A dealership looks simple from the outside: it buys vehicles, sells vehicles and services them. The audit is not simple. Three areas carry most of the risk: finance and insurance (F&I) income that can reverse after the sale, vehicle inventory held under a floor plan lender's lien, and a high volume of customer cash and personal data. A firm that audits a dealer needs a program built around those three.
How revenue is recognized
A vehicle sale is a point-in-time performance obligation. Control passes when the customer takes delivery, the deal is funded or contracted, and title and risk move to the buyer. The cutoff question is the last days of the month and the year: deals booked as sold but not delivered, and "spot deliveries" where the customer drives away before financing is approved. Pair the work with the cutoff testing procedures.
F&I is the harder area. When the dealer arranges financing or sells a service contract, it earns a commission from the lender or the product administrator. The lender or administrator claws back the commission if the customer pays off the loan early, defaults, or cancels the product. Under ASC 606 that makes the commission variable consideration. The dealer includes in revenue only the amount for which it is probable that a significant reversal will not occur, and it reassesses the estimate every period. The constraint is set out in ASC 606-10-32-11 through 32-13, and the same analysis drives the refund and cancellation reserve. The mechanics are covered in our guide to variable consideration and the constraint.
Public dealer groups disclose chargeback reserves in their financial statement notes. One group reported $55.3 million of aggregate chargeback reserves at December 31, 2025, up from $51.6 million at December 31, 2024.
Principal versus agent matters for service contracts and gap products. If the dealer is an agent for a third-party administrator, it records the commission, not the gross contract price. See gross versus net revenue.
Risk areas
- F&I chargeback reserve. The estimate is management's, the data sits in the dealer management system (DMS) and the lender portals, and an understated reserve flatters income.
- Vehicle inventory existence and valuation. Units are high value, identified by VIN, and movable. Used units carry net realizable value risk as they age.
- Floor plan. Selling a financed unit creates an obligation to pay the lender. Sold-out-of-trust positions, where a unit is sold but the lender is not paid, are a core floor plan failure mode.
- Manufacturer incentives and holdbacks. Receivables from the manufacturer, factory credits and warranty claims need cutoff and collectibility testing.
- Contracts in transit. Deals sold to a lender but not yet funded sit as receivables at year-end.
- Cash. A business that takes large cash deposits has IRS reporting duties and a fraud exposure.
- Customer data. The FTC Safeguards Rule treats a dealer that finances or arranges financing for consumers, or that leases vehicles for longer than 90 days, as a financial institution (16 CFR 314.2). Obtain management's written scope conclusion for its financing and leasing activity.
Typical audit procedures
Revenue and F&I. Select deals across the year and agree the buyer's order, retail installment contract and delivery documentation to the sales journal. Obtain the chargeback roll-forward by product and lender: opening reserve, provision, chargebacks paid, closing reserve. Test the inputs by recomputing cancellation and payoff rates from the DMS and lender statements, then compare the prior-year reserve to actual chargebacks run off in the period. Recalculate the reserve and challenge any change in method.
Inventory. Attend the physical count and reconcile it to the VIN-level perpetual listing (see inventory observation procedures). Include units on loan, in service, at auction and out for demonstration. Test costing, including reconditioning costs capitalized, and test net realizable value for aged used units using post year-end sales prices (see inventory costing under ASC 330).
Floor plan. Confirm balances and terms directly with each lender (see external confirmations). Reconcile the lender's unit list to the VIN listing, and search for units sold before year-end where payoff occurred after year-end. Test interest accruals and curtailment payments, and read the agreement for covenants.
Receivables. Trace contracts in transit to funding after year-end. Confirm manufacturer receivables to statements and test warranty and incentive claims to supporting documents.
Cash and compliance. A trade or business that receives more than $10,000 in cash in a single transaction or related transactions files Form 8300, due within 15 days after the transaction, per IRS guidance. Select large cash deals and agree each to a filed form. For information security, a covered dealer must designate a Qualified Individual and oversee its service providers by contract (16 CFR 314.4(a) and (f)). A notification event involving unencrypted information on at least 500 consumers must be reported to the FTC as soon as possible and no later than 30 days after discovery (16 CFR 314.4(j)). Ask whether any event occurred and how it was resolved.
Worked example (illustrative numbers)
A dealer sold 1,200 financed vehicles in the year with an average F&I commission of $1,400 per deal, or $1,680,000. Management reserves 6 percent for chargebacks, or $100,800. Recomputing from lender statements, the trailing eighteen months show early payoffs and cancellations that reversed 9.5 percent of commissions. At that rate the reserve is $159,600, so the reserve is short by $58,800. The auditor proposes the adjustment, and also asks why management's rate sits below actual experience.
PBC items
- Year-end VIN-level inventory listing with cost, age and floor plan lender
- Lender statements, floor plan agreements and payoff letters
- F&I commission reports by lender and product, plus chargeback roll-forward
- Contracts-in-transit listing and subsequent funding detail
- Manufacturer statements, incentive and holdback reconciliations
- Cash receipts log and filed Forms 8300
- Written information security program and any incident log
- Used-vehicle aging report and subsequent sales detail
Red flags
- Reserve rate unchanged for years while chargebacks trend up
- Units on the lender's list that are not on the lot and have no sale record
- Large cash deals split into smaller amounts across days
- Contracts in transit that remain unfunded after year-end
- Year-end spike in deliveries recorded without delivery documents
- Floor plan payoffs that lag unit sales
Sources
- FASB ASC 606-10-32, Revenue from Contracts with Customers (variable consideration and the constraint)
- FASB ASC 330-10, Inventory
- 16 CFR 314.2, definitions (automobile dealership leasing example)
- 16 CFR 314.4, Standards for Safeguarding Customer Information
- IRS, Form 8300 and Reporting Cash Payments of Over $10,000
- SEC EDGAR, XBRL disclosure of a public retail automotive dealership group, chargeback reserves, December 31, 2025
- PwC Viewpoint, Revenue from contracts with customers: unexercised rights (constraint and reassessment of estimates)
- AICPA, AU-C Section 505, External Confirmations, and AU-C Section 501, Audit Evidence: Specific Considerations for Selected Items
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