When thinking about your year end restaurant audits there are some key areas that could be cleaned up in order to help the audit process go smoother. Don’t stress, we have put together a list of some common areas that generally result in financial statement adjustments and ways to help prevent this.
Key Audit Areas:
- Gift cards
- Gift cards are very common among restaurants. As gift cards can be issued under various programs, it is important that the accounting department has a full understanding of all current gift card programs in order to ensure that there are sufficient processes and procedures in place to account for these amounts properly. Reconciling schedules should be kept in order to help track amounts per systems to amounts recorded in the general ledger and financial statement accounts. We recommend keeping these reconciling schedules up to date on a monthly basis (as opposed to yearly or not at all) which should drastically help to prevent any material misstatements uncovered during the audit.
- Included in the accounting for gift cards is a breakage calculation that should be performed on gift card sales. Breakage relates to the percentage of gift cards that are not redeemed by customers. One common way to calculate this estimated amount is to use a historical rate of forfeited gift card sales. This amount is then recognized as revenues from services that were paid for but not used.
- Deferred rent
- Deferred rent typically occurs when you are given either free rent or have escalating payments based on the terms of the lease. When a new lease is adopted or an existing lease is modified, you should evaluate how it will affect deferred rent, rent expense and rental payments. As such, it is important to keep updated schedules on these leases.
- Private companies with fiscal years beginning after December 15, 2021 are required to adopt the Accounting Standard Codification (ASC) Topic 842 on Leases. The new lease standard will account for leases as assets and liabilities on the balance sheet. Due to these changes, it is extremely important to gather accurate lease information. If there are any questions on how this change will affect your company, reach out to your auditor for additional guidance and information.
- Another area that can get messy if proper schedules are not maintained are accruals. As accruals represent expenses incurred which impact your company’s net income on the income statement, it is extremely important to keep updated reconciled schedules of these accounts. The most common accruals are interest expense accruals, suppliers’ accruals, and wage or salary accruals. When reconciling month end amounts be sure to keep these in mind and accrue when needed.
In order to help the year end audit go as smoothly as possible, review the areas noted above and try to keep monthly reconciliations of all balance sheet accounts. This will help to prevent material misstatements and additional billings. Remember to reach out to your auditor on issues that you are not able to solve by looking up proper accounting guidance. We are here to help!
If you have any questions about your restaurant’s audit, please contact your Henry+Horne advisor.