Construction Contract Analysis

Based on the Financial Reporting System (FRS) 111, construction contracts has been defined as a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. Construction contracts can be divided into two which were fixed cost contracts and cost plus contracts. Fixed cost contracts are agreement between contractor and customer being made which based on a fixed price or a fixed rate per unit. Meanwhile, cost plus contracts is based on the cost incurred of the construction and a specific percentage of the cost of the project or a fixed fee as the contractor’s profit.

Contract revenue

The method used to determine outcome would be the percentage of completion method. When the outcome can be estimated reliably at the reporting date then the contract revenue and costs will be recognized as revenue and expenses incurred. For fixed cost contracts, the outcome can only be reliable if the contract revenue can be measured reliable, probable, costs to complete and stage of completion can be identified and measured. Meanwhile, for cost plus contract the outcome of the contract can be estimated reliable if the contract costs can identified and measured and probable that economic benefits associated with the contract will flow to the

This is due to the total of that particular sections are not significant in term of qualitative and quantitative which is less than materiality amount.

Substantive testing – Assets

When came to the substantive testing for assets, it consists of 5 parts which were cash and bank balances, trade receivables, other receivables, property, plant and equipment and amount due from contract customer.

Trade receivables

When come to the trade receivables, we needed to go through a test named trade receivables circularization and it is assist with the monetary unit sampling. Monetary Unit Sampling is a type of value –weighted selection in which sample size, selection and evaluation results in a conclusion in monetary amounts. One benefits of this approach to defining the sampling unit is that audit effort is directed to the larger value items because they have a greater chance of selection, and can result in smaller sample sizes. This approach may be used in conjunction with the systematic method of sample selection and it most efficient when selecting items using random selection. The purpose of this testing is to choose which trade receivable should be choose in order to send the trade receivable confirmation. But since under this engagement, the organization have only 1 trade receivable thus we only 1 confirmation needed to be