“Audit as you go”

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   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  What distinguishes Construction Auditors:

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 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.)

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  “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

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 notbecome 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 complete1. 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 go1. 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 Review of events before they occur may create independence implication as it may lead to selfreview prejudice.

Recommended Solution Adoption of structured approach and inform audit committee / board the procedures adopted and limitations in advance.

Long term working relationships Spending longer time with client at projectsmay result in establishing relationships with the client personnel.

 Team rotation  Training initiatives  Supervision and frequent reviews

More likely that construction auditors discover exceptions just by walking around the site. Therefore the planning should give sufficient time cushion for site visits. Examples of possible value addition through this method are:  Health and safety violations  Idle/ghost manpower  Excessive procurement or equipment hire  Scrap held at site without proper sale procedures  Security lapses  Violation with insurance covenants  Violation with Municipality / Regulatory requirements 11

 More skepticism can lead to higher chances of finding exceptions leading to recoveries  If all overcharges of four buildings are discovered, fifth building can be built for free  Sub-contractors have tendency of creating change orders as a source of supernormal profits  Material quality variations are norms but they still exceptions and need to be identified 12

Categories of Inherent Risks Contractor and/or legal risk, including the use of different contract delivery systems  Budget risks, including cost overruns  Design risk, such as improper, incomplete, or unsafe design  Cost containment risk, including (sub-)contractor overbillings  Liability and/or negligence risk, as well as the related need for insurance  Surety risk, such as performance and payment bond risk  Schedule risk, including schedule delays  Quality assurance risk, including quality of construction  Safety risk, including construction workers becoming injured Coverage of Project Lifecycle Reasonable Assurance on Compliance Related.

Matters Construction Agreements Review Addressing type of Contract Goal Congruence – Cost Control Reviewing Reliability of Financial and Performance Reporting  Using the work of experts for technical areas  Reviewing Sub-contractors billings  Reviewing Rental and Sub-contracted work Costs  Reasonable Mitigation of Fraud Risk Factors – Though not the responsibility  Play role in construction claims – identifier and/or catalyst