As we are now in early 2023, 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. 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
Identify any concerns/questions beforehand to address questions with your auditor in a timely fashion before the audit begins.
The main accounting issues are listed below. For 2022, the long-awaited implementation of ASC 842 Leases is finally applicable and will be new for everyone this year (unless publicly traded). If you have not yet started on your ASC 842 implementation, please do not delay as it is significant for restaurant companies with real estate leases.
- Accounting Standards Codification (ASC) 842 Leases
- Gift card liability and breakage
- Loyalty program liability and breakage
- Going concern
- Impairment analysis – including impairment analysis of right-of-use assets
- Debt financing, restructuring, or forbearance
- Consolidation of variable interest entities (VIEs)
- Related party transactions
- Business combinations
- Equity-based compensation
- Involuntary conversions (e.g., natural disasters, fire damage)
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. 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. Sometimes the increased risk is unavoidable, but there are ways to mitigate the 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 the 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.
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
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, charts 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.
Evaluate your going concern projections to ensure the Company can sustain operations 12 months after the issuance date of the financial statements.
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
- Acquiring a business
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.
Article written by:
Senior Manager, Assurance & Business Advisory Services