For many contractors, the CPA's report is not a regulatory formality. It is a document the surety reads line by line before deciding how large a bond program to extend. That changes the engagement. The statements have two readers, the owner of the business and an underwriter who needs to judge whether the contractor can finish what it starts. This guide covers what sureties look at and how a firm should plan the report, the schedules and the audit work around them. The revenue model itself is covered in the contractor audit overview.
Why contractors need bonds
Bonding requirements come from statute and from contract. For federal construction, 40 U.S.C. 3131 requires a performance bond and a payment bond before award of a contract of more than $100,000 for the construction, alteration or repair of a public building or public work. That is the statutory figure. FAR 28.102 applies an inflation-adjusted threshold, so confirm the amount in force at the award date. The payment bond defaults to the total amount payable under the contract. The contracting officer may set a lower amount with documented findings, but not below the performance bond amount. Many states have comparable statutes for public work, and private owners and lenders frequently ask for bonds by contract.
The surety is guaranteeing the contractor's performance and payment of subcontractors and suppliers. Its underwriting exists to judge whether that guarantee will ever be called.
What the surety reads
Old Republic Surety's published guidance describes three levels of CPA service. A compilation assembles management's figures with no assurance. A review gives limited assurance. An audit tests the figures and results in an opinion. The guidance calls internally prepared statements the least reliable type and the review the most commonly used level. The level for a particular program is set by the surety, so the engagement partner needs that requirement in writing before accepting the work. See audit vs review vs compilation.
Underwriters analyze:
- Working capital and equity. Sureties prefer to see equity rise from year to year.
- Receivables. Underwriters may reduce receivables based on collectability. Old Republic's guidance says balances over 90 days are deducted unless they are undisputed retainage.
- Goodwill and inventory. Goodwill is removed and inventory is reduced for items unlikely to be used.
- Profitability and expense control. Whether overhead moves with revenue.
- Cash flow. Cash from operations and whether earnings are retained.
- Underbillings and overbillings. Underbillings are an asset and overbillings a liability, both from the WIP schedule.
Supporting schedules include the WIP schedule, receivable and payable agings, and personal financial statements of the owners.
On the WIP, the same source says sureties track gross profit over time to detect fade, compare each completed job's original estimated margin with its final result, and watch for significant recurring underbillings, which indicate slow billing practices or unapproved change orders the contractor cannot bill and may not be paid for. Significant overbillings should be matched by substantial cash and receivables on the balance sheet. Underwriters also compare the profit remaining in backlog with expected overhead, because future profit has to cover future overhead.
What this means for audit planning
Each item on the surety's list maps to an audit risk. If the surety adjusts for aged receivables, receivable valuation is a focus. If it measures equity, any estimate error moves the number it cares about most. If it reads underbillings, the estimate to complete is the sensitive assumption. A contractor facing a bonding renewal has a heightened incentive to present the figures favorably, which is the setting for the presumed fraud risk in revenue recognition. Build the assessment accordingly, using fraud risk assessment under AU-C 240.
Plan for these in the engagement:
- Engagement letter. State the purpose of the statements, the level of service, whether the WIP schedule will be covered, and the deadline the surety sets.
- Timing. Statements arrive after the audit fieldwork, and the surety waits on the report before bidding. Agree on a calendar early.
- Interim work. Obtain the WIP schedule and job cost detail at an interim date so that estimate testing is not compressed into the final weeks.
- Subsequent events. Report dates matter when jobs are in dispute or a bond claim is possible. See subsequent events.
The WIP schedule as supplementary information
Sureties want the WIP schedule with the statements, and it is presented as supplementary information accompanying the financial statements. When the firm is engaged to report on it, the schedule is covered by the firm's work in relation to the financial statements as a whole, and the underlying data must be tied out to the accounting records. See AU-C 725 on supplementary information. The testing steps for the schedule are in testing the WIP schedule.
Worked example
These figures are illustrative. A contractor applying for a larger bond program reports the following at year-end.
| Item | As reported | After estimate adjustment |
|---|---|---|
| Current assets, including $600,000 of underbillings | $4,100,000 | $3,750,000 |
| Current liabilities | $2,900,000 | $2,900,000 |
| Working capital | $1,200,000 | $850,000 |
| Equity | $2,000,000 | $1,650,000 |
During testing, the cost estimate on one large job rises, which reduces revenue and the underbilling by $350,000. Working capital falls from $1,200,000 to $850,000, a decline of about 29 percent, and equity falls by the same $350,000 before any tax effect. Nothing about the contractor's cash changed. But the surety would be reading a different company, and it would also see the lower margin on the job. The adjustment, and the evidence that supports it, are exactly what the surety is paying for when it asks for a CPA's report.
PBC items
- WIP schedule at year-end and prior year-end, with completed jobs list
- Surety program letter or bond requirements and any financial covenants
- Receivable and payable agings, with retainage detail
- Bonded job list and bond amounts
- Indemnity agreements and any surety correspondence on claims
- Owner financial statements, where the surety requires them
- Backlog report with remaining margin by job
Red flags
- A bond claim, notice of default or surety inquiry during the audit period
- Margin fade across several successive WIP schedules
- Underbillings rising faster than revenue
- Pressure to deliver statements by a date set by the surety before testing is complete
- Going concern indicators such as limited bonding capacity; see going concern under AU-C 570
Sources
- 40 U.S.C. 3131, Bonds of contractors of public buildings or works, https://www.law.cornell.edu/uscode/text/40/3131
- Old Republic Surety, Financial Statements: What to Expect in the Underwriting Process, https://www.orsurety.com/blog/financial-statements-what-to-expect-in-the-underwriting-process
- Old Republic Surety, Work in Process Reports: Key for Contractors and Surety Companies, https://www.orsurety.com/blog/work-in-process-reports-key-for-contractors-and-surety-companies
- RSM US LLP, Revenue Recognition for Construction Contractors (November 2025), https://rsmus.com/content/dam/rsm/insights/financial-reporting/1pdf/revenue-recognition-considerations-for-the-construction-industry.pdf
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error