Question

(b) During the year ended 30 June Year 6, Nungua Ltd acquired freehold land at a cost of
GHC 500,000 and built a distribution centre on it, using a mixture of subcontract and own
labour. The distribution centre cost a total of GHC 200,000 to construct. The construction was
completed by the end of April.

Required:

Set out the audit objectives in respect of the above and the substantive procedures you would
carry out to achieve those objectives.

Answer 1

Capital construction projects can create significant exposure for organizations that are unaware of the risks associated with excessive cost, project delays and quality issues. The  detailed audit strategies to address the risk and exposure in each phase of the life cycle (Planning/Design, Bid/ Procurement, Construction, and Close-out) – with emphasis on the construction project delivery and compensation methodologies.

Why Audit Construction Contracts?

• List and discuss the reasons and basis for auditing construction contracts.
• Discuss the objectives of a construction audit.
• Identify some of the controls that should be present in a construction project.

The Construction Life Cycle

Define the four stages of the construction life cycle giving some of the associated risks for each stage and the possible controls that could be in place.

• Planning/Program & Design
• Bid/Procurement
• Construction
• Close-Out

Audit Planning :

• List the different types of contracts that are used for construction projects.
• List the risk and exposure specific to each type of contract.
• Create a process and the rationale for selecting projects and/or activities to audit.

Issues Related to the Use of Sub-Contractors :

• List issues and potential concerns with the use of subcontractors.
• Establish issues that are unique to DBE.
• Develop audit strategies and approach

Safety and Insurance Related Issues

• List areas of potential safety concern.
• List insurance related issue for each concern.
• Develop audit strategies and approach to mitigate risk in the safety and insurance area...

Construction audit procedures extend beyond a cursory check to ensure guidelines and specifications are followed to include pre-construction and planning phase reviews. A full audit provides structured reviews throughout the construction process while focusing heavily on keeping project costs within budget. An added element of a construction audit checklist is risk management planning, which includes monitoring invoices, insuring industry best practices are followed and a strong element of financial control. In fact, managing risk is the key way project auditors keep a project on budget as increased risks can quickly lead to skyrocketing costs.

Construction Audit Procedures :

The procedures used in an audit of your construction process largely revolve around the scope of services and timeframe you engaged the auditing firm to assess. After the pre-construction phase, auditors continue to monitor billing and construction costs to make sure the project is moving forward according to plan and on budget. The auditor may also assess the actual work site and find ways for the building process to be streamlined or pivoted to address outside factors, such as weather issues or a problem with delays due to compliance with municipal building codes. In many instances, your contractor primarily directs the construction site and would implement changes, but an outside auditor helps verify engineers and contractors are making the right decisions when redirecting efforts to an area that can lead to a higher price tag.

Structural Reviews on Projects

A construction audit look primarily at your financials and considers construction elements and safety as it relates to the monetary elements of a project. This can include inspecting materials and completed areas of a build to ensure all elements of a contract are being upheld. For example, an examination of materials could reveal that a cheaper type of wood was utilized for beams than specified in the contract and billing or that a delivery ramp was not built with the incline necessary for effective loading and unloading of merchandise. More thorough reviews of the technical elements of construction are led by independent inspectors before a municipal code enforcement officer makes final inspections for licensing purposes.

The main stratagies required for the Nungua Ltd, when deailing with subcontractors -

1. Put it in writing. Clearly define roles and responsibilities for both the subcontractor and your company.
2. Train for customer service. Many subs lack the benefit of your experience with successful customer service.
3. Pay properly.
4. Evaluate.
5. Take precautions.