15 Tips to Prepare You for Your Next Audit
With another audit season just over the horizon, it is time to start planning so your next audit goes as smoothly as possible.
Below is a generally accepted accounting principles
checklist of things to prepare before your next audit begins. This can help ensure your financial statements are issued timely.
- Have copies of permanent file documents (such as any new or amended organizational documents, loan agreements, leases, and franchise agreements) ready.
- Are vendor rebates for part of the year not expected to be received until after year-end? If so, has a receivable been recorded at the end of the year for the amount to be received? If vendor rebates are paid in advance, has the full amount of the rebate been earned at year-end or does a portion need to be deferred?
- Make adjustments to ensure certain expenses are accrued (such as bonuses or property taxes), previous prepayments have been amortized over the year (such as insurance costs or service contracts), and any new prepayments have been properly recorded (such as rent).
- Do any new lease agreements include escalating lease payments or free rent periods? If so, is the rent expense straight-lined over the entire term of the lease? For older leases with escalating rent payments or free rent periods, is the deferred rent liability at year end proper?
- If you renegotiated any lease agreements, you’ll need to adjust your deferred rent schedule to reflect the change in payments.
- Have you properly accounted for any new or existing tenant improvement (TI) allowances? A TI allowance is provided by the landlord as an incentive to sign the lease agreement and helps your company improve its premises. The allowance is then amortized over the base term of lease as a reduction of rent expense. If construction has started on the property, but the TI allowance has not been received as of year-end, has a receivable been recorded?
- Are any of your long-lived assets or goodwill impaired? If assets will not realize their benefit over the remaining life of the business, an impairment charge will need to be recorded.
- Have you considered amortizing goodwill over 10 years as permitted by Accounting Standards Update (ASU) 2014-02?
- Are the useful lives of fixed assets proper? Leasehold improvements are limited to the shorter of their economic life or the lease term. Do the lives of any new leasehold improvements reflect the lease term of the existing lease agreement? Did you remodel? If so, make sure the life is consistent with the lease term used in your deferred rent schedule.
- Review property, plant and equipment additions during the year to determine if any should be expensed. Alternatively, review repair and maintenance expenditures to ensure items should be expensed versus being capitalized. Make sure to put a written capitalization policy in place. If asset additions are for the replacement of old assets, make sure the old assets have been disposed of and properly accounted for.
- Was a new restaurant constructed during the year or an existing restaurant renovated? If so, did you properly capitalize interest and wages of those involved with the project?
- Have payments made for loan fees related to obtaining new financing or a refinancing, architect fees related to the construction of a restaurant, or lease negotiation fees been properly capitalized?
- If you are self-insured for health and workers’ compensation insurance, have you recorded an accrual for the known claims incurred and not paid, as well as an accrual for incurred but not reported (IBNR) claims?
- Are you properly tracking the cash value of gift cards so the liability for the gift cards can be properly determined? Have you determined if any cards will not be redeemed and has the income on these cards (“breakage”) been recorded? You must consider state escheatment laws when recording breakage.
- Are you up to date with the latest FASB ASUs and have you taken them into account when preparing your year-end financial statements?
If you can, check these off your list before your audit begins to help ensure this year’s audit goes as efficiently – and as quickly – as possible.