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If you’re the owner of a limited company, you’ll already be familiar with the requirement to prepare and file annual accounts with Companies House. However, as your construction business grows, you may reach a point – sometimes without realising – where preparing accounts is no longer sufficient and a statutory audit becomes mandatory.
Stewart Halton, Corporate Services Director explains how you can get prepared.
If your company breaches two of the following thresholds for two consecutive years, an audit is likely to be required (although exemptions can apply):
- Turnover: £10.2m (or £15m for accounting periods commencing on/after 6 April 2025)
- Gross assets: £5.1m (or £7.5m for accounting periods commencing on/after 6 April 2025)
- Average number of employees: 50
For many owner‑managed construction businesses, this first audit can feel like a significant step up in scrutiny. It’s often though that an audit is something to fear, but in reality they can help build trust with owners, customers, regulators, lenders and the public by showing that the company is being run transparently and responsibly by those in charge.
Why construction businesses face unique audit challenges
Construction is fundamentally different from many other sectors. Being aware of these differences helps you understand where audit focus will naturally fall.
Long‑term contracts and work in progress
Construction projects often span months or years, with revenue recognised before cash is received. Auditors will pay close attention to:
- How contract revenue is recognised
- The accuracy of cost‑to‑complete estimates
- Whether anticipated losses are identified promptly
Subcontractor labour and CIS
Many construction companies rely heavily on subcontractors, making CIS compliance critical. Auditors will examine:
- Verification of subcontractors
- Accuracy and timeliness of CIS returns
- Reconciliations between payment records, returns, and accounts
Incomplete or inconsistent CIS records are one of the most common problem areas in construction audits.
Cashflow versus profit
Construction businesses can appear profitable on paper while still struggling with cashflow due to a lot of the spend being incurred in the short-term, with anticipated income not likely to be received until further down the line. Auditors will often question:
- Large work‑in‑progress balances
- Aged debtors and retentions
- Whether profit recognition reflects economic reality
Understanding this distinction helps mitigate anxiety when figures are challenged.
Common worries business owners have about their first audit
It’s entirely normal to feel uneasy about being audited for the first time. Some of the most frequent concerns include:
Loss of control
Having external auditors examine your records can feel intrusive, especially if you have always “kept things in your head” rather than formally documented. Always remember that auditors are not there to trip you up, but instead are looking to help show that accounts are ‘true and fair’.
Being challenged on figures you don’t fully understand
Estimates around job profitability, accrued income, or provisions may have been prepared by external accountants. But auditors will still expect management to understand and support them, so preparing for this in advance is essential.
Disruption to day‑to‑day operations
Audits do require time and attention. Poor preparation often leads to repeated information requests that distract you and your team – however your daily operations will generally remain unaffected.
Cost
Audit fees can feel significant, particularly when margins are tight. However, poor records and last‑minute preparation almost always increase audit costs.
What if they find something wrong?
Many owners fear that an audit will uncover serious issues. In practice, most findings relate to process improvements rather than wrongdoing, especially in first‑year audits. Implementing changes suggested by an auditor will more than likely save time, money and effort in the long-run.
Common first‑audit pitfalls for construction SMEs
First‑time audits for our clients often reveal similar issues across growing construction businesses:
- Poor documentation – decisions or estimates not formally recorded (such as the basis for stating that a particular project is X% complete)
- Over‑reliance on external accountants – management unable to explain numbers
- Lack of a clear audit trail – figures in accounts not easily traceable back to source records
- Inconsistent WIP calculations – methods changing year to year
- Weak controls over subcontractor and supplier payments
None of these automatically lead to a “bad” audit outcome, but they would make audit testing more difficult and could be the cause of some of the figures in the accounts being misstated.
How to prepare for a first audit: Practical steps for construction owners
Advance preparation is the key to a smooth audit process.
Key actions include
Get stock and materials right
Ensure an accurate year‑end stock figure is taken, including:
- Materials held on site
- Materials held off site
- Identification of obsolete or damaged stock
Auditors will expect counts or reconciliations that can be independently verified.
Prepare a robust Work in Progress (WIP) schedule
Your WIP schedule should be clear, consistent, and supportable. For each contract, include:
- Contract value (including approved variations)
- Costs incurred to date
- Estimated costs to complete
- Stage of completion at year end
- Revenue recognised to date
- Expected profit or loss
Document the assumptions behind estimates, particularly cost‑to‑complete figures.
Maintain strong CIS records
Ensure all subcontractor costs are supported by:
- Copies of monthly CIS contractor returns
- Evidence of subcontractor verification
- Clear schedules supporting weekly or monthly payments
These records must reconcile to both your accounts and HMRC submissions.
Make sure management understands the numbers
Even if an external accountant prepares your accounts, auditors will expect comments and opinions from management. So, take time to understand:
- How profit on long‑term contracts is calculated
- Why WIP is shown as an asset or liability
- The difference between accounting profit and cashflow
Improve the audit trail
Make sure figures in the accounts can be traced back to:
- Accounting software
- Job cost reports
- Payroll and subcontractor records
- Bank statements and supplier invoices
Clear cross‑referencing reduces queries and audit time.
Plan early and communicate
Engage with your auditors early, agree a timetable, and allocate internal responsibility for information requests. A controlled audit process minimises disruption.
We’re here to help
A first audit can feel daunting, especially in a complex sector like construction. However, with preparation and the right perspective, it can be a positive step that strengthens confidence in your financial position, improves internal processes and supports long‑term growth and credibility
And rather than something to fear, your first audit can be an opportunity to put your construction business on a stronger, more professional footing for the future.
To discuss any of the above in more detail with Stewart or one of our experienced audit team, call us on 0330 058 6559 or email hello@scruttonbland.co.uk
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