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QUALIFICATION PROCESS |
CHOOSING A CPA - WHAT TYPE OF STATEMENT DO YOU NEED
The old saying about computers, "garbage in garbage out," definitely applies to the preparation of financial statements. If a contractor does not have good cost records, the figures will look fine on paper, but will not stand up to scrutiny or analysis. Therefore, engaging the services of a good accountant, preferably a Certified Public Accountant, is essential. A contractor should seek someone who knows the construction business and the peculiarities of accounting for that field. The CPA's firm handling the local supermarket may not know anything about construction account and as a result will be of dubious value to the contractor and the surety.
Here again, your professional surety agent can guide you in selecting a CPA with proper credentials.
Depending on how long you have been in business, be prepared to furnish your last three fiscal year end financial statements prepared by an independent CPA.
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In addition, you will also need the personal financial statements of the owners of the corporation. These should be concurrent with the last corporate fiscal year end.
The corporate statements prepared by your CPA should contain the following:
- Auditor's Certificate
- Balance sheet.
- Profit and loss statement.
- Source and use of funds.
- Schedule of work in progress.
- Schedule of completed jobs.
- Schedule of general and administrative expenses
- Explanatory footnotes
Most sureties today are insisting on CPA AUDITED REPORTS. There are occasions when a surety will accept less, and for that reason alternatives will be discussed. Effective July 1, 1979, the American Institute of Certified Public Accountants changed their standards relative to the scope of their investigation of the figures they present in their client's financial reports. The rules for an audit and the expression of the accountant's opinion on the financial report have not changed. What has changed is the area of unaudited reports. Accountants may now provide either a "review" or a "compilation." A review entails doing some of the normal audit tests so that the accountant may provide a degree of assurance about the financial report. If he does a compilation, the accountant provides no assurance regarding the figures because he is not required to perform any of the normal audit procedures required to verify the numbers. In general, the surety community considers a compilation to be of little value.
It must be kept in mind, however, that sureties in general do not like internal prepared figures because they lack the stamp of approval of an independent auditor and are difficult to verify.
If the statements are unaudited, schedules of accounts receivable, accounts payable, cash and fixed assets, if applicable, should be included.
While there are a number of accounting methods for contractors THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTS AUDIT AND ACCOUNTING GUIDE FOR CONSTRUCTION CONTRACTORS states that the percentage of completion method is preferable. This method allows you to determine the percentage complete on each job in
progress and apply that percentage to the contract price and expected gross profit to determine the income and gross profit to be reported for the period.
Depending on the time elapsed since your last fiscal year end, you may also be asked to provide an interim financial statement to show how your current year is progressing.
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