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:: Retail Industry Audit Technique Guide (ATG) - Chapter 4:
Examination Techniques for the Food and Beverages Industries (Pizza
Restaurants)
Chapter
4
- Examination
Techniques
for the
Food and
Beverages
Industries
(Pizza
Restaurants)
Income
Income
considerations
will be
similar
to any
other
retail
operation
and will
be
determined
by the
internal
controls
in
place.
As with
any
retail
business
or
operation
that is
cash
intensive
or where
family
members
can
remove
currency
from the
register
before
sales
are
recorded,
the
examination
must
focus on
income
and
internal
controls.
The
examiner
should
be alert
for
other
sources
of
income,
such as
delivery
sales,
faxed
orders,
internet
orders
and
take-out
business.
It would
be easy
to
exclude
the
gross
receipts
from an
entire
type of
sales.
The
examiner
should
question
the
taxpayer
regarding
the
policy
of
accounting
for each
type of
sales.
In many
smaller
and
family
owned
pizza
restaurants,
documentation
of
income
and
expenses
may be
lacking.
In all
cases,
the cash
register
tapes
must be
retained
and
income
must be
deposited
intact.
There
must be
sufficient
documentation
to
verify
the
gross
receipts
reported
on the
tax
return.
If
income
records
are
unreliable
the
examiner
will use
the
appropriate
indirect
method
to
estimate
income.
One such
method
is the
unit
volume
markup
method.
It may
be
necessary
to
contact
the
pizza
restaurant
suppliers
to
obtain
the
original
purchase
invoices
on all
identified
cases.
The
ingredients
purchased
and used
in the
making
of
pizzas
and
grinders
are used
to
determine
total
pizza
and
grinder
sales.
Cost of
Goods
Sold
As with
any
restaurant,
the
examiner
should
obtain a
copy of
the menu
and
review
the
prices
of all
menu
items
with the
taxpayer
to
identify
the best
selling
items
and
determine
the cost
of the
ingredients.
Purchases
may be
paid in
cash so
the
examiner
should
note the
extent
of cash
payments.
If
purchase
invoices
are not
available
third-party
contacts
can be
made,
after
notifying
the
taxpayer,
to
secure
an
accurate
cost of
goods
sold.
As with
other
restaurants,
if cost
of goods
sold is
understated
by the
examiner
then an
indirect
method
for
determining
income
will
also
understate
gross
receipts.
The
number
of pizza
boxes
used
will be
a factor
in any
markup
calculation,
so the
examiner
must
accurately
establish
this
element
of cost
of goods
sold. It
will be
necessary
to know
the
number
of
pizzas
that can
be made
from 100
pounds
of
flour,
since
flour
deliveries
are
fairly
standard
orders
in this
business
The
owner
will
know
exactly
how much
flour is
needed
to make
the
dough
for the
day-to-day
pizza
orders.
Expenses
When
employees
and
suppliers
are paid
in cash,
ensure
that
employment
and
information
returns
were
filed.
In the
absence
of
proper
reporting,
the
taxpayer
will
have a
difficult
time
proving
the
expense
is
actually
a bona
fide
business
expense.
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