Construction Industry Sustainability Audit and Risk Management

We assess the work performed at the location and the centralized office. We cover following areas:-  

  1. Selection of a Project

Incredibly, many construction projects are initiated without even the most basic cost-benefit analysis or feasibility study. Documented evidence justifying the project should be submitted 

We determine whether the project has been evaluated before being accepted by the entity, appropriate approvals have been obtained and ensure that the risk on accepting the project has been properly evaluated by the management.

A few Analytical Procedures that can be performed include:

  • Evaluation of project wise profitability ratio of projects completed during the period.
  • Evaluation of budgeted profitability of all new projects approved.
  1. Approvals for Registration

The entity needs to liaison from various government authorities for approvals right from the start of the construction project. The building constructed without sanctions or deviated more than 5 per cent from approved plan attracts penalty, and authorities have right to demolish the building without any prior notice.

  1. Procurement

Procurement is the most essential part of an entity operating in the construction industry. It refers to the items/services procured by the concern in order to enable it to provide its services. For the construction industry, procurement usually consists of cement, iron, steel, sand, bricks and gravel. Apart from the above mentioned, purchase also includes purchase of services and purchases of labour.

We review the following processes and make the observations, if any:

  • Vendor Management
  • Material/service requisition process
  • Purchase order
  • Receipt of Material
  • Supply Chain Management  
  • Cash purchases at site
  • Other services  
  • Scrap identification and disposal  
  1. Material Handling and Storage

The efficient handling and storing of materials are vital to industry. In addition to raw materials, these operations provide a continuous flow of parts and assemblies through the workplace and ensure that materials are available when needed. Unfortunately, the improper handling and storing of materials often result in costly injuries. It has generally been observed that storage of materials has not been effective in many small construction entities.

  1. Fixed Assets

Fixed assets in the case of an entity operating in the construction industry normally includes items such as, land and buildings, plant and machinery, furniture, fixtures and fittings, motor vehicles, office equipment, computers, etc. Acquisition, transfer and disposal of fixed assets should be done in accordance with the prescribed accounting procedures. There are three important processes related to Fixed Assets:

We check the following to evaluate the internal control systems with regard to fixed assets:

  • Whether there is proper system of segregation of duties with regard to:
  • Review the entity’s procedure to identify the asset requirement.
  • Review the entity’s procedure for deciding the asset procurement or hiring. In case of procurement, on full payment or hypothetication.
  • Whether the particular capital expenditure is included in capital budgeting? If not, whether the necessary management approvals been obtained for execution?
  • Whether there is a well laid down procedure for acquisition of fixed assets with regard to invitation of quotations, selection of suppliers, approval of prices, payment terms, technical specifications and delivery schedule?
  • Whether the necessary approvals from appropriate level of authority been obtained for transfer of fixed asset from one location to an other location?
  • Whether the date of installation is rightly identified and recorded?
  1. Cash and Bank

 Cash and Bank plays a vital role for any business entrepreneur. The management of this liquid asset speaks about the ethics of an entity. With all kinds of vigilant measures implemented to safeguard these current assets, yet loop holes, will be there. Bank transactions can be more regularized than cash transactions, as the risks involved in cash is comparatively high.

We review the following important aspects:

  • Review the effectiveness of entity’s policy of delegation of authority over cash and bank receipts and payments.
  • Ensure whether the entity’s policy is strictly implemented and violations, if any, have been brought to the senior management attention and got ratified.  
  • Review maintenance of documentation
  • Ensure that Bank reconciliation statements were prepared regularly and all items have been properly reconciled.
  • Ensure compliance with The Stamp Act, 1899 for stamping of receipts in excess of the prescribed limit.  

 We can perform various analytical procedures such as following:

  • Average Cash Utilization vs Average Cash Maintained
  • Cash Insurance vs Cash Balance
  1. Revenue Recognition 

We refer to Accounting Standard (AS) 7, “Construction Contracts”, issued by the Institute of Chartered Accountants of India, for detailed understanding of accounting for construction contracts and accounting treatment of revenue and costs associated with construction contracts.

  1. Payroll

We through our audit procedures is find out whether any fictitious employees (ghost workers) are employed in the entity. The procedures performed could be in the form of inquiries and discussions with the management, verification of employee records, verification of bank records for testing disbursement, etc.

We review the following aspects of payroll process:

  • Review the HR manual to check the HR policies with regard to following:
  • Whether proper documentation has been maintained for employee’s personal information, joining information along with compensation details.  
  • Whether the registrations with PF, ESI, professional tax and other statutory authorities have been done and properly renewed.  
  • Whether the reimbursements payments are made as per approved policy.
  • Whether recovery and remittance of PF, ESI and Professional Tax from employees is made regularly.
  • Check the calculation, collecting and remitting of income tax from employees, calculation of settlement claims, and perquisites and payments.
  • Whether the procedure adopted and documentation maintained for employees attendance and leave claims is adequate.
  • Ensure that the leave encashment and leave travel allowance payment is as per the approved policy.
  • Check that the provision for gratuity is done correctly.
  • Check the computations and approvals for incentives for employees.
  • We perform additional analytical procedures over a period of time and compare them for ascertaining any inconsistency, such as following:
  1. Operating Costs 

The significant operating costs for any entity operating in this sector include the following:

  • Hiring Expenses
  • Repair and Maintenance
  • Logistics

We verify the systems, processes, controls, procedures built within the system so as enable smooth, proper and order movement of employees to and fro from the work place. There should also be proper controls for usage of logistics for purpose of business only. We perform various procedures such as, cross checking logistics records with attendance registers, verification of in time and out time records with logistic records, cost per employee travelled, etc.

We also perform following additional analytical procedures over a period of time and compare them for ascertaining any inconsistency.

  • Operating Cost to Revenue (Project-wise)
  • Variable Cost per Man Hour per Project
  • Maintenance Cost to Value of Fixed Assets
  1. Running Account Bill (RAB)

Running Account Bill is a unique feature in the construction industry. It is nothing but the cumulative amount billed to the client in accordance with the terms of the contract with the client. The entity bills the client on a periodic basis based on the milestones achieved as specified in the contract.

Generally, at the time of initiation of the contract, the client makes an advance termed as Mobilisation Advance in order to enable the entity to commence the scheduled contract. The said Mobilisation Advance is adjusted against RAB raised by the entity.  

The client makes the payment for the incremental work certified as adjusted by Mobilisation Advance, Provisional Acceptance and Final Acceptance.

  1. Disputed Claims

Claims in case of civil construction could be claims against the carriers for losses in transit, claims against the clients for non-fulfilment of contractual obligations by them, claims against suppliers, insurance companies and customs authorities for any loss or destruction of materials, equipments and duty refunds, etc. Such claims may or may not be accounted for.

We perform with respect to disputed claims are given below:-

  • Does the entity have an approved policy for ascertaining losses giving rise to claims from contingent asset complete in all aspects?
  • Are the claims properly lodged and registered?
  • Does the  entity  have  a  proper method of valuation of claims and is it supported with the corroborative evidence?
  • Have proper follow up action been taken for the realisation of over due claims and have the claims that are irrecoverable been  systematically written off?
  1. Compliance with Standards and Regulations

We verify the compliance of these statutes and report thereon as a part of his internal audit. Also, we verify registration with various statutory authorities and renewal of the same as a part of his audit procedures.

We consistently provide product that meets customer and applicable regulatory requirements, and aims to enhance customer satisfaction through the effective application of the system, including processes for continual improvement of the system and the assurance of conformity to customer and applicable regulatory requirements.