As 2020 quickly comes to an end, we are pleased to provide restaurateurs with an annual reminder of items to keep on the radar before the annual financial statement audit. Planning is the key to a successful and efficient audit. Staying in touch with your external audit team is instrumental, as well as making sure a thorough review of control processes, staff preparedness, and financial record readiness is completed ahead of audit scheduled fieldwork. All of those steps will minimize day-to-day interruptions and alleviate your accounting staff’s concerns about having the proper documentation and related materials ready when requested by the audit team. This year’s pandemic brought many challenges to restauranteurs, including several additional accounting issues/considerations. Below is a list of steps to follow to enable the team to be as prepared as possible for the audit work.

Address Accounting and IT Issues Before the Audit Commences

Evaluate your accounting practices in relation to common accounting issues listed below. Identify any concerns/questions beforehand to address questions with your auditor in a timely fashion before the audit begins.

  • PPP Loan accounting treatment and forgiveness
  • Lease concessions
  • Closed store reserves
  • Gift card liability and breakage
  • Loyalty program liability and breakage
  • Going concern
  • Impairment analysis
  • Debt financing, restructuring, or forbearance
  • Consolidation of variable interest entities (VIEs)
  • Related party transactions
  • Business combinations
  • Equity-based compensation

In addition, part of your auditors’ responsibility will be to obtain an understanding of your IT control environment, specifically, segregation of duties (“SOD”) based on general ledger system access profiles. Evaluate how controls operated during remote work related to the pandemic. SOD 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. Determine if there was an increased risk of SOD during 2020 due to remote operations. Did all controls operate as designed during lockdowns and remote operations? Sometimes increased risk is unavoidable, but there are ways to mitigate 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. Discuss any concerns you have with your auditor early on.

Get a 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 the 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 purpose, and 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 the 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 onsite. 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.

Prepare for Remote Audit

Due to the pandemic’s current situation, assess whether you and your team are ready for a remote audit. Most likely, the majority of audits will be performed remotely well into 2021. Brainstorm with your team, assess if everyone on the team has access to the files remotely, and can provide them to auditors in electronic format. Prepare for a potential lockdown and have accounting records ready.

Collect the Right Documentation

Most of the audits that incur additional costs almost always have reconciliation issues. 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:

  • Trial Balances – up to date, adjustments posted, any missing information flagged for auditors
  • Reconciliations – reconciled to bank statements, loan balances tied to loan documents, PP&E balances tied to sub-ledger reports, AP tied to sub-ledger, and accrued expenses properly analyzed

Permanent Files

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, operating agreements, chart of accounts, and documentation about your internal control environment.

Bank Covenants

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.

Going Concern

Evaluate your going concern projections to ensure the Company can sustain operations 12 months after the issuance date of the financial statements. Many businesses experienced difficulties during the COVID era; thus, preparing ahead of time will allow for finding a way to secure additional funds if needed.

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 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. In addition, 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 the audit process or need assistance with a restaurant audit, GBQ can help! For additional information click here to contact us. We look forward to speaking with you soon.


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