A restaurant has no receivables worth the name and inventory that turns in days, so the balance sheet is quiet. The risk sits in the daily flow: sales rung through a point-of-sale (POS) system, cash handled by shift staff, tips, gift cards sold ahead of use, and payroll. Auditing a restaurant group is mostly an exercise in proving that completeness of sales and cash controls hold across many small, similar transactions.
How revenue is recognized
Food and beverage sales are recognized at the point of sale, when the guest receives the meal. The audit focus is completeness and cutoff: every ticket should reach the POS, every POS day should reach the general ledger, and every deposit should reach the bank.
Gift cards are the main ASC 606 topic. Cash received for a card is a contract liability, not revenue. Revenue is recorded when the card is redeemed. Cards that are never used create breakage. If the restaurant expects to be entitled to breakage, it recognizes the amount in proportion to the pattern of redemptions by customers. If it does not expect to be entitled, it recognizes the remaining balance only when the likelihood of redemption becomes remote. Estimates of breakage are subject to the constraint on variable consideration and are reassessed each period. An entity cannot adopt a policy of recognizing breakage only when it occurs if it expects to be entitled to it. Amounts that must be remitted to a state under unclaimed property law are not breakage and stay in liabilities. The guidance is in ASC 606-10-55 on customers' unexercised rights. Our guide to the deferred revenue schedule covers the roll-forward format.
Third-party delivery apps add a principal versus agent question: whether the restaurant records the full order price and the platform fee as expense, or only its net share. See gross versus net revenue.
Risk areas
- Sales completeness. Voided and discounted tickets, comped items and "no sale" drawer opens are routes for skimming.
- Cash handling. Cash is collected by many people in many places, so cash controls are the primary control area.
- Gift card liability. Liability balances can sit outside the accounting system, in a card processor portal.
- Tips and payroll. Tips affect payroll taxes and, for larger operations, an annual information return.
- Leases and impairment. Individual restaurants are tested at the restaurant level for impairment when performance declines. See ASC 842 lease accounting.
- Food cost. Shrink, waste and cutoff of purchases against inventory.
Audit procedures
Sales. Reconcile POS daily sales reports to the general ledger and to bank deposits for a sample of days spread through the year, including the first and last week. Include credit card settlements, delivery platform remittances and cash. Run analytics on voids, comps and discounts by employee, shift and location, and investigate outliers. Test payment-type mix for stability: a drop in cash share without an explanation is an alert.
Cash. Observe an opening and closing count if possible, and agree the cash over and short log to deposits. Compare the sequence of deposit dates to POS days to detect delayed deposits. Test petty cash and tip payouts.
Gift cards. Obtain the roll-forward: opening liability, cards sold, redemptions, breakage recognized, closing liability. Agree sales and redemptions to the processor report. Recompute breakage from historical redemption curves by card vintage, and test that revenue follows the pattern of redemptions. Ask whether the state requires unredeemed balances to be reported as unclaimed property, and test that those amounts were excluded from breakage.
Tips and payroll. Under IRS guidance, cash tips of $20 or more in a month are wages subject to employer and employee Social Security and Medicare tax, and employees report them to the employer. Agree credit card tips collected to tips paid out and to payroll records. Test service charges: they are not tips, and amounts distributed to employees are wages subject to withholding.
Form 8027. The IRS instructions require employers operating a large food or beverage establishment to file Form 8027 located in the 50 states or the District of Columbia where tipping is customary and the employer normally employed more than 10 employees on a typical business day in the preceding calendar year. If reported tips for a payroll period are less than 8 percent of gross receipts, the establishment must allocate the difference among directly tipped employees. Fast-food operations are excluded. Obtain the filed forms and agree gross receipts and charge tips to the ledger.
Inventory and purchases. Observe a count at year-end (see inventory observation procedures), then test the last invoices before and after year-end and the search for unrecorded liabilities.
Worked example (illustrative numbers)
A new gift card program sold $400,000 of cards in its first fiscal year, and $276,000 of that value was redeemed by year-end. Historical data from a comparable program shows that 8 percent of card value is never redeemed. Expected breakage on the cards sold is therefore $32,000 (8 percent of $400,000), and expected redemptions are $368,000. Redemptions to date are 75 percent of expected redemptions ($276,000 divided by $368,000), so breakage recognized in the year is $24,000 (75 percent of $32,000). Revenue for the year from the program is $300,000 ($276,000 redeemed plus $24,000 breakage), and the contract liability at year-end is $100,000 ($400,000 less $300,000). If the state requires remittance of unredeemed card balances, no breakage is recognized, revenue is $276,000 and the liability stays at $124,000. The auditor tests the 8 percent against card vintages and the state's unclaimed property rule.
PBC items
- POS daily sales summaries and void, comp and discount reports
- Bank statements, deposit slips and card processor settlements
- Delivery platform statements
- Gift card sales and redemption report with roll-forward
- Tip, payroll and service charge reports, plus Forms 8027 if filed
- Inventory counts and last invoices before and after year-end
- Lease agreements and store-level profit and loss statements
Red flags
- Void and comp rates that vary sharply by manager
- Cash deposits that lag POS sales by several days
- Gift card liability that decreases while card sales increase
- Reported tips well under the allocation level without an explanation
- Cash share of sales falling while unit counts are stable
- A closed location with a lease still on the books at full carrying value
Sources
- FASB ASC 606-10-55, Revenue from Contracts with Customers (customers' unexercised rights)
- PwC Viewpoint, Revenue from contracts with customers: unexercised rights
- IRS, Instructions for Form 8027
- IRS, About Form 8027
- IRS, Publication 15, Employer's Tax Guide
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks
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