A franchised or independent dealership is a high-volume, thin-margin business with a few large balance sheet accounts: vehicle inventory, the floor plan notes that fund it, and the receivables from lenders on cars already delivered. Those accounts are tied to each other, and the audit works best when they are tested together.
How the dealership makes money
Dealerships earn gross profit from new vehicles, used vehicles, parts and service, and from finance and insurance (F&I). In F&I, the dealer arranges installment loans or leases through third-party lenders and receives a commission from the lender. One large public dealer group describes its exposure to loss on those financing arrangements as limited to the commissions it receives. The same group sells vehicle protection products primarily on a straight commission basis and also participates in future underwriting profit on some products. That structure creates the chargeback liability discussed below.
Floor plan financing
Dealers fund new vehicles through a floor plan line, a revolving note secured by the vehicle inventory and paid down when each unit is sold. See the glossary entry on floor plan financing. Floor plan interest rates are variable, so interest expense moves with benchmark rates. One large public dealer group disclosed new vehicle floor plan interest expense of $132.1 million for 2023 against $35.5 million for 2022, a line the auditor can predict from rate and balance data.
Audit points:
- Confirm balances and terms directly with each lender; see external confirmations.
- Reconcile the floor plan statement to inventory unit by unit. Every financed vehicle on the lender statement should be on the lot or sold with proceeds in transit to the lender.
- Out-of-trust exposure. A dealer that sells a financed vehicle and uses the proceeds before paying the lender is out of trust. Floor plan agreements treat it as a default, so it is a going concern matter.
- Covenants and curtailments. Aged units can trigger principal curtailment payments. Test compliance with loan covenants and assess classification; see debt classification and covenants.
- Manufacturer floor plan assistance. One large public dealer group disclosed in its 2016 Form 10-K that it records rebates, holdbacks and floor plan assistance as a reduction of vehicle cost, recognized in income when the vehicle is sold or when earned under a specific program, whichever is later. Its 2023 Form 10-K reports floor plan assistance as a component of new vehicle gross profit. Read each dealer's policy and agree the program statements to it.
Contracts in transit
When a customer finances a purchase, the dealer delivers the vehicle and sends the signed contract to a lender, which funds it after review. Until the funds arrive, the dealer carries a receivable, called contracts in transit. The balance is collected within days, so it should be small relative to monthly financed sales, and it is a natural test of cutoff and of unrecorded problems.
Testing steps:
- Obtain the contracts in transit schedule by deal, lender and date.
- Vouch subsequent receipts to bank statements.
- For items not collected after a normal funding window, obtain the reason: missing paperwork, lender rejection, or a customer who never completed financing.
- Look for deals where the lender has refused to fund. A vehicle sold under a "spot delivery" arrangement, where the customer takes the car before financing is final, may come back to the dealer. Counsel review is part of the response to any such deal.
- Ensure revenue is not recognized on a deal that has not met the sale criteria.
Inventory and F&I in brief
Vehicle inventory is stated at the lower of cost or net realizable value, and a large public dealer group reports monitoring new vehicle values against NRV and carrying used vehicle inventory net of cumulative write-downs ($12.2 million at December 31, 2023). F&I commissions are subject to chargebacks, which one large public dealer group states it estimates on an individual product basis from historical chargeback experience. Both areas get full treatment in auto dealership F&I chargebacks and vehicle inventory. The link between them and this guide is the floor plan: every financed unit that is written down or sold affects the lender balance, the curtailment calculation and the borrowing base.
Risk areas
- Out-of-trust sales and misapplied proceeds
- Contracts in transit that are old, unfunded or fictitious
- Manufacturer incentives, holdbacks and warranty receivables
- Parts inventory obsolescence
- Related-party real estate leases with the owner
- Customer deposits and titles held
Worked example
This example is illustrative. A dealer reports $4,000,000 of floor plan notes payable at year end. The lender statement lists 90 financed units totaling $4,000,000. The perpetual inventory shows 84 of those units on hand at a cost of $3,640,000. The remaining 6 units, with a lender balance of $360,000, were sold in the last three days of the year, and contracts in transit show $410,000 for those deals.
The auditor agrees the 6 sold units to sales documents. Two of the 6, financed at $120,000, have no funding receipt in the 10 business days after year end. One was a spot delivery where the lender declined the contract. The dealer owes the lender the payoff on each financed unit, and the proceeds that were never received mean the dealer is out of trust by $120,000 until the lender is paid. The adjustment reduces contracts in transit and sales, returns one vehicle to inventory, and requires covenant and going concern evaluation if the dealer cannot cure.
PBC items
- Floor plan statements, loan agreements and curtailment schedules
- Perpetual inventory listing by VIN with aging
- Contracts in transit schedule and subsequent funding detail
- Manufacturer incentive and holdback statements
- Vehicle count sheets
- Customer deposit and title register
- Parts inventory and cost listing
- Franchise agreements, financial statements submitted to the manufacturer and loan covenant calculations
Red flags
- Floor plan balance exceeding the cost of vehicles on hand
- Unit counts that differ between lender audits and the books
- Contracts in transit growing with no change in sales
- Repeated changes to financed deal terms after delivery
- Aged units that keep triggering curtailment payments
- Owner withdrawals timed with floor plan borrowing
Sources
- AutoNation, Inc., Form 10-K for fiscal year 2023, Item 1 and Item 7 (sec.gov/Archives/edgar/data/350698/000035069824000021/an-20231231.htm)
- AutoNation, Inc., Form 10-K for fiscal year 2016, revenue recognition, manufacturer incentives and chargeback liability (sec.gov/Archives/edgar/data/0000350698/000035069817000028/an10k2016.htm)
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Part of CORAA University · Specialized engagements: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error