It’s that time of year again to close the books and get ready for your annual audit. You may be cringing because it’s coming soon, but with proper planning and communication, the audit process can go very smoothly for you and not be time consuming. We’ve compiled our top 10 restaurant audit preparation best practices to help you get ready.
1. Agreed upon timelines – It is so important to agree on audit timelines with your auditors and keep to those timelines in order to meet your deadlines. Communication is key during the planning process to agree on realistic timelines and deadlines. If you have doubts of meeting your timing, communicate this as soon as possible to your auditor so schedule changes can be made.
2. Audit request listings – Each year you’ll get an audit request listing that will help in the performance of the audit. For the most part, your year-end reconciliations and perm file updates will cover most of the listing. Certain year-end adjustments like impairment and closed store reserves will take a bit more analysis. Make sure you understand the request list. If you already prepare a schedule that meets what is being requested, be sure to discuss this schedule with the auditor. We’d much rather use a schedule you already do to avoid extra work.
3. Accounting issues – It can be hard to keep up on the latest financial reporting requirements and many complex accounting issues can arise during the year. It’s important to know when you have an issue. Once you know there’s an issue and still need help after consulting the proper guidance, then you should reach out to your auditor for guidance and tools to help you. Complex accounting issues include business combinations, liquidity concerns, impairment, closed store reserves, lease accounting, debt restructuring and gift card accounting. The FASB is always issuing new guidance, so make sure you know what’s new or ask your auditor.
4. Reconciliations – You might be surprised that I am mentioning this, but this is the number one reason why audits don’t go smoothly and incur additional costs. At least annually, all balance sheet accounts should be formally reconciled. There’s a big difference between reconciled and rolled forward. Also keep in mind with many fiscal year-ends not ending on December 31 that you are reconciling to your correct fiscal year-end date.
5. Trial balances – It’s so important that the trial balance given to your auditors is final and reflective of all year-end adjustments. It’s customary to expect certain year-end adjustments after you provide the trial balance, such as a healthcare accrual or other significant estimate. If it’s not final, make sure you communicate this to your auditors, so they can determine whether to start or delay the audit.
6. IT general controls – As part of the audit, it is our responsibility to obtain an understanding of the internal control environment. A big part of this is the access levels in significant software used, like your general ledger, to determine whether segregation of duties within the software are achieved. Even if duties are segregated and performed that way, if the general ledger access levels give everyone the right to do all functions, then internal control deficiencies come into play which may be raised to a significant deficiency or material weakness.
7. Permanent files – I know a year goes by fast but it’s a good practice to keep an audit folder with the newest perm files for the auditors. This would include new lease agreements, new or refinanced debt agreements and updated operating agreements. Be ready to provide these to your auditor.
8. Subsequent events – As part of the audit, it is our responsibility to evaluate significant subsequent events through the date of financial statement issuance. It’s a good practice to bring up these events as they happen with your audit team. A sample of significant events would include new stores, closed stores, new leases, new debt and liquidity concerns.
9. Bank covenants – Most likely you have quarterly or annual bank covenants that are dependent upon the final audited numbers that won’t be finalized right away. I would recommend always calculating your debt covenants off your final trial balance to assess whether there is high likelihood you may not pass the covenants. In such case, you should start the bank covenant waiver discussion with your banker to avoid further delays and not hitting your financial reporting deadlines.
10. First-year audits – If you’re about to experience your first audit of your financial statements, be prepared for some frustration to happen along the way. First-year audits can be challenging as the auditors are going much deeper on the numbers and need a lot more evidence to meet our professional standards. Being aware of the recommendations above can make a first-year audit go much smoother. If possible, it’s always great to get a review of your financial statements before you need your first audit. This will flush out most of the major issues.
The audit can be a little frustrating but improving your readiness with these restaurant audit preparation tips can make the process much more efficient and less stressful and time consuming. Having an auditor who understands restaurant issues and your industry is also important.
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