BARS AND RESTAURANTS
Restaurants can be divided into two types of restaurants: fast food and full service. Fast food restaurants include those that provide only take-out services, as well as franchises offering -in or drive-through services
The bar and restaurant industry is particularly susceptible to theft and embezzlement. Bars and restaurants typically make numerous small dollar sales in a relatively short period of time (for example, lunch or dinner). Many employees receive and manage large amounts of cash. Some restaurants do not properly segregate the duties of their employees to the extent necessary to maintain good internal controls. This is especially true of bars where one bartender takes the order, fills the order, receives the payment, records the payment, and may even balance out the till at the end of the day. Bars and restaurants tend to pay their employees near minimum wage and have a high rate of employee turnover. Additionally, bar and restaurant employees often have access to large inventories of food and alcohol. For these reasons, bars and restaurants may have a high risk of employee theft and embezzlement unless they implement and maintain a set of good internal controls.
Some bar and restaurant owners may underreport income by any of several methods. For example, they may operate open tills, use double sets of books, and fail to report certain sales transactions. Restaurant employees may be aware of the owner's underreporting, and may even have been asked to assist in the underreporting of income. Additionally, a dishonest bar or restaurant owner may encourage dishonest employees. Bar or restaurant employees may underreport income by concealing cash receipts or underreporting tips.
The challenge for the examiner is to separate restaurant owners who are in compliance with the tax laws from restaurant owners who have failed to satisfy their tax obligations. To do this, the examiner should focus on 1) unreported income by the restaurant, 2) cost of sales, and 3) unreported tip income by the employees. While other issues may also be of concern to the examiner, these three issues will generally need to be addressed in the audit of a restaurant.
The following is a list of possible books and records that will be found during the examination:
1. Daily cash register tapes including credit card sales, credit card tips, cash sales in total and by server
2. Deposit slips
3. Credit card and house account charge slips
4. Daily operating reports
5. Weekly profit and loss reports
6. Check register or copies of coded voucher checks
7. Bank statements for checking, savings, and all credit card sales
8. Bank reconciliation
9. Cash pay-out recaps (by account classification)
10. Inventory reports of food, liquor, beer, and wine done daily, weekly, and at year-end 11. Purchases recap and unpaid bills recap (vendor and account classification)
12. Equipment purchases (include copy of invoice)
13. Payroll records including time cards and time sheet and payroll summary
14. Accrued payroll and payroll taxes entries
15. Monthly and/or quarterly tax returns
16. Annual tax returns including Forms W-2, 1099, 8027, and related entities' tax returns
17. Books of original entry including: cash receipts journal; sales journal; general ledger; and working trial balance
18. Monthly financial statements including income statement, balance sheet, cash flow statement, and changes in financial position
19. Employee sales and tip report (daily, quarterly, and annual)
20. Menu engineers system report showing standard costs and sales price by menu item.
COMMON METHODS AND INDICATIONS OF UNDER REPORTING INCOME
1. Record a smaller sales amount on the daily operating report than is shown on the cash register tape. This reduces the amount of cash that must be deposited for the day. 2. Regular cash overages. This is an indication that sales are not being recorded, and a breakdown in controls.
3. Collect the side income (for example, vending machine proceeds, tee shirt revenue, gambling fees, and admission charges) and do not include the income on the daily operating report.
4. Collect directly from special customers, parties, and banquets and do not report the income on the daily operating reports
5. Purchase food and supplies for personal consumption without reimbursing the restaurant.
6. Deposit supplier rebates into the owner's person account without recording the payments in the books and records.
7. Purchase food for friends, charge them, and do not record any amounts collected and pocket the funds.
8. Turn off the register or leave the cash drawer open for periods of time (for example, during the lunch rush).
9. Turning off the register hours ahead of the close of the restaurant.
10. Refusing to purchase a register which records time of sales, and when machine is balanced out. Refusing to purchase a point-of-sales system claiming the cost is too high.
11. Balancing out the till days or weeks after the end of the shift.
12. Depositing cash from sales days or weeks after the end of the shift.
13. Never depositing any coins collected from daily sales.
14. Use two registers to record sales, and only report sales from one.
15. Creates a second set of records of sales on same machine at the end of every day with lesser totals than originally recorded. This is done on older models of cash register machines.
16. Key in a smaller amount on the cash register than is collected and pocket the difference.
17. Have a vending machine with no record of income received from vendor, usually in cash.
18. Kickbacks from suppliers.
19. Specific credit cards not rung as a payment, for example Diner's Club may never be rung up as a sale.
20. Reimbursement from employees for uniforms.
21. Omission of side income such as tee shirt sales or pool table fees.
22. Sales from certain tables or chairs are not recorded or even assigned to a server on the machines.
23. Higher than expected food and liquor costs but company still operates at a loss in excess of 3 years.
24. One person prepares all the records and there is no separation of duties.
25. Falsifying records or invoices.
26. Destroying books and records especially after contacted for examination.
27. The cash register machine is changed frequently or is lost but is not a computerized system.
28. Duplicate guest checks are not kept.
29. Owner has high lifestyle or is acquiring assets with no apparent source of income. 30. Owner conceals assets.
31. Making false statements to IRS agents regarding income.
32. Attempts to hinder the examination. For example, failure to answer pertinent questions, repeated cancellations of appointments, or refusal to provide records.
33. Testimony of employees concerning irregular business practices.
34. Transfer of assets for purposes of concealment, or diversion of funds to key officers or trustees.
35. Backdating of documents.
36. Attempts to bribe the examiner.
37. Using false Social Security Numbers.
38. Assets located under other names.
39. Transactions surrounded by secrecy.
40. Use of secret bank accounts.
41. Claiming fictitious deductions.
42. Intentional under or over footing of columns in journal or ledger.
43. Unable to locate cash registers tapes.
44. Unable to locate cash registers machines.
45. Depositing income in other family name bank accounts.
46. High employee theft and possible embezzlement.
47. No employees report any tips, and none are reported to the IRS by the employer. 48. Report of cash robbery with police department for cash located in the home.
49. Payment of most business expenses with cash or personal expenses with cash that has never been recorded as income.