1. Who runs the business? Family-operated or management-operated?

2. What are the duties of those who run the business?

3. What amount of time does each individual spend at the business?

4. What type of reports are prepared for the business, and who prepares them? (i.e. tip reports, daily sales reports, etc.)

5. How much of the bookkeeping is done and/or kept at the business site? Does the owner have an accountant or bookkeeper who maintains his or her own bookkeeping system?  Who writes the checks?  Who signs the checks?  Who decides which bills to pay and when to pay?  Is there a "What to pay" listing prepared?

6. Who else has managerial control over the employees at the restaurant?

7. Does the management have any prior experience in the industry?

8. What are the days and hours of normal business operation?

9. What type of restaurant?

10. What type of clientele frequents the restaurant?

11. What is the customer capacity of the restaurant?

12. What are the average number of dinners sold on the weekdays and weekends?

13. What type of payment is accepted? (i.e. cash only, credit cards,checks)

14. What is the average cost of a meal?

15. Who determines the price of the meal?

16. What type of entertainment, if any, is offered?

17. Is there a cover charge for the bar or any entertainment, at anytime during the evening?  - How are the entertainers paid?

18. Are banquet facilities available?

19. Is there a set fee for banquets or is the charge determined on an individual basis?

20. Is there a "happy hour" (time period when alcoholic drinks are sold at a discount)?  - Do you have any special pricing days?

21. Are food specials offered daily?

22. What are the average number of employees on the payroll?

23. How many people are working on day, afternoon, or night shifts for the various areas of the restaurant?

24. What type of hours do the employees work - day, afternoon, evening?

25. How are employee's paid - weekly, biweekly, monthly?

26. Are any individuals working at the restaurant considered independent

27. How is time kept for the employees - sign-in, time clock?

28. What type of side duties, if any, do the employees have on a daily, weekly, or monthly basis?

29. Who calculates tips for each server?

1. How are sales by the waiter staff controlled?

2. Are pre-numbered meal tickets used for each customer and/or table?

3. If so, how are they issued to each server?

4. What is each server's responsibility for the numbered meal tickets?

5. What happens to voided meal tickets?

6. Does someone in management verify voided tickets?

7. Are cash registers used for the restaurant and/or bar?

8. Where are they maintained?

9. Are they pre-set for the individual menu or drink items?

10. Who has access to the cash register?

11. Are cash register drawers closed after each sale?

12. Do the cash registers print sales tickets?

13. How are overrings handled?

14. Are sales tickets given to the customers?

15. Is access to the register tapes restricted? To whom?

16. Are the registers closed out at the end of each shift? By whom?

17. Are beginning and ending cash register transaction numbers compared?

18. If two or more bartenders and/or hostesses, etc. work simultaneously, do they use the same or different cash registers?

19. Are cash register readings taken during each cashier's shift?

20. Is the cash reconciled to the register tapes and deposited in the bank intact. If so, at what intervals and by whom?

21. How are expenses for the business paid?

22. Are any expenses paid in cash? If so, are these amounts accounted for?

23. What types of controls are placed on the cash?

24. Who has access to the cash receipts?

Cash:  Cash in the bank should be reconciled between book balances and the bank statements. Generally the taxpayer's accountant will have bank reconciliations available to inspect or examine. The bank reconciliation(s) should then be reconciled to the tax return.

Reasonableness Testing Techniques

1. Obtain the yearend reconciliation and compare it to the books. Old out in income. Likewise, the most recently issued outstanding checks should be examined to determine if the taxpayer engages in the practice of drawing checks but not issuing them promptly. This practice is usually applicable to cash-basis taxpayers. If you believe this practice exists, observe the dates checks were paid as stamped by the bank on the cancelled checks. Another way is to look for a credit balance in the cash account indicating checks drawn but not issued until later.

2. Using cancelled checks, test one month's returned checks in the following manner: Compare the name of the payee with that of the endorser. If they do not agree, or if the name of any officer, partner, shareholder, etc., appears as secondary endorser, determine why. The cash disbursement book should be open to the appropriate month while this is being done. If the payees of any checks are the officers, etc., or if the checks are drawn to "bearer" or "cash," look at the cash book to see if the payee described therein is the same one named on the check itself.

3. Review the cash disbursements journal for a selected period. Note any missing check numbers and large or unusual items. Determine the propriety of these items by comparing with vouchers and other records.

4. Determine if voided checks have been properly handled.

5. Review the cash receipts journal for items identified as ordinary business sales and be alert for items such as sale of an asset or prepaid income.

6. Review entries in the general ledger cash accounts for unusual items which do not originate from the cash receipts or disbursements journal. These entries may indicate unauthorized withdrawals or expenditures, sales of capital assets, or omitted income.

Income From the Sale of Food

The formula below can provide a reasonable estimation of annual sales for the examiner to use in a comparison to figures on the tax return. The numbers used should be derived from the initial interview. Any large discrepancy between the income derived from these numbers and those reported on the tax return may indicate unreported income or inflated expenses. The examiner should then look closely at the pertinent accounts (such as food/beverage purchases, monthly sales, etc.) in the books and records.

Possible daily volume X Average check per seat = Daily Sales

The possible daily volume would be the number of seats in the establishment multiplied by how many times in a day they are occupied. The possible daily volume can be broken down into time periods in a day--breakfast, lunch, or dinner--to get a more accurate tally.

The average check per seat can be obtained from the taxpayer during the initial interview.

The daily sales can be extended to weekly and yearly sales based on the days open in a week and the weeks open in a year.

-- Daily sales X Days open in a week = Weekly sales

-- Weekly sales X Weeks open in a year = Yearly sales

These estimates can be accurate if consideration is made for vacant seats and people who walkout before paying their bill. During the initial interview ask enough pertinent questions to determine if these or any other situations should be considered.

Normal audit procedures such as tracing gross receipts to bank deposits, doing a bank deposit analysis of all business and (the owner/manager) personal accounts, etc. should be performed. Consider the interview responses received concerning internal controls. Does the same person who counts the daily receipts also make the bank deposit? Are the meal orders taken on numbered tickets or would it be easy to simply not ring up a sale on the cash register for some orders? The examiner must look closely at the supervision habits in the restaurant to evaluate how sales might be understated or how easily theft may occur and by whom.

Another account to look at to test the accuracy of income reported is advertising. Are specials advertised? How often? Specials may refer to certain menu items or discounted prices or both. Are the times for which specials are offered (such as happy hour, weekly breakfast hours, etc.) reflected in the daily receipts ledger?

Books and Records

As previously stated, due to the diversity of taxpayers in the bar and/or restaurant industry, a variety of books and records may be found during the examination. Some taxpayers will keep very detailed records of their purchases of food and liquor, describing the quantities purchased, the price paid, and when it was purchased. Other taxpayers will make purchases on an as needed basis only, and will not have any structured purchases journal and will usually only have cancelled checks and/or invoices for the items purchased.

The following is a list of possible books and records that will be found during the examination.

1. Daily Operating Reports

2. Check Register or Copies of Coded Voucher Checks

3. Bank Statement

4. Bank Reconciliation

5. Paid-Out Recaps (by Account Classification)

6. Ending Inventories (food, liquor, beer, wine)

7. Unpaid Bills Recap (vendor and account classification)

8. Equipment Purchases (include copy of invoice)

9. Payroll Summary

10. Accrued Payroll

11. Monthly and/or Quarterly Tax Returns

12. Copies of Daily and Weekly Profit and Loss Statements.