 Situation Analysis:After eight months into the lease term, high occupancy levels were being achieved but the Owner's financial objectives were not being met with respect to the foodservice operation. Monthly revenues were falling short of the threshold at which the Operator would share the profits of the operation and deficit amounts were being subsidized by the Owner per the conditions of the lease. The Owner requested an immediate spot audit to confirm that revenue and expenses were being properly accounted for. The Challenge: The challenge was in obtaining necessary documentation sufficient to complete the financial audit. Lack of sufficient documentation and unorganized manual bookkeeping systems created opportunities to overlook obvious shortcomings. Project Strategy: - Select representative month and test revenue/ expenses.
- Audit every cash register transaction for entire schedule on two operating days.
- Assess general level of control of the food production management system.
- Audit physical food inventory and tie product usage into item sales from cash register tapes.
- Confirm that expenses are authorized per the lease agreement.
- Focus on sales reporting.
- Confirm that all catering delivery sales are accounted for.
- Submit report findings and provide recommendations for improved controls and procedures to protect the Owner’s interest.
Findings: - Daily sales spiked during audit period as CFL observed all cashiering transactions.
- Initial findings prompted audit of two additional months.
- Unable to vouch sales in view of the fact that catering sales were not being rung at register.
- Careful audit of the expenses revealed 10-15% variance of submitted expenses.
- Unable to account for appropriate number of cash register tapes on a daily basis.
- Cash “paid outs” included significant payments of cash to employees for hours worked.
- No physical inventories were being taken.
- Food cost was unadjusted for ending inventories.
- The Operator was relying on estimates and allocations in lieu of actual expenses for insurance benefits and taxes.
- With a menu pricing structure pegged at 5-10% below local market prices, the Owner is unknowingly subsidizing the cost of meals to both tenants and visitors.
- No identification card is required to eat in the cafe.
- Audit variances were summarized for owner action.
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