Internal Audit Procedures
Document Type: Procedure
Version: 1.0
Last Updated: February 2026
Distribute To: CFO, Controller, Internal Auditor
Purpose
Establish procedures for conducting internal audits to ensure accurate financial reporting, effective internal controls, and operational compliance.
Why Internal Audit Matters
Internal Audit Benefits:
- Catch errors before external auditors do
- Identify control weaknesses
- Detect fraud indicators
- Improve operational efficiency
- Strengthen bank/surety confidence
- Reduce external audit fees
Construction-Specific Risks:
- Job cost misallocation
- WIP manipulation
- Unauthorized change orders
- Payroll fraud (ghost employees, time theft)
- Vendor kickbacks
- Equipment theft/misuse
Internal Audit Program
Audit Categories:
| Category | Frequency | Focus |
|---|---|---|
| Financial controls | Quarterly | Cash, AR, AP, payroll |
| Job cost | Monthly | Cost allocation, WIP |
| Operational | Semi-annually | Processes, compliance |
| Compliance | Annually | Licenses, insurance, contracts |
| IT/Cybersecurity | Annually | Access controls, data security |
| Fraud indicators | Ongoing | Red flags, anomalies |
Quarterly Financial Controls Audit
Cash Controls:
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CASH CONTROLS AUDIT
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Period: _______________ Auditor: _______________
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BANK RECONCILIATION REVIEW:
☐ All accounts reconciled monthly
☐ Reconciliations prepared timely (within 10 days)
☐ Reconciling items cleared promptly
☐ Independent review/approval documented
☐ Outstanding checks aged (list items over 90 days)
Findings:
___________________________________________________________
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CASH RECEIPTS:
☐ Mail opened by two people or locked box
☐ Checks restrictively endorsed immediately
☐ Deposit log maintained
☐ Deposits made intact daily
☐ Receipts recorded same day
☐ Segregation: receive ≠ record ≠ deposit
Sample tested (10 receipts):
| Receipt Date | Amount | Deposit Date | Recorded Date | OK |
|--------------|--------|--------------|---------------|-----|
| | | | | |
Findings:
___________________________________________________________
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CASH DISBURSEMENTS:
☐ Checks require dual signature above $________
☐ Blank check stock secured
☐ Voided checks defaced and retained
☐ Positive pay or check matching used
☐ Wire transfers require dual approval
☐ Credit cards reviewed monthly
Sample tested (10 disbursements):
| Check # | Amount | Invoice | Approval | 3-Way Match | OK |
|---------|--------|---------|----------|-------------|-----|
| | | | | | |
Findings:
___________________________________________________________
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OVERALL CASH CONTROLS RATING: ☐ Strong ☐ Adequate ☐ Weak
Action items:
___________________________________________________________
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Accounts Receivable Audit:
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ACCOUNTS RECEIVABLE AUDIT
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Period: _______________ Auditor: _______________
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BILLING REVIEW:
☐ Billings agree to contracts/schedules of values
☐ Billings prepared timely per contract
☐ Supporting documentation adequate
☐ Appropriate approval before sending
☐ Retainage calculated correctly
Sample billings tested:
| Project | Billing # | Amount | Contract | SOV Match | OK |
|---------|-----------|--------|----------|-----------|-----|
| | | | | | |
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COLLECTIONS:
☐ Aging report accurate
☐ Collections efforts documented
☐ Write-offs properly approved
☐ Credit memos authorized
AR Aging Analysis:
| Aging Bucket | Balance | % | Trend |
|--------------|---------|---|-------|
| Current | | | |
| 31-60 | | | |
| 61-90 | | | |
| 91-120 | | | |
| Over 120 | | | |
Items over 90 days reviewed:
| Customer | Amount | Age | Status | Action |
|----------|--------|-----|--------|--------|
| | | | | |
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RETAINAGE:
Total retainage receivable: $________________
Expected release timing documented: ☐ Yes ☐ No
Any disputes: ☐ Yes (document) ☐ No
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OVERALL AR RATING: ☐ Strong ☐ Adequate ☐ Weak
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Accounts Payable Audit:
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ACCOUNTS PAYABLE AUDIT
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Period: _______________ Auditor: _______________
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VENDOR SETUP:
☐ New vendors require approval
☐ W-9 obtained before payment
☐ Vendor master changes logged
☐ Duplicate vendor check performed
☐ Related party vendors identified
Sample new vendors (5):
| Vendor | W-9 | Approval | Duplicate Check | OK |
|--------|-----|----------|-----------------|-----|
| | | | | |
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INVOICE PROCESSING:
☐ 3-way match (PO, receiving, invoice)
☐ Invoices approved before payment
☐ Correct job/cost code assignment
☐ Duplicate invoice check
☐ Payment terms captured correctly
Sample invoices (15):
| Invoice | Vendor | Amount | PO Match | Approval | Coding | OK |
|---------|--------|--------|----------|----------|--------|-----|
| | | | | | | |
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SUBCONTRACTOR PAYMENTS:
☐ Pay apps reconcile to subcontracts
☐ Lien waivers obtained before payment
☐ Retainage calculated correctly
☐ Back charges documented
☐ COIs current
Sample sub pay apps (5):
| Sub | Project | Pay App | Contract | Waiver | COI | OK |
|-----|---------|---------|----------|--------|-----|-----|
| | | | | | | |
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OVERALL AP RATING: ☐ Strong ☐ Adequate ☐ Weak
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Payroll Audit:
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PAYROLL AUDIT
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Period: _______________ Auditor: _______________
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EMPLOYEE SETUP:
☐ New hires properly documented (I-9, W-4)
☐ Pay rate changes authorized
☐ Terminations processed timely
☐ Direct deposit changes verified
Sample new hires (5):
| Employee | Hire Date | I-9 | W-4 | Rate Auth | OK |
|----------|-----------|-----|-----|-----------|-----|
| | | | | | |
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TIME TRACKING:
☐ Time records approved by supervisor
☐ Job/cost code allocation reviewed
☐ Overtime properly calculated
☐ GPS/time clock data matches records
Sample time records (10 employees, 1 week each):
| Employee | Hours | Supervisor Approval | Job Codes | OT Calc | OK |
|----------|-------|---------------------|-----------|---------|-----|
| | | | | | |
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PAYROLL PROCESSING:
☐ Payroll register reviewed before processing
☐ Gross-to-net calculation verified
☐ Deductions accurate (benefits, garnishments)
☐ Payroll taxes calculated correctly
☐ Certified payroll accurate (if applicable)
Sample payroll (5 pay periods):
| Pay Date | Gross | Net | Taxes | Benefits | OK |
|----------|-------|-----|-------|----------|-----|
| | | | | | |
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FRAUD INDICATORS:
☐ Compare employee addresses (duplicates = ghost employee risk)
☐ Review employees with no withholdings
☐ Verify terminated employees removed from payroll
☐ Compare direct deposit changes to employee confirmations
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OVERALL PAYROLL RATING: ☐ Strong ☐ Adequate ☐ Weak
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Monthly Job Cost Audit
Job Cost Controls:
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JOB COST AUDIT
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Period: _______________ Auditor: _______________
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COST ALLOCATION:
☐ All costs coded to valid jobs
☐ No costs to closed jobs
☐ Overhead allocation consistent
☐ Inter-job transfers documented
Sample cost postings (25):
| Transaction | Job | Cost Code | Amount | Support | OK |
|-------------|-----|-----------|--------|---------|-----|
| | | | | | |
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BUDGET VS. ACTUAL:
Jobs with over 10% variance from budget:
| Job | Budget | Actual | Variance | Explanation | OK |
|-----|--------|--------|----------|-------------|-----|
| | | | | | |
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WIP REVIEW:
☐ % complete calculations documented
☐ PM cost projections reviewed
☐ Over/under billings reasonable
☐ Revenue recognition consistent
Sample WIP calculations (5 jobs):
| Job | % Complete | Method | Support | Reasonableness | OK |
|-----|------------|--------|---------|----------------|-----|
| | | | | | |
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CHANGE ORDERS:
☐ Change orders properly approved
☐ Pricing documentation adequate
☐ Contract value updated timely
☐ Revenue recognized appropriately
Pending/disputed change orders:
| Job | CO Amount | Status | Exposure | Action |
|-----|-----------|--------|----------|--------|
| | | | | |
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OVERALL JOB COST RATING: ☐ Strong ☐ Adequate ☐ Weak
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Annual Compliance Audit
Licenses & Registrations:
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COMPLIANCE AUDIT - LICENSES
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Date: _______________ Auditor: _______________
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CONTRACTOR LICENSES:
| License Type | Number | Expiration | Renewal Date | Status |
|--------------|--------|------------|--------------|--------|
| State contractor | | | | |
| City/county | | | | |
| Specialty | | | | |
☐ All licenses current
☐ Renewal calendar in place
☐ Responsible person identified
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BUSINESS REGISTRATIONS:
| Registration | Expiration | Status |
|--------------|------------|--------|
| State business registration | | |
| DBA filings | | |
| Secretary of State | | |
| Local business tax | | |
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PROFESSIONAL CERTIFICATIONS:
| Person | Certification | Expiration | Status |
|--------|---------------|------------|--------|
| | PE | | |
| | OSHA 30 | | |
| | Other | | |
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Insurance Compliance:
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COMPLIANCE AUDIT - INSURANCE
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| Coverage | Carrier | Policy # | Expiration | Limits | Required | OK |
|----------|---------|----------|------------|--------|----------|-----|
| GL | | | | | | |
| Auto | | | | | | |
| WC | | | | | | |
| Umbrella | | | | | | |
| Prof/E&O | | | | | | |
☐ Certificates of insurance on file for all projects
☐ Additional insured endorsements in place
☐ Premium payments current
☐ Loss runs reviewed
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Fraud Risk Assessment
Red Flag Review:
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FRAUD INDICATOR ASSESSMENT
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Date: _______________ Auditor: _______________
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CASH/DISBURSEMENT RED FLAGS:
☐ Unusual vendor payment patterns
☐ Payments to unfamiliar vendors
☐ Payments just below approval thresholds
☐ Duplicate payments
☐ Payments to employees (not payroll)
☐ Missing documentation
☐ Altered documents
Analysis:
___________________________________________________________
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PAYROLL RED FLAGS:
☐ Employees at same address
☐ Employees with no tax withholdings
☐ Excessive overtime (specific employees)
☐ Time approved by same person always
☐ Pay rate changes without documentation
☐ Terminated employees still paid
Analysis:
___________________________________________________________
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JOB COST RED FLAGS:
☐ Excessive materials to certain jobs
☐ Equipment always charged to same job
☐ Costs to closed jobs
☐ Unusual subcontractor payments
☐ Write-offs without explanation
☐ Margin manipulation patterns
Analysis:
___________________________________________________________
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BEHAVIORAL RED FLAGS:
☐ Employees who never take vacation
☐ Resistance to audits or questions
☐ Living beyond apparent means
☐ Close relationships with vendors
☐ Unusually protective of duties
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FRAUD RISK RATING: ☐ Low ☐ Medium ☐ High
Follow-up required:
___________________________________________________________
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Audit Documentation
Working Paper Standards:
- Clear purpose statement
- Population and sample selection
- Testing procedures performed
- Results and exceptions
- Conclusions
- Preparer signature/date
- Reviewer signature/date
Retention:
- Audit working papers: 7 years
- Reports: Permanent
- Supporting documents: 7 years
Reporting
Audit Report Format:
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INTERNAL AUDIT REPORT
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Audit Area: _______________
Period: _______________
Auditor: _______________
Report Date: _______________
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EXECUTIVE SUMMARY:
Overall rating: ☐ Strong ☐ Adequate ☐ Needs Improvement
Key findings:
1. ___________________________________________________________
2. ___________________________________________________________
3. ___________________________________________________________
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DETAILED FINDINGS:
Finding #1:
Condition: _________________________________________________
Criteria: _________________________________________________
Cause: ____________________________________________________
Effect: ___________________________________________________
Recommendation: ___________________________________________
Management response: ______________________________________
Target completion: ________________________________________
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PRIOR AUDIT FOLLOW-UP:
| Prior Finding | Status | Notes |
|---------------|--------|-------|
| | | |
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DISTRIBUTION:
☐ CFO
☐ Controller
☐ CEO/Owner (significant findings only)
☐ External auditors (as needed)
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Action Item Tracking
Finding Follow-Up:
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AUDIT FINDING TRACKER
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| Finding # | Description | Owner | Due Date | Status |
|-----------|-------------|-------|----------|--------|
| | | | | |
Status: Open, In Progress, Closed, Overdue
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Related Documents
- Annual Audit Preparation
- Internal Controls Policy
- Fraud Prevention Policy
- Financial Reporting
Template provided by support.construction. Trust but verify—especially your own processes.