Year-end financial statements: so simple if you are organized!

by François Lacoste-CPA auditeur,CA, October 08 2019
Year-end financial statements: so simple if you are organized!

Your fiscal year-end date is fast approaching and you, as a travel agency owner, are preparing, like every year, to spend some time with your auditor to write the famous annual financial statements! If you knew how much a minimum of organization would allow you to save stress and money! Reviewing the financial statements may result in higher costs if your accounting information is incomplete or even erroneous. Here are some useful details to help you prepare your data and avoid surprises with the review fees of your financial statements.

First, it is important to understand that an auditor has a responsibility to identify how your accounting processes work. The auditor wants to understand how a transaction is initiated (sales, purchases, salaries), who authorizes the transaction, by whom and when the transaction is recorded, and finally whether there is a review of your transactions internally.
To help the auditor understand how your accounting processes work, prepare a document in which you will describe them. This will allow him/her to quickly analyze whether there are risks of inaccuracies, errors or fraud in certain areas of your business.
Let's take a look at the various elements directly related to the financial statements below to ensure that there are no mismanaged aspects that could lead to overtime for your auditor during the review process.

- Bank, credit card, line of credit, long-term debt

Bank reconciliations must be done at a minimum monthly, in order to quickly detect any errors that may occur in bank accounts. It must be ensured that checks have all been recorded in the accounting system on the date of issue. There should be no outstanding deposits that are several days old. If this is the case, you must investigate.

You also need to ensure that interest on the lines of credit is recorded monthly and that the balance of the statement balances each month. For long-term debts, it is common for the lender to issue a payment schedule detailing the principal and interest. Make sure monthly that the balance of the debt to the balance of verification and according to the schedule is correct; any discrepancies must be investigated and corrected.
For the preparation of the year-end financial statements, please provide the following documents to the auditor at a minimum: bank statement for the last fiscal month of all bank accounts, line of credit, credit card and long-term debt statement of account.
You must also provide the conditions for renewal of the line of credit and all information concerning new debts that have been contracted during the financial year, including the conditions of the latter.

- Accounts receivable

Review the accounts receivable list on a monthly basis throughout the year to detect billing or cashing errors. At the end of the year, you must specify to the auditor whether there are accounts receivable to be provisioned for bad debts.
Make sure you have invoiced all the bookings that have been made in the correct fiscal year. Provide a description of the process you have put in place to ensure that sales close to the end of the year have been billed in the correct year.
The auditor wants to make sure that the breakdown of your sales is adequate. Provide details about your accounts receivable gaps compared to your previous fiscal year. Unjustified discrepancies may raise doubts about your sales tracking and may require time for the auditor to ensure that accounts receivable is accurate.

- Prepaid expenses

If you have prepaid expenses, you can prepare a schedule of disbursements, the expense of which covers the following year. We mainly find in the prepaid expenses the following elements: OPC permit, bond, insurance. To ensure that the amount is adequate, you must provide the date of payment and the period that is covered by the disbursement.

- Tangible assets

Tangible assets consist mainly of the following: office furniture, computer equipment, leasehold improvements, signage. Please provide a capitalization policy to the auditor so that he or she knows how you want to record certain expenses that would be capitalized.
You can provide copies of invoices for purchases that you have capitalized. Review the Maintenance and Repair, Office Supply or other General Ledger items for items that would not have been capitalized. If certain expenses are high, tell the auditor why they have not been capitalized.

- Intangible assets, other assets, goodwill

We find several items in this category such as goodwill, franchise cost, rental deposits. One of the important items is goodwill. You must provide the purchase contract of the company that has been acquired. Provide your purchase price breakdown.
You could also be asked for the cost for the franchise acquisition; the contract referring to it will have to be provided as well. If you have made deposits for rent, electricity, please provide a copy of the lease and the date on which the deposit for electricity will be refunded.

- Accounts payable

Accounts payable consist mainly of the following: administrative suppliers, travel suppliers, commissions to be paid, salaries, paid vacation, source deductions and taxes. You must describe your process to make sure that you have accounted for all the invoices related to the services you obtained during your fiscal year.
For commissions to be paid, the reports of the commissions payable at the end of the year must be reviewed and the amount payable after the end of the year will be recorded. You want to make sure that you make an appropriate match between the gross commission income and the commission that will be paid to the travel agents. You must provide details about the wages to be paid which cover the end of the fiscal year and which will be paid after the end of the year. Concerning wages, you must also describe the number of hours paid to your employees during the fiscal year.
Note that since January 2017, the Quebec tax rate varies according to the number of hours paid to employees. Provide the paid vacation balance per employee at the end of your fiscal year. You must specify how often your source deductions are made and whether you use an external payroll service. Make sure you have validated your GST / QST returns as filed with the provincial/federal governments.
Investigate reports that you believe are abnormal in order to detect errors that may have occurred in billing or expense reporting.

- Taxes

Provide all notices of assessment you have received from governments. You can provide proxies to your auditor so that he or she can access your government records. These proxies save time in quickly obtaining information about your tax files.

Share capital

Provide a summary of the resolutions that have been added to your minute book over the last year.

- Revenues

The Office of Consumer Protection (OPC) in Quebec requires clarification on sales subject to the compensation fund for travel agencies’ customers and sales made through another travel agent (wholesaler).
To do this, you can provide a product-specific sales analysis to identify sales subject to the compensation fund. For sales made as a wholesaler, make sure you have separate products or that agencies are set up as a corporate account to be able to output reports with the right information.
Make sure your products that are subject to the compensation fund are properly identified. Ask the official entity (OPC in Quebec) if you have any doubts about the subjection of certain travel products.

- Operational charges

Compare your expenses with the previous year and specify the reason for the variations or non-changes. The analytical review assists your auditor in documenting your file to ensure that there are no significant errors in the operating expenses.

- Other documents

You must provide all the contractual commitments that you have signed and that are in force in the coming years (lease, royalty agreement, equipment rental, etc.). Inform the auditor of outstanding litigation and any other events that have occurred since the end of your fiscal year (new loan, business acquisition, capital purchase, discovery of fraud, etc.) Other documents or information may be required depending on what the auditor observes during the examination.

In conclusion, an auditor bills you his time when preparing your financial statements.
Prepare in advance the maximum amount of accounting information for reviewing the financial statements!
In addition to being professional, this will save you a lot of unnecessary expenses.
Good luck in preparing your year-end financial statement!

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