There are a few easy steps a restaurant owner can take when preparing financial statements. When auditors arrive for fieldwork, it’s important that the staff be knowledgeable and prepared for the process so that the auditors can get in and out as quickly as possible. Reviewing the process and individual steps ahead of the financial audit will minimize interruptions to day-to-day operations and alleviate back-office staff’s concerns about having the proper documentation and related materials ready when requested by the audit team. Below is a list of audit preparation steps to follow which can get the team as prepared as possible for the work.
Address Accounting and IT Issues Before the Audit Commences
Restaurants have unique accounting concerns to be aware of, and address, in a timely manner. Being aware of the issues allows you to know whether a potential issue exists and gives you the time to seek consultation with your auditors so the issue is addressed timely. The following accounting issues are common to the industry.
- New revenue recognition rules (effective 2019)
- New lease accounting rules (effective 2021)
- Closed store reserves
- Gift card liability and breakage
- Loyalty program liability and breakage
- Going concern
- Debt financing or restructuring
- Consolidation of variable interest entities (VIEs)
- Related party transactions
- Business combinations
- Equity-based compensation
Similarly, IT general controls should be on your radar. Part of your auditors’ responsibility will be to obtain an understanding of your IT control environment, specifically, segregation of duties based on general ledger system access profiles. Segregation of duty issues are common and most often occur when the CFO/controller has no restrictions within the general ledger system; thereby, eliminating any checks and balances expected to be in place. Sometimes this is unavoidable, but there are ways to mitigate this segregation of duties no matter the size of the company. Certainly, avoiding a material weakness, as a result of the audit is important, but safeguarding the assets of the company through proper segregation of duties is paramount to the success of the company.
If you have concerns about your accounting processes or your IT general controls, reach out to your auditor before the audit begins. They can point you in the right direction.
Get an Accounting Review
It may be wise to get a review before you embark on a full-blown audit. First-year audits can be especially difficult because auditors must establish a baseline understanding of its business. If you commission a review the year before you plan to get an audit, your reviewing team can give you recommendations on what to tweak and adjust before the full-scale audit commences.
Review Your Engagement Letter
The engagement letter is the roadmap needed to navigate the annual audit. It provides all the necessary information about the audit from the purpose of financial statements, fieldwork specifics through final audit report delivery. The specific information includes:
- Objective, period, and scope of the audit
- Catalog of professional standards the auditors will be following
- List of the auditors’ responsibilities, including a brief explanation of the procedures they will perform both on- and off-site
- List of management’s responsibilities, including what information you and your staff will be responsible for collecting
- Start and end dates for audit work
- Delivery date of audit report
- Fees and billing expectations
Attend Pre-Audit Meetings
The auditors will schedule a time to discuss the upcoming audit. This is where you should bring up concerns identified in the engagement letter and ask clarifying questions. At this meeting, the auditors should discuss the documentation requests and expected timeline, including when they plan to be on-site. Remember, the schedule will include timelines and deadlines for both the auditors and internal team members. Pay careful attention to ensure the expectations are clear.
Preparing Financial Statements
If you can collect all the documents the auditors request, the audit will breeze by smoothly. Here are a few things you should have ready:
Before you prepare anything else, make sure that your trial balances are up to date. Make sure all year-end adjustments have been posted. If you are still waiting for information, flag the affected accounts for your auditors. A clean trial balance will set your audit off on the right foot.
Audits that incur additional costs almost always have reconciliation issues. Reconcile your balance sheet accounts before the auditors arrive. For example, you should make sure that:
- Your cash balances reconcile to your bank statement
- Your loan balances tie to loan statements
- Your fixed assets balances tie to subledger reports
- Your payables accounts tie to accrual calculations or bills you’ve received
Each of your balance sheet accounts should tie to some sort of supporting documentation.
Auditors keep a folder of long-term agreements to reference at each successive audit. This includes agreements that span multiple years like lease agreements and loan documents, and it also includes internal documents like organizational charts, accounting policies, articles of incorporation, chart of accounts, and documentation about your internal control environment.
Calculate your bank covenants and determine whether any issues exist. Your auditors will want to see if you meet the conditions of those covenants. If you are concerned you may soon violate those covenants, work with your banker to renegotiate the conditions. To issue a clean report, your auditors will need confidence that you will be able to service your debt with your bank in future years.
List of Subsequent Events
Subsequent event testing is when auditors evaluate events that occurred after the period that is being audited. Even if these events do not impact your reported financials, the auditors may need to disclose them. Some common events worth mentioning are:
- opening or closing a restaurant
- a damaging fire in an existing location
- signing a new lease
- negotiating new debt terms
- new capital investment from investors
Schedule Time for the Financial Audit
Two to three weeks before fieldwork begins, the auditor should provide a list of accounts, reports, transactions, vendors, etc., they plan to test. You will need to pull supporting documentation for those selections. Ensure that you have enough time to find those documents and still get your day-to-day work completed. And although it is not strictly necessary, many restauranteurs choose to clear their schedule the week that your auditors arrive for fieldwork. Being able to respond to their requests quickly will help them stay on track.
“Preparation is the key to success.” Annual audits do not have to be daunting, and they should not fill you with dread. With the right preparation and support from your auditors, your staff can avoid interruption and you can oversee the work with minimal stress. Although there is a lot of work to be done, audits will not be burdensome or scary if prepared. If you have questions about audit procedures or need assistance with a restaurant audit, GBQ can help! For additional information please call us at 614-221-1120 or click here to contact us. We look forward to speaking with you soon.