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Construction in Progress: Audit Risks, Evidence and Documentation for Hong Kong Auditors
Practical audit procedures, evidence points, and documentation considerations for Hong Kong audit teams.
Practice Overview
Last updated: 16 September 2026
Construction in progress (CIP) can concentrate substantial expenditure, technical judgments and project information from across an entity. For financial-reporting purposes, the balance commonly requires clear linkage between the asset or project, the nature of each cost and the stage of completion. A well-designed audit approach starts with a current understanding of the project population, governance, information flows and factors that could affect the relevant assertions, rather than treating CIP as a single homogeneous balance.
At a high level, HKFRS concepts relevant to property, plant and equipment focus attention on recognition, measurement, depreciation and impairment. The HKSA framework similarly connects risk assessment, tailored responses, sufficient appropriate evidence and clear documentation. For CIP, audit quality is strengthened when the working papers explain the project-specific risks, the rationale for selection and procedure design, the source and reliability of evidence obtained, and how contrary information or significant judgments were evaluated. This article is general professional education for Hong Kong auditors and is not engagement-specific audit, legal, tax or regulatory advice.
Key Audit Issues
Cost eligibility and capitalisation boundaries
CIP may include invoices, internal labour, professional fees, site preparation and other project expenditure. The principal risk is that costs which are not appropriately attributable to bringing an asset to the condition necessary for its intended use are capitalised, while qualifying costs are omitted or classified inconsistently. Judgments over indirect cost allocations, variation orders and borrowing costs, where relevant, can increase valuation and classification risk.
Existence and physical progress
Ledger balances can remain recorded even when work has stopped, scope has changed or the reported stage of completion is unsupported. Physical observations, progress records and third-party documentation may point in different directions. The audit response should consider how project status evidence corroborates the recorded asset and whether restrictions on site access or remote evidence affect its reliability.
Completeness, cut-off and project coding
CIP accounting often relies on purchase-to-pay feeds, timesheets, contractor claims and manual journals. Delayed invoices, late certifications, goods or services received around year end, and incorrect project codes can cause costs to be recognised in the wrong period, omitted, duplicated or charged to the wrong project. Reconciliations alone may not identify errors arising before data enter the CIP register.
Recoverability, impairment indicators and changed estimates
Cost overruns, extended delays, redesign, funding constraints, abandoned work or changes in intended use may indicate that the recorded amount is not recoverable or that project estimates require reassessment. Risk increases where management relies on forecasts or technical assumptions. The audit file should show how relevant indicators, management’s response and potentially contradictory project information were considered.
Transfer to use, depreciation and presentation
A project may contain separately usable components or reach a stage at which an asset is capable of operating as intended, even if the wider programme continues. Delayed transfer from CIP can defer depreciation, while premature transfer can distort classification and expense recognition. Presentation, componentisation and disclosures may also require attention when balances, commitments or judgments are material to the financial statements.
Tailored Audit Procedures
Establish and reconcile the CIP population
Obtain the detailed CIP register and reconcile opening balances, additions, transfers, disposals and closing balances to the general ledger and, where applicable, the fixed-asset register. Investigate reconciling items, unusual journals, dormant projects and movements that are inconsistent with the entity’s operations or prior-period patterns.
Select projects using risk-relevant characteristics
Design project and transaction selections in response to the assessed risks. Relevant characteristics may include value, age, cost overruns, incomplete documentation, related-party involvement, significant estimate changes, unusual journal entries, late-period additions and projects approaching completion. Document why the selection and extent of testing respond to the identified risks.
Test costs to persuasive underlying support
For selected additions, inspect appropriately relevant documents such as approved budgets, contracts, purchase orders, supplier invoices, payment records, contractor certificates, timesheets or technical reports. Reperform relevant calculations and assess whether the recorded amount, period, project code and accounting treatment are consistent with the entity’s policy and the applicable financial-reporting framework.
Corroborate project status and existence
Where appropriate, observe a selected site or evaluate alternative evidence of progress, then compare it with project reports, approved claims, photographs, milestone records and management explanations. Consider whether the evidence is contemporaneous, independent where available and sufficiently specific to the asset or work recorded. Follow up material inconsistencies rather than relying on a single source.
Perform cut-off and completeness testing
Test selected activity around the reporting date using receiving records, invoices, payment runs, contractor claims, subsequent invoices and subsequent payments. Trace selected source documents into the accounting records and inspect post-year-end movements for indications of unrecorded liabilities, omitted CIP additions, incorrect period recognition or transfers that should have been recorded earlier.
Evaluate estimates, transfer decisions and disclosures
Assess management’s analysis of cost-to-complete, impairment indicators, abandoned or suspended work, completion dates and transfer-to-use decisions. Compare significant assumptions with approved project information and subsequent events where relevant. Evaluate whether depreciation, classification and financial-statement presentation and disclosures are consistent with the applicable framework, and document the basis for conclusions on significant judgments.
Controls and Evidence to Consider
Approved project master data and change governance
A controlled project master can link each CIP code to an approved business case, budget, responsible owner, asset category and expected completion date. Retained approval records and authorised change orders create evidence of who approved scope, budget and classification changes, and help prevent unauthorised projects or recoding.
Authorised procurement and cost capture
Controls over purchase orders, goods or service receipt, invoice approval and project-code validation can support accurate and complete cost capture. Evidence may include approval workflows, three-way-match records, exception reports and documented review of manual journals or allocation calculations.
Periodic CIP reconciliation and project review
A periodic reconciliation between the CIP register, general ledger, project-management records and budget-to-actual reporting can identify missing, duplicate or misclassified costs. Evidence is stronger when the review identifies aged, overspent or inactive projects, records explanations for exceptions and shows timely follow-up by an appropriate reviewer.
Completion, impairment and transfer assessment
A defined review of project milestones, assets available for use, delays, cost overruns and changed plans can support timely transfer from CIP and consideration of recoverability. Useful evidence includes completion certificates, commissioning records, technical sign-off, impairment-assessment papers and documented approval of transfer dates and asset classes.
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