Page 25 - Internal Auditor M.E. - June 2019

construction audit

contractually, however, variations can take many forms, in the Log also provides the status of variation order i.e. approved,
manner they arise, which are defined by FIDIC (Red Book) as rejected, disputed, in process etc. Comprehensive logs may also
below: carry percentage of completion for each variation, showing the
status of works.
1) Variation initiated by Engineer or Employer
While selecting a sample, auditor should consider the quantum of
Variation clause(s) in the contract permits the employer to engineering instructions received, variations submitted, general
make amendments in the contract’s elements and this ensures status of approvals, values, certifications and work performed. A
responding to practical needs of the project. These changes can sample may be selected considering the impact on cost or activity
be additional works, modifications or omissions (full or partial e.g. works on a variation for an activity affects project’s critical
descoping or deletion of an activity or element). path, which results in extension of time.
Changes can also include ‘Acceleration order or Sequence
changes’ which is generally required to complete the works
prior to agreed completion of the project. The works included Audit Objectives
as provisional sums in the BOQ can be executed using variation The key audit objectives for variation reviews are:
order. Any other minor or incidental nature of works are
required to be carried out in a day work basis (FIDIC, Red • To provide assurance on the design and effectiveness of the
book). internal controls for variation management;
• To ensure compliance with policies & procedures and with
2) Variations initiated by Contractor applicable rules & regulations;
For reasons attributable to the contractor or when value • To ensure ‘variation workflow procedures’ make the most
engineering is part of the scope, the contractor may work on efficient use of the available resources.
an acceleration plan and intends to complete the project earlier
than planned. In certain circumstances, contractor may identify • To ascertain that the required knowledge, skill and
certain additional works to be carried out, eventhough not competency is resourced.
specifically part of scope. In this scenario, contractor identify
these works for approval of Engineer and Employer. In a dispute Review Scope Outline
situation, the same can be part of contractor’s claim.
Following are the recommended scope review areas which should
3) Other categories of Variations be considered for testing analysis on variations to the contract.
The other categories may include re-measured contracts,
whereby any change in quantities may be claimed via a variation Timely communication Variation orders are approved
order. There may be other situations like technical errors in Cost and Cause Assessment Conditions agreed
contractual terms or design and force majeure which may give Methodology and procedure to Compliance with policy &
rise to variation orders. establish a variation procedure and contractual
A variation for addition in the scope or an omission for descoping requirement
can arise from any of the categories. Follow-up and dispute resolution Variation - Claimed in payment
During Audit Planning Phase (ref: Audit Process) auditor should procedure applications
obtain the basic understanding of the type and complexity of Documentation and audit trail Back to back contracts
the project, contractual requirements for variations vis-à-vis
nature and type of variations. Auditor should update the audit Staff competence and efficiency Management Reporting
programme considering the special conditions, timelines, agreed
methodology, key risk areas and materiality.
The auditor should always consider circumstances having a
material impact on variation management. One of those situations
can be absence of robust procedure to capture variations and out
Variation Log of scope works which can directly affect the project’s profitability
The first basic document, which provides an overview of the and can cause cost overruns. With review of correspondence and
variations’ status is “Variation Log”. Log provides information minutes, an auditor should always be vigilant about situations
giving rise to variations.
about type of variations (generally separate logs are maintained for
each category), status of submission, description of variation to the Another situation can be delayed or missed notifications and
contract, reference to the engineering instruction and reference submissions, which may not only be classified as noncompliance
to the letters and notifications, submission/claim value, internal of the contractual terms but can cause rejections or delay in cash
value and value attributable to the subcontractor. Log may also flows.
have certification and/or back to back status of certifications with The following process flow provides the basic understanding of a
subcontractors. generic audit process flow, embedded with variations review:

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