contractors 07–.08
Types of Contracts 09–.10
Contract Modifications and Changes 11–.12
Bonding and the Surety Underwriting Process 13–.19
Project Ownership and Rights of Lien 20–.21
Financing Considerations 22–.30
Joint Ventures 31–.34
Reporting for Financial and Income Tax Purposes 35–.37
Typical Industry Operations 38–.50
Preparing Cost Estimates and Bids 39–.45
Entering Into the Contract 46
Planning and Initiating the Project 47–.50
Variations in Size and Methods of Operation 51
Project Management 52
2 Accounting for Performance of Construction–Type Contracts 01–.36
Basic Accounting Policy for Contracts 03–.08
Percentage–of–Completion Method 04–.06
Completed–Contract Method 07–.08
Determining the Profit Center 09
Measuring the Extent of Progress Toward Completion 10–.12
Income Determination Revenue 13–.20
Impact of Change Orders on Revenue 14–.18
Impact of Claims on Revenue 19–.20
Income Determination Cost Elements 21–.28
Accounting for Contract Costs 22
Cost Attributable to Claims 23
Precontract Costs 24–.25
Cost Adjustments for Back Charges 26–.27
Estimated Cost to Complete 28
Computation of Earned Income 29
Revised Estimates 30
Provisions for Anticipated Losses on Contracts 31
Selecting a Measure of Extent of Progress 32
Costs of Equipment and Small Tools 33–.36
3 Accounting for and Reporting Investments in Construction Joint Ventures 01–.45
Joint Venture Accounting 03–.40
Accounting Methods 03–.08
Capital Contributions to Joint Ventures and Initial Measurement of Investments in Joint Ventures 09–.16
Sales to a Venture 17–.20
Subsequent Measurement and Presentation of Investments in Joint Ventures 21–.40
Determining Venturers Percentage Ownership 41
Conforming the Accounting Principles of the Venture 42
Losses in Excess of a Venturer s Investment, Loans, and Advances 43
Disclosures in a Venturer s Financial Statements 44–.45
4 Financial Reporting by Affiliated Entities 01–.11
Combined Financial Statements 04–.06
Presentation of Separate Financial Statements of Members of an Affiliated Group 07–.10
Presentation of Separate Financial Statements of Members of an Affiliated Group That Constitute an Economic Unit 11
5 Other Accounting Considerations 01–.138
Definition of a Public Business Entity 01
Fair Value Measurements 02–.50
Definition of Fair Value 05–.12
Valuation Techniques 13–.15
Present Value Techniques 16–.18
The Fair Value Hierarchy 19–.22
Application of Fair Value Measurements 23–.31
Additional Guidance For Fair Value Measurement in Special Circumstances 32–.36
Disclosures 37–.46
Fair Value Option 47–.50
Accounting for Certain Receive–Variable, Pay–Fixed Interest Rate Swaps 51–.55
Disclosure 55
Service Concession Arrangements 56–.61
Discontinued Operations 62–.70
Disposal Group Classified as Held for Sale 66–.68
Disclosure 69–.70
Impairment of Long–Lived Assets 71–.104
Property, Plant, and Equipment 71–.76
Intangibles Goodwill 77–.86
Accounting Alternative 87–.101
Intangibles Other 102–.104
Accounting for Identifiable Intangible Assets in a Business Combination 105–.109
Accounting Alternative 105–.109
Business Combinations Pushdown Accounting 110–.115
Asset Retirement Obligations 116–.122
Mandatorily Redeemable Stock 123–.124
Presentation of an Unrecognized Tax Benefit When a Tax Carryforward Exists 125–.126
Differences Between Financial Accounting and Income Tax Accounting 127–.134
Accounting Methods Acceptable for Income Tax Purposes 135–.138
Cash Method 136–.137
Accrual Method 138
6 Financial Statement Presentation 01–.60
Balance Sheet Classification 01–.05
Guidelines for Classified Balance Sheets 06–.18
General Guidance 07–.11
Retentions Receivable and Payable 12–.14
Investments in Construction Joint Ventures 15
Equipment 16
Liabilities 17
Deferred Income Taxes 18
Offsetting or Netting Amounts 19–.24
Disclosures in Financial Statements 25–.46
Significant Accounting Policies 26
Revised Estimates 27
Backlog on Existing Contracts 28
Receivables 29–.35
Going Concern 36–.46
Disclosures of Certain Significant Risks and Uncertainties 47–.48
Accounting for Weather Derivatives 49
Disclosures of Multiemployer Pension Plans 50–.60
Multiemployer Plans That Provide Pension Benefits 51–.58
Multiemployer Plans That Provide Postretirement Benefits Other Than Pensions 59
Sample Disclosure for Plans That Provide Pension Benefits 60
7 Auditing Within the Construction Industry 01–.08
Audit Focus 02–.07
Scope of Auditing Guidance Included in This Guide 08
8 Controls in the Construction Industry 01–.29
Project Administration and Contract Evaluation 08–.10
Job Site Accounting and Controls 11–.14
Billing Procedures 15–.18
Contract Costs 19–.21
Contract Revenues 22–.23
Construction Equipment 24–.25
Claims, Extras, and Back Charges 26
Joint Ventures 27
Internal Audit Function 28–.29
9 Planning the Audit, Assessing and Responding to Audit Risk, and Additional Auditing Considerations 01–.103
Scope of This Chapter 01–.02
Planning and Other Auditing Considerations 03–.34
Planning the Audit 04–.06
Auditor s Communication With Those Charged With Governance 07–.21
Audit Risk 22–.26
Materiality 27–.34
Use of Assertions in Obtaining Audit Evidence 35–.36
Understanding the Entity, Its Environment, and Its Internal Control 37–.62
Risk Assessment Procedures 40–.41
Discussion Among the Audit Team 42
Understanding the Entity and Its Environment 43–.45
Understanding of Internal Control 46–.62
Assessment of Risks of Material Misstatement and the Design of Further Audit Procedures 63–.85
Assessing the Risks of Material Misstatement 64–.69
Designing and Performing Further Audit Procedures 70–.85
Evaluating Misstatements 86–.88
Audit Documentation 89–.98
Identifying and Evaluating Control Deficiencies 99–.103
10 Major Auditing Procedures for Contractors 01–.65
Job Site Visits and Interim Audit Procedures 02–.07
Accounts Receivable 08–.26
Unbilled Receivables 12
Retentions 13–.14
Unapproved Change Orders, Extras, Claims, and Back Charges 15–.18
Contract Scope Changes 19
Contract Guarantees and Cancellation or Postponement Provisions 20–.24
Collectibility 25–.26
Liabilities Related to Contracts 27–.31
Contract Costs 32–.38
Costs Incurred to Date 35
Estimated Cost to Complete 36–.38
Income Recognition 39–.59
Evaluating the Acceptability of Income Recognition Methods 42–.48
The Percentage–of–Completion Method 49–.51
The Completed–Contract Method 52–.53
Combining and Segmenting 54
Review of Earned Revenue 55–.57
Analysis of Gross Profit Margins 58–.59
Review of Backlog Information on Signed Contracts and Letters of Intent 60–.64
Management Representations 65
11 Other Audit Considerations 01–.47
Affiliated Entities 02–.11
Participation in Joint Ventures 03–.09
Auditing Affiliated Entities and Related Party Transactions 10–.11
Participation in a Group Audit 12–.14
Capitalization and Cash Flow 15–.17
Types of Auditor s Reports on Financial Statements 18
Going Concern Considerations 19–.24
Supplementary Information in Relation to the Financial Statements as a Whole 25–.35
Additional Considerations 34–.35
Auditor s Communications Related to Internal Control Matters 36
Legal and Regulatory Considerations 37–.47
State Statutes Affecting Construction Contractors 37
The Auditor s Consideration of Compliance With Laws and Regulations 38–.40
Reporting of Identified or Suspected Noncompliance 41–.44
Governmental Prequalification Reporting 45–.47
12 Consideration of Fraud in a Financial Statement 01–.38
The Importance of Exercising Professional Skepticism 03
Discussion Among Engagement Personnel Regarding the Risks of Material Misstatement Due to Fraud 04–.09
Obtaining the Information Needed to Identify the Risks of Material Misstatement Due to Fraud 10–.13
Considering Fraud Risk Factors 12–.13
Identifying Risks That May Result in a Material Misstatement Due to Fraud 14–.23
A Presumption That Improper Revenue Recognition Is a Fraud Risk 16–.22
Key Estimates 23
Assessing the Identified Risks After Taking Into Account an Evaluation of the Entity s Programs and Controls That Address the Risks 24
Responding to the Results of the Assessment 25–.28
Evaluating Audit Evidence 29–.30
Responding to Misstatements That May Be the Result of Fraud 31–.34
Communicating About Possible Fraud to Management, Those Charged With Governance, and Others 35
Documenting the Auditor s Consideration of Fraud 36–.38
Appendix
A The New Revenue Recognition Standard: FASB ASC 606
B The New Leases Standard: FASB ASU No. 2016–02
C Overview of Statements on Quality Control Standards
D Illustrations of Segmenting Criteria
E Computing Income Earned Under the Percentage–of–Completion Method
F Examples of Computation of Income Earned
G Example of Change in Accounting Estimate
H Sample Financial Statements Percentage Contractors, Inc.
I Reporting on Supplementary Information in Relation to the Financial Statements as a Whole
J Sample Financial Statements Completed Contractor, Inc.
K The Auditor s Report
L Information Sources
M Schedule of Changes Made to the Text From the Previous Edition
Glossary
Index of Pronouncements andOther Technical Guidance
Subject Index
