The auditor could review a selected sample of contracts to evaluate whether the contracts meet the basic conditions of the SOP for use of the percentage-of-completion method. The auditor could also obtain, review, and evaluate documentation of estimates of contract revenues, costs, and the extent of progress toward completion for the selected sample of contracts. Also, the auditor could obtain a representation from management on the acceptability of the method. .
When a contractor uses the completed contract method as the basis accounting policy, procedures must be performed by the auditor to test the acceptability of this method as well. The objective of the auditor in examining these contracts are to determine the proper amount and accounting period for recognition of the profit from completed contracts, the amount of anticipated losses on uncompleted contracts that should be recognized in the current period, and the consistency in application of the method of determining completion. The auditor could obtain a schedule of uncompleted contracts at the beginning and end of the period and evaluate whether the volume is significant in relation to the volume of contracts started and completed during the period. Or the auditor could estimate the effect of reporting on the percentage-of-completion basis and evaluate whether the results would produce a material difference in financial position or results of operations.
Once the auditor is satisfied with the income recognition methods for various contracts, he can review the earned revenue. The auditor should review the contract and related correspondence files to assess the reasonableness of management's current estimate of contract revenues. The auditor should obtain and review workpaper schedules that summarize contract information from the contractor's books and records together with audit data arising from the audit of contract activity.