When reviewing your books to extract needed information on payrolls and amounts paid to subs, auditors generally want to review both your summary records and your source records.
Auditors prefer to work from summary records whether computerized or manual because this makes their job easier. Summary records tend to be more legible and pre-categorize the payrolls and amounts paid to subs by type of work performed. However, auditors also want to access the source records to perform periodic spot checks to make sure that the summary records are accurate.
Most builders use Quick Books or a similar program that produce very nice summary reports for both payrolls paid to employees and amounts paid to subs. If the builder isn’t automated, the auditor will want to view manual summaries such as a cash disbursement journal or a general ledger.
If neither automated nor manual summaries are available, the auditor will be forced to use source records such as check book registers or bank statements. Forcing an auditor to pour over tedious source records can be a big mistake as they’re often not legible and they can more easily lead to misunderstandings resulting in classification errors that can cost you money.
In addition, you’ll need to provide certificates of insurance for each sub to prove that they were insured at the time that they performed work for you. This means that you might need two different certificates of insurance for each sub since their policies might expire while they’re in the middle of a job. Also, if your certificate of insurance looks suspicious to the auditor, he may call the insurance agent to verify.