With this year’s audit season underway, we thought it might be useful to share with our architectural readership some of the common issues identified during audits of financial statements.

Contracts and documentation

The nature of architectural practices’ work can mean projects start before contracts have been signed. The scope, stages and fees for projects will all be scrutinised by the auditors and, in the absence of a signed contract, you’ll need to provide evidence that fees were agreed. This includes situations in which the scope of a project changes and additional fees are agreed. Such documentation is crucial because it underpins the practice’s revenue policy.

Project costing calculations

All architectural practices will be familiar with having to provide their auditors – or indeed their accountants if the financial statements do not require an audit – with a work-in-progress (“WIP”) calculation, set out project-by-project. Auditors closely review the methodology used to estimate each project’s ongoing costs - and therefore its profit. There can be a natural tendency to overestimate the profitability of a new or recently started project and this is something that is often challenged as part of the financial statements audit.

Undisclosed liabilities

It is easy for businesses to overlook liabilities such as a commitment for expenditure yet to be paid, legal claims likely to result in a payment, or a project that has shifted from profit-making to loss-making. All of these have the potential to reduce the firm’s reported profit and one of the purposes of an audit is to identify situations where these liabilities may exist.