Financial Statement Audit Preparation of Your Restaurant or Franchise: Steps and Best Practices

At a glance

• The main takeaway: Proper financial statements are essential when managing a growing business and should provide a detailed breakdown of the business’s current financial performance. 
• Impact on your business: Timely preparation of your restaurant’s financial statements is key to determining whether you are achieving your goals or if you must adjust.
• Next steps: Aprio has a dedicated accounting team that can provide audit-readiness and bookkeeping services for GAAP-ready financial statements. Our Restaurant, Franchise & Hospitality team can help franchisees and restaurateurs achieve profitable growth and take your restaurant operations to the next level.

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The full story:

Audits are typically required by third parties and are used to make investing or lending decisions. These third parties generally require financial statements that are prepared in accordance with generally accepted accounting principles (GAAP). A complete set of financial statements includes profit and loss (P&L) statements (also known as income statements), balance sheets, and statements of equity and cash flow.

Even when audits aren’t mandatory, they offer significant benefits. Audits ensure consistency and transparency in financial reporting, build confidence among investors and lenders, and help businesses comply with regulatory requirements. They also provide a credible overview of a company’s financial health, which is crucial for long-term growth and stability.

In this article, we explore how to prepare for a GAAP audit and how an audit can benefit your restaurant to achieve long-term profitable growth.

What is GAAP?

Generally Accepted Accounting Principles (GAAP) is a widely used financial reporting practice in the United States. GAAP is the set of accounting rules, standards, and procedures established by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). GAAP is the accrual basis of accounting and is a set of accounting rules to ensure complete, consistent, and comparable financial reporting, which allows third parties to analyze and make decisions about the financial health of a company.

Here are a few benefits of having a GAAP-audited financial statement: 

• Consistency and transparency: GAAP provides a standardized accounting framework which is significant to ensuring consistency and transparency across financial reports. 
• Confidence in investors and lenders: GAAP financial statements provide a credible overview of a company’s financial health and build trust with stakeholders and potential investors. 
• Compliance with the SEC: Since GAAP is practiced mainly in the U.S., some publicly traded companies are required by the U.S. Securities and Exchange Commission (SEC) to file GAAP-compliant financial statements.

What are the circumstances for an audit for a restaurant or franchise client?

An audit is typically required by an outside party, such as an investor, private equity, or a lender. For franchisors, an audit is required to file the franchise disclosure document (FDD). Terms of the audit requirement are typically documented in the credit (lender) or operating (investor) agreement. Restaurant owners should note that these audited financial statements are due between 90 or 120 days after the fiscal year-end. Restaurant owners/CFOs need to be diligent about reading these agreements and understanding those requirements.

How to prepare for an audit of your financial statements

It is important to understand the roles and responsibilities of the employees in the organization. As part of the audit, the CPA firm will need to assess internal controls and interview your accounting and operations teams. They will ask questions such as who performs certain accounting transactions and who approves the monthly financial statements and reconciliations. This is critical information to auditors because it allows them to assess the audit risk as it pertains to the financial statements.

Additionally, books and records will need to be in order and supportable. For example, significant balance sheet accounts—most importantly cash—should be reconciled on a monthly basis. Management should also have documentation and support for significant transactions and journal entries from throughout the year.

Entities should also ensure that significant contracts such as credit agreements and operating and lease agreements are maintained in a central and secure manner. 

What are some of the most common mistakes when preparing for an audit?

Failing to have a month-end close process is usually the top oversight when an engagement team is auditing a client. It takes a significant amount of time to prepare financial records to be in accordance with GAAP. This includes having processes and controls in place as well as a knowledge of GAAP to prepare timely financial statements.

To avoid potential delays in financial statement prep and delivery, it is important for restaurant owners and franchisees to understand what is and is not reconciling in the balance sheet on a monthly basis. For instance, many restaurateurs or franchisors focus on the income statement, but do not reconcile the balance sheet. Having a process in place to reconcile cash on a monthly basis, accruals on a monthly-to-quarterly basis, and accounts receivable when they are regularly due can help restaurateurs or franchisors prepare for an audit. Not reconciling the balance sheets in time can result in significant audit adjustments.

Communication is also key to getting a timely audit completed. Regular communication with the accounting and audit team as well as maintaining and monitoring the audit request list is essential to staying on schedule.

Consulting with a professional advisor that can perform timely monitoring and adjustment of books and records will help to avoid delays in the audit process.

The bottom line

Proper financial statements are crucial for managing a growing business, providing management, investors, and lenders a detail of financial performance for the year. Timely preparation of these statements helps determine if goals are being met or if adjustments are needed. Consulting with professional advisors can ensure audit-readiness and support profitable growth.

Aprio has a dedicated accounting team that can provide audit-readiness and bookkeeping services for GAAP financial statements. Our Assurance practice team can guide clients through all the preparation as well as provide tools to understand and report on the GAAP basis of accounting. 

With our innovative back-office solutions, financial guidance, tax planning, and advisory services, Aprio’s Restaurant, Franchise & Hospitality team can help franchises and restaurateurs achieve profitable growth and take your restaurant operations to the next level. 

If you are interested in improving your employee benefits solutions package, contact Aprio’s Employee Benefits Services team to get started.

Related Resources/Assets/Aprio.com articles/pages

Aprio’s Restaurant, Franchise & Hospitality Services Page 

Audit: Meaning in Finance and Accounting and 3 Main Types 

Generally Accepted Accounting Principles (GAAP): Definition and Rules 

Understanding GAAP rules