Which procedure would you perform to test the accuracy and cut-off of revenue and costs around year-end for long-term construction contracts?

• A. Reconcile costs incurred to date with billings and revenue recognized.
• B. Test a sample of contracts for correct % complete.
• C. Review post-year-end billings and accepted deliveries.
• D. Inspect change orders near year-end.

Answer: (A)

The main idea being tested is confirming that revenue and costs for long-term construction contracts are recorded in the correct period and for the correct amount, based on the contract’s stage of completion. For these contracts, revenue and costs are recognized progressively as work advances (the percentage-of-completion method), so at year-end you need evidence that the amounts shown for costs incurred to date, billings to date, and revenue recognized to date line up with how much work has actually been completed.

Reconciling costs incurred to date with billings and revenue recognized directly ties together what has been spent with what has been billed and what has been recognized as revenue, all in relation to the year-end progress. This approach provides a clear check that the cost side and the revenue side reflect the same level of completion and that nothing is mis-timed or omitted as year-end closes are performed.

The other options touch useful aspects of contract accounting, but they don’t hit the year-end cut-off and overall accuracy as directly. Testing some contracts for the percent complete assesses the calculation of completion but not the complete alignment of costs, billings, and revenue at year-end. Reviewing post-year-end billings and accepted deliveries helps with cut-off in a broader sense but focuses on items after year-end rather than the completeness of the year-end balances. Inspecting change orders affects scope and potential revenue impact, but it does not by itself verify that year-end revenue and costs are accurately recorded and properly cut off.