What preparation actually means
An audit does not test whether your business is well run. It tests whether the financial statements are supported by evidence. Preparation is the work of making sure every material balance can be tied to a schedule, and every schedule can be tied to a document.
Contractors who prepare well usually spend less on fieldwork, receive fewer adjusting entries, and finish sooner. Contractors who do not prepare end up doing the same work anyway, under deadline pressure, at a higher cost.
Bank reconciliations
Reconcile every bank, credit card, and merchant account through the period end. Keep the reconciliation report, the statement and an explanation for every outstanding item. Old outstanding checks and unexplained reconciling items are among the first things questioned.
Balance sheet reconciliation
Every balance sheet account needs a supporting schedule that agrees to the trial balance. This is the single highest value preparation task. If an account cannot be explained, it will be tested more heavily.
- Cash and restricted cash
- Receivables and allowance for doubtful accounts
- Retainage receivable and retainage payable
- Prepaid expenses
- Fixed assets and accumulated depreciation
- Accrued liabilities
- Deferred revenue, over and under billings
- Clearing, suspense and undeposited funds
- Equity, distributions and shareholder accounts
Accounts receivable
Provide an aging that agrees to the general ledger, plus subsequent cash receipts showing what has been collected after period end. Identify disputed balances, insurance claims still in process, and amounts you do not expect to collect. Be ready for confirmations to be sent to significant customers.
Accounts payable
Provide an aging that agrees to the ledger and a search for unrecorded liabilities: invoices received after period end that relate to work performed before it. Unrecorded subcontractor and material invoices are one of the most common contractor audit adjustments.
Debt schedules
List every loan, note, line of credit and financing arrangement with balances, rates, payment terms, maturity, collateral and covenants. Attach lender statements or amortization schedules and confirm the current versus long term split at period end.
Fixed assets
Maintain a fixed asset register showing acquisition date, cost, useful life, method, current year depreciation and accumulated depreciation. Support additions with invoices and document disposals, including trade ins on vehicles and equipment, which frequently go unrecorded.
Lease schedules
Gather every lease agreement for property, vehicles and equipment. Under current lease accounting standards, the classification and the resulting right of use asset and lease liability depend on the contract terms, so the underlying documents matter as much as the payment history.
Payroll related balances
Reconcile wages, payroll taxes, withholdings, accrued paid time off, workers compensation accruals and benefit liabilities to payroll reports and filed returns. Where payroll posts from an outside provider, confirm the journal entry maps to the correct accounts and that labor reaches jobs rather than sitting in a single overhead line.
Opening balances
If this is a first year engagement, or if the file was migrated between accounting systems, opening balances will be examined. Be prepared to show how the prior period ending balances became the current period opening balances, and to explain any conversion adjustments.
Job records
Assemble contracts, approved change orders, billing schedules, job cost detail and the job list reconciled to revenue. Job level records should tie back to the general ledger. When they do not, the audit expands, because the revenue figure itself becomes a question.
Work in progress
Where contracts span periods, prepare a WIP schedule with contract value, approved change orders, cost to date, estimated cost to complete, percentage complete, revenue earned and over or under billings. Document how estimates to complete were developed and who approved them. Estimate support is scrutinized closely because it drives reported revenue.
Supporting schedules and documentation
Build a single organized package rather than answering requests one at a time. A prepared by client list, indexed and cross referenced to the trial balance, dramatically reduces back and forth.
- Trial balance and general ledger detail for the period
- Signed contracts and change orders
- Major vendor and subcontractor invoices
- Insurance policies and certificates
- Bonding correspondence where applicable
- Board or owner approvals for significant transactions
- Related party agreements and balances
Historical cleanup
If prior periods were never reconciled, cleanup should happen before the engagement begins, not during it. Correcting several years of accumulated issues while an auditor is waiting is the most expensive way to do the work, and it puts the timetable outside your control.
What commonly creates audit friction
The same handful of issues cause most contractor audit delays:
- Job reports that do not agree with the general ledger
- Revenue recognized without documented estimates to complete
- Payroll posted in a single entry with no labor allocation to jobs
- Deposits recorded net of processor fees, so revenue is understated
- Unrecorded subcontractor and material liabilities at period end
- Balance sheet accounts with no supporting schedule
- Missing or unsigned contracts and change orders
- Related party transactions that were never formally documented
Important disclosure
Contractor Plus Books is not a CPA firm and does not perform audits, reviews, compilations or other attestation engagements. We prepare the underlying accounting records, reconciliations and supporting schedules so that your CPA can perform their engagement efficiently.
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