Able Construction Company entered into long-term construction contracts, recognizing income using the percentage of completion method of accounting. To finance its operations, Able borrowed funds from the bank and agreed to comply with restrictive loan covenants dependent on reported income from the long-term contracts. The percentage of completion method of accounting requires, among other things, an agreement with well-defined, enforceable terms, a reliable method of estimating costs to complete the contracts, and recognition of losses at the time they become known. As part of the audit of Able, its auditors read the contracts for all projects in progress, tested costs incurred to date, and assessed the ultimate profitability of the contracts, including discussing them with management. A significant part of verifying income under percentage of completion is auditing costs incurred. In the current year, managements records and schedules of projects indicate that all projects will result in a profit. For each project, there is a separate schedule showing estimated total revenue from the project, costs incurred in the current period, costs incurred to date, estimated total costs, percentage of completion, and profit recognized in the current period. The auditor discussed each project with management, performed audit tests to support the schedule, and concluded that the revenue, expenses, and profit were reasonably stated. Reported income allowed Able to meet several of the restrictive covenants in its loan agreement with the bank. In fact, Able had incurred a significant loss on one of its major projects. Able engaged a subcontractor to do reconstructive work not anticipated in the original contract bid. In awarding the subcontract, Able entered into an agreement with the subcontractor that the work would not be paid for until after its audit was completed in an effort to defer recording losses associated with the additional work. Management hid the subcontractors invoices from the auditors as they were received. During the next year, management recognized this loss but doctored the invoices so that it appeared the unexpected additional cost was incurred during that year, and that the previous years statements were correct and that all loan covenants with the bank were satisfied. The fraudulent misstatement was discovered several years later when Able went bankrupt and the CPA firm was sued by the bank for performing inadequate audits. The firm was ultimately found not responsible, but only after spending extensive time and large amounts of money defending its audit.