Construction Audit Risk Based Planning

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Developing Ideal Audit and Control Programs for Construction Companies•

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Introduction Distinguishing roles and responsibilities More in-depth knowledge of industry Longer commitment of auditor “Audit as you go” vs. “Complete Project/Phase Audit” Advantages Disadvantages Independence Considerations Auditing by Walking Around Assumptions of anomalies Designing realistic audit objectives Audit Objectives Conclusion 2

 Distinguishing roles and responsibilities of construction auditors for effective risk assurance and governance  Designing realistic audit objectives: Gaining practical insights on inherent risks in the construction industry  Meeting board and stakeholder expectations: Tailoring audit and control programs for effective risk assurance and governance  Establishing independent internal audit department in construction

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What distinguishes Construction Auditors:

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More in-depth knowledge of industry Longer commitment of auditor “Audit as you go” vs. “Complete Project/Phase Audit” Independence consideration Auditing by Walking Around (ABWA) Assumptions of anomalies: i.e. Change Orders, Cost Recovery and Claims

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Understanding of Construction Project Lifecycle Understanding of value engineering concepts Understanding of Key Players in Construction Industry Knowledge of Construction Contracts (17 elements, FIDIC Rules and Devil in the Details)  Understanding of Financial and Management reporting framework (IFRIC 15, IAS 11 etc.)

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Small number of large projects Move along the construction phases Analyze information based on regular updates Constant liaison with various role players Frequency of investigations Observation of events (e.g. material delivery at site) Delays in project lead to delays in audit completion

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“Audit as you go” vs. “Complete Project/Phase Audit” Another distinguishing factor is the choice of methodology that can be adopted for construction audits.

Both methods have advantages and disadvantages

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Auditing after the project or as phases are complete

Audit as you go

1. The audit is concentrated and work can 1. Any overpayments noted can be quickly rectified. be divided between a team of auditors. 2. Easier to evaluate invoices when they are all together. 3. Auditor independence is seldom brought into question. 4. Auditor is not viewed as a hindrance or obstacle. 2. Takes fewer auditors as the review is spread out over the life of the project. 3. Easier to obtain documents while they are contemporary. 4. Observation is more reliable than recalled memory

5. Can fix before they happen (but need to ensure that the auditor does not become a decision maker). 6. Easier to observe and assess work in progress rather than to check on things after fact.

7. Easier to remedy control weaknesses and to tighten controls before a problem ensues. 8. Better and more open relationship that leads to frank disclosure of issues. Auditing is perceived as adding value.

Auditing after the project or as phases are complete
1. Have to rely on construction team members to remember what was done. 2. Opportunity cost of not getting problems solved as they happened. 3. May be too late to fix certain problems.

Audit as you go
1. Long commitment of a single auditor and project may be difficult to pass on to other auditors. 2. Double billings harder to detect when you look at bills one at a time. 3. Paper extensive. Organization is key to handling the amount of paper that comes in. 4. The construction team may not be welcome to the idea. They may feel more distance is needed.

4. Auditors cannot see some work done as it becomes “hidden” (MEP, HVAC works etc.).

5. Construction team may be unavailable or unwilling to devote necessary resources

5. If too many problems are noticed, auditing maybe accused of getting in the way or “witch hunting”.

Possible Pitfalls Pre-event Audits...
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