Historic Costs Methods - Long Term Contracts
You will notice such this exercise is completely dependent on the company estimating its further costs. This is wherever the auditor has to be extra careful since the directors can distort the accounts through utilizing unrealistic estimates. Usually, historic costs methods are alternative and inappropriate processes must be adopted. Therefore they may invloved:
1) Examination of the company's budgetary and budgets system. Are they such a reliable basis for finding out future costs or do the figures appearing further to be pure guess work.
2) Comparison of the costs to date on the contract along with the real budget whether they relate reasonably, than it will provide some confidence such the future costs are also reasonably stated.
3) Comparison of the conclusions of previous contracts completed along with the real budget to determine the company's capability at forecasting.
4) Perform detailed tests to substantiate the future costs by reference to technical data and reports from several independent personnel.
5) Review the progress of contracts in relative to any penalty clauses for late delivery. Whether the auditor is satisfied which the future costs are fairly stated, so he should check the estimation of attributable profits, taking into account the matter of prudence on the basis of the points raised previous. Whether it becomes apparent at which completion of a contract a loss will be made, after that a loss should be charged against income in the year then it is foreseen. Whether any profits have previously been taken in the past years they should be written back along with the total loss.