Today’s posting is the first in a series of articles about “auditproofing” your restaurant. By this, I mean taking proactive steps to help ensure that your restaurant or bar is not unfairly reassessed for sales and income taxes when it is audited by the CRA or provincial tax ministry. Please check back regularly for other methods of auditproofing your business. If you have any questions, please post comments to the articles, and I will do my best to respond. If you prefer, you can email your questions to me.
Most restaurants have a computerized point of sale (POS) system to keep track of items ordered by each guest, send orders to the kitchen or bar, and process guest check settlements. Most systems can keep track of many other important transactions, such as discounts given (by type and employee), voids (with reasons, by type and employee), ingredient usage, and many others. From a tax perspective, the POS system keeps track of every item ordered and calculates the appropriate sales tax. Just like your car, the POS needs to be maintained properly.
One of the first audit steps a tax auditor performs is to reconcile the POS sales and tax figures with the accounting records and with the actual sales tax returns that were filed. The auditor will also check to ensure that the correct sales taxes were charged on each item sold. Any discrepancies will cast doubt on the reliability of the procedures to accurately calculate and remit taxes and ensures that the auditor will be justified in using an indirect audit method to reassess sales (and income taxes) for the restaurant.
Here are a few steps that you should perform before your restaurant is audited.
Recalculate Taxes on Sales
It would be incredibly time-consuming to check every transaction that the restaurant processes. Luckily, we don’t have to check every one. We can check them in bulk for a period of time. If the figures are correct for the entire period, they are likely to be correct for every transaction processed during that period.
Consequently, for each period, review the POS report that shows sales and taxes collected. In Ontario, the report should show non-alcoholic sales (food and beverages), and alcoholic beverage sales, together with the total GST, PST (food at 8%) and PST (alcohol at 10%). I suggest that this report be run monthly, but you could do it daily or weekly, too. Once you have the report, multiply the total sales for each category (alcohol & non-alcohol) by the applicable PST rate, and compare this figure with the sales tax collected as shown on the report. Total sales (both types) multiplied by the 5% GST rate should be compared with the total GST collected that is shown on the report.
Any differences between the calculated tax and the tax shown on the report should be investigated. One reason for there being a difference is that some of the sales transactions were exempt from one or more taxes. Examples include purchases by Status Indians and Foreign Diplomats and food sales less than $4.00 in Ontario.
The more likely reason you will find a difference between the calculated tax and the actual tax collected is that the POS system contains errors in the tax setup for one or more menu items. When this happens, the auditor will conclude that the POS system and the internal controls over sales are not effective to ensure the accuracy and completeness of the sales and sales tax figures. Consequently, you want to ensure that all discrepancies are identified quickly and appropriate corrective action taken.
If you find discrepancies, you will have to check the tax codes for every menu item in the POS. All food and non-alcoholic beverage menu items should be coded to charge 8% PST and 5% GST. All alcoholic beverages should be coded to charge 10% PST (Ontario) and 5% GST. This can be a time-consuming task, but if done properly, you should not have to do this again.
A POS Key for Every Item
You should ensure that every item sold has its own key in the POS system. Ensure that a new POS key is set up prior to adding any new wine to the menu. Do not let staff try to convince you that they “need” an Open Liquor key. They don’t, unless you fail to set up keys for all menu items. They may try to argue that they don’t have time to find the right key when they’re busy, etc… If this is a problem, ensure that they are properly trained on the POS system and consider reorganizing menu items on the POS to make it easier to find items quickly. Why is this so important? Once you have an Open Liquor key, it will be used for a wide variety of customer purchases. Wine, beer, alcohol and even food will be processed under this key. This will distort the reporting of sales by category (and taxes collectible) and it will make it impossible for you to accurately track usage of ingredients based on actual sales. As we will see in future posts, this will be an extremely important control when we need to rebut the auditor’s assumptions.
POS Menu Security
Once you have completed this task, I recommend that you change the security authorizations in the POS system to restrict all staff, except yourself or a trusted manager, from making changes to or adding menu items. With this control in place, you will only have to check future changes and new menu items for accuracy. Subsequent monthly reconciliations should reveal no unexplained discrepancies.
Other Housecleaning Tasks
While not the topic of today’s post, when you are checking each menu item, you can perform other useful steps that we will be using in future auditproofing tasks. In particular, while checking the tax codes, you should also ensure that each menu item (focus on alcoholic beverages only) is summarized in the appropriate sub-category. Here are a few typical sub-categories: Domestic bottled beer, Imported bottled beer, martinis, shots, cocktails, Wines by-the-glass, Wines by the bottle, etc… Accurate categorization of all menu items will make it easier to analyse sales data in the future.
Another step is to create recipes for menu items. Usually, when we think of recipes, we might think of a cooking recipe for a dish. While this can be programmed into most POS systems, this can be an extremely time-consuming exercise. Most auditors are far more concerned about alcoholic drink sales. Consequently, you should consider creating recipes for all alcoholic beverages. Having a recipe for each menu item will allow you to prepare POS reports of ingredient usage, based on the actual items ordered for any period of time. Depending on the level of sophistication required, these usage reports can also be used to identify inventory shortages and assist in placing orders to replenish stock.
Recipes can be as simple as having an “ingredient” of one bottle of Heineken for a bottle of Heineken (menu item). A glass of wine could have 6 ounces of Catena Malbec, or it could be described as 25% of a bottle of Catena Malbec. Cocktails could have several alcoholic ingredients.
Recipes can have a standard spillage factor built in or not. If you do incorporate a spillage factor, it should be a fairly accurate estimate of the true spillage amount. Note that this percentage will vary among the various liquor categories. If the spillage factor is included in the recipe, it is one less factor that needs to be explained in future variance analyses.
This post has been concerned with the menu items in a POS system. I have not discussed other issues such as discounts, voids, spoiled stock, and customer comps. These will be discussed in future posts.