Loss-making contract

Generally 1 mark per comment on matter/financial statement risk/evidence point:

– Identify loss-making status of contract (only ½ mark if no calculation of loss)
– Per IAS 11 the loss must be recognised in full
– FSR is overstated profit if loss not recognised
– Penalties for late completion may exist
– FSR is overstated profit/understated liabilities if not recognised
– Incentive for loss not to be recognised due to planned sale of company
– Consideration of materiality

Evidence:

– Obtain budget and recompute anticipated loss
– Agree fixed price to contract
– Review contract for late-completion penalty clauses
– Review internal architect’s report
– Inspect quote or other supporting document for amount of additional costs
– Consider use of an expert regarding amount of additional costs
– Discuss estimate of additional costs and timeframe with contractors
– Review cash flow forecasts