Construction Audit Procedures: Quiz and Flashcards

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Questions and Answers

What is the main focus of Chapter 4 in the College of Business Studies curriculum?

Learning about marketing strategies in the real estate sector

Understanding the nature and background of Construction & Real Estate as a Specialized Industry (correct)

Exploring international business practices

Acquiring knowledge about general business principles

Why does the real estate industry maintain stability despite economic fluctuations?

As a result of limited property development opportunities

Due to a decrease in demand for homes and commercial spaces

Because of the constant demand for homes and commercial spaces (correct)

Owing to the pandemic's negative impact on the industry

What impact did lockdown measures have on the construction sector during the COVID-19 pandemic?

Accelerated construction projects

Weakened demand for office and high-end residential spaces (correct)

Led to an overall improvement in construction efficiency

Increased demand for commercial properties

Why is the construction and real estate sector in the Philippines considered resilient amid the COVID-19 pandemic?

Potential to serve as a catalyst for national recovery Signup and view all the answers

What is one aspect covered in Chapter 4 that helps students identify audit considerations specific to construction contracts?

Industry background and auditing procedures Signup and view all the answers

In what areas does the real estate industry encompass according to the text?

Various facets including development, leasing, appraisal, marketing, and management Signup and view all the answers

What is the primary benefit of a unit price contract according to the text?

The owner can easily compare the price of each unit with the total cost of the project Signup and view all the answers

What is the primary risk for the owner in a time and materials contract?

The contractor may intentionally increase the costs and time to maximize their profits Signup and view all the answers

What is the purpose of a bid bond in a construction contract?

To guarantee the contractor will sign the contract if awarded the project Signup and view all the answers

What is a key benefit of transparency in a unit price contract?

It enables the owner to better understand the contractor's costs and profit margins Signup and view all the answers

Which type of contract places the most risk on the owner?

Time and materials contract Signup and view all the answers

What is the primary purpose of contract modifications and changes in construction projects?

To address unforeseen circumstances or changes in scope Signup and view all the answers

What is the purpose of preparing preliminary plans and cost estimates for a construction project?

To determine the feasibility of the project Signup and view all the answers

Which of the following is NOT mentioned as a prequalification requirement for bidders on a construction project?

Membership in a professional organization Signup and view all the answers

What types of bonds may be required from bidders on a construction project?

Bid bond, payment bond, and performance bond Signup and view all the answers

What is the purpose of the contractor's estimating department in preparing a bid for a construction project?

To estimate the quantities of materials, labor, and equipment needed Signup and view all the answers

Which of the following statements about income tax reporting methods used by contractors is TRUE?

Some contractors defer income recognition until contracts are completed Signup and view all the answers

What is the primary purpose of financial statements prepared by construction contractors?

To obtain financing and bonding for projects Signup and view all the answers

What is the primary consideration for the auditor in the audit of a construction entity's financial statements?

To assess the risks of material misstatement at the overall financial statement level and the assertion level Signup and view all the answers

Which of the following areas would NOT normally receive particular attention in the audits of the financial statements of construction contractors?

The entity's revenue recognition policies Signup and view all the answers

Why must the auditor of a construction entity be thoroughly familiar with the criteria applied to the entity's accounting estimates?

All of the above Signup and view all the answers

Which of the following is NOT mentioned as a relevant factor that the auditor should consider in the audits of construction contractors?

The entity's revenue recognition policies Signup and view all the answers

What is the degree of estimation uncertainty and the risk of material misstatement affected by?

The nature and reliability of information available to management to support the accounting estimates Signup and view all the answers

What is the auditor's primary responsibility in the audit of a construction entity's financial statements?

To assess the risks of material misstatement through understanding the entity and its environment, including its internal control Signup and view all the answers

Which of the following standards provides guidance specific to contractors in the construction industry?

FASB ASC 910 - Contractors Signup and view all the answers

According to FASB ASC 605-35-25-1, which of the following methods should be chosen based on a careful evaluation of circumstances?

Either percentage-of-completion or completed contract method Signup and view all the answers

Which method recognizes revenue and expenses based on the proportion of work completed?

Percentage-of-completion method Signup and view all the answers

When is the percentage-of-completion method used according to the given information?

When estimates are reasonably dependable and specific conditions are met Signup and view all the answers

Which method recognizes revenue and expenses only upon completion of the contract?

Completed contract method Signup and view all the answers

Which of the following standards provides principles for recognizing revenue from contracts with customers, including construction contracts?

IFRS 15 - Revenue from Contracts with Customers Signup and view all the answers

Study Notes

Overview of Construction Industry

The real estate industry includes various facets of property management, such as development, leasing, appraisal, marketing, and commercial/residential property management.
The industry remains stable despite economic fluctuations due to the constant demand for homes and commercial spaces.
The construction and real estate sector in the Philippines has shown resilience during the COVID-19 pandemic, potentially serving as a catalyst for national recovery.

Types of Contracts

Time and Materials Contracts: The owner is required to pay the contractor for any unexpected costs, changes, or time overruns that take place over the course of the project, costing them more than they initially planned for.
Unit Price Contracts: Remeasurement allows the owner to compare the price of each unit with the total cost of the project, providing transparency to all parties involved.

Contract Modifications and Changes

Contracts may undergo modifications, including penalties and incentives related to factors such as completion dates, plant capacity, and cost estimates.

Bonding and Surety Underwriting Process

Contractors may be required to post bid bonds or make deposits before submitting bids, typically equal to a percentage of the total project cost estimated in the feasibility study.
Bid Bond: The contractor and surety promise the owner that if the contractor who is awarded the contract does not sign the contract or cannot provide performance bond, the surety will pay, subject to the maximum bid bond.

Income Tax Reporting and Financial Reporting

Some contractors use income tax reporting methods aligned with estimating uncertainties, such as deferring income recognition until contracts complete or using the modified accrual basis or cash basis.
Financial statements of construction contractors are commonly used for credit and bonding purposes.

Preparing Cost Estimates and Bids

When a customer decides to construct a new facility, an architect or engineer may be engaged to prepare preliminary plans and cost estimates for the project.
Bidders may be limited to those who can meet specified prequalification standards regarding financial capacity, experience, and availability of specialized equipment.

Auditing Construction Contracts

A contractor's work in progress schedule is based on a substantial amount of estimations of contract price and costs.
The auditor of a construction entity must be thoroughly familiar with the criteria that must be applied to those estimates.
The auditor's primary consideration is to obtain a sufficient understanding of the entity to assess the risks of material misstatement at both the overall financial statement level and the assertion level.

Accounting for Performance of Construction Type Contracts

FASB ASC 910 provides guidance specific to contractors in the construction industry.
PAS 11 provides principles for recognizing revenue and costs associated with construction contracts.
PFRS 15 provides principles for recognizing revenue from contracts with customers, including construction contracts.
FASB ASC 605-35-25-1 clarifies that the choice between the percentage-of-completion and completed contract methods should be based on careful evaluation of circumstances.

Percentage of Completion Method vs. Completed Contract Method

Percentage of Completion Method: Recognizes revenue and expenses based on the proportion of work completed.
Completed Contract Method: Recognizes revenue and expenses only upon completion of the contract.

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Description

Learn about the nature and background of the Construction & Real Estate industry as a specialized sector and gain insights into planning and performing audit procedures for financial statements. Get ready to enhance your knowledge in auditing specialized industries.

Audit of Construction Industry Chapter Overview