Internal Audit for a Construction Company Checklist

At first, internal audit should establish broad expectations about presentation and data collection; this may involve holding an initial meeting with management to set these parameters.

Next, internal audit should identify and examine all project-related financial transactions in the general ledger that reflect owner expenditures, reconcile vendor payment histories and inspect samples of contractor and subcontractor labor attendance sheets.

1. Risk Assessment
An internal control risk assessment is the foundation of any construction audit, providing auditors with a way to evaluate controls from a holistic viewpoint and ascertain if a company is adequately protecting itself against fraud or other risks.

This includes reviewing the department’s organizational structure, delegation of authority and management reporting processes in order to identify accountability. Furthermore, this assessment includes looking at their philosophy and operating style, regular channels of communication as well as all internal risk evaluation processes.

This step involves assessing whether or not the department is adhering to regulatory requirements, thus mitigating legal risks and protecting against financial penalties. Furthermore, it’s critical that analysts examine and document all mitigating and compensating controls implemented for each process to provide greater context for audit recommendations that will ultimately make better sense to senior leaders.

2. Project Management
Project management is the formalized practice of overseeing projects with strategic value. Such endeavors usually require unique deliverables that require specific resources and timeframes in order to complete successfully.

Project audits inspect the internal controls that support project management. This typically includes reviewing processes that document project oversight as well as procedures used to capture and record non-payroll costs associated with construction activities.

An additional step should include reviewing the cost structure by interviewing staff and gathering documents such as meeting minutes, payment applications, inspection reports and invoices. This can significantly shorten the closeout period (when a project has been substantially completed and ready for payment), saving both business owners and contractors money in the process.

3. Contracts
An operational internal audit evaluates whether business processes align with mission statements, values and objectives as well as assesses whether staff have the requisite skills, knowledge and experience for performing any particular process.

An audit for construction projects typically entails inspecting:

Contractor performance relative to contract terms. Recognizing instances of noncompliance with project scope, milestone payments or the Davis-Bacon Act. Acquiring certified payrolls and verifying compliance with federal and state prevailing wage requirements.

Contract Type – Cost based contracts typically present greater risks and savings opportunities than standard ones, so review of contractor invoices to ensure they are correctly claiming allowable costs is essential in reconciling job costs against invoice. An online contract management platform facilitates easy negotiations while creating an audit trail of the entire negotiation process.

4. Financials
As part of this step, an auditor verifies the financial aspects of a project by verifying contractor costs against contracts and working with business owners to set an acceptable closeout period (from when a project has substantially completed until final payment of contractor invoices is due). This ensures contractors save money in interest charges while also reducing disputes over payment issues.

An auditor will also perform an audit on the project’s cost structure, ensure change orders have been processed appropriately, and review contractor invoices to ensure they accurately report labor and material costs. This reduces risk by eliminating opportunities for employees to steal items from jobsite or falsify expense reports.

5. Human Resources
An audit should also cover human resource areas of a business. This involves reviewing HR goals and strategies against organizational goals as well as company structures like number of managers/supervisors/full time employees vs part time employees as well as timeframe for temporary employment contracts as well as compliance with state regulations regarding data protection of employee records.

Fraud in the construction industry is an ongoing and pervasive issue, offering thieves opportunities to defraud companies through schemes and schemes. Internal controls are key in helping prevent fraudulent activity through strong policies and procedures in place. EasyLlama provides HIPAA compliant training courses for your company to meet compliance standards while protecting sensitive data – our online courses feature interactive quizzes and bite-size real-life example videos which work across any device!