What is a franchise audit? What’s involved with a franchise audit? These questions and more are answered by Moh Metwally in this podcast episode.
*This podcast presentation is cut from the Big Sky Franchise Team webinar series that was originally a live broadcast on July 29, 2021.
Tom DuFore, Big Sky Franchise Team (00:00):
If you’ve been wondering how to franchise your business or how to take your franchise company to the next level, then this podcast is for you. I’m your host, Tom DuFore, CEO of Big Sky Franchise Team and a serial entrepreneur. And welcome to the Franchise Your Business podcast. On the episode today, we have our webinar from this past Friday, all about franchise audits. So if you’ve ever wondered, what is a franchise audit? How does a franchise audit work? Why do I need one? What are all the details involved? This is the podcast for you and our guest is Mo Metwally who’s a CPA, an audit partner at Metwally CPA, and he specializes in franchise audits. So we’ll go ahead and jump right into his overview on the franchise audit process.
Mohamed Metwally, Metwally CPA PLLC (00:50):
All right, Tom. Thank you so much. Thanks everyone for joining. Just like Tom mentioned, my name is Mohammad Metwally. I’m out of Dallas, Texas. Been a CPA for a while and I’m an exhibit four. Right now my practice is basically specialized in franchise audit. So I’m trying to walk you through what is audit, what to expect. Some of you already been there and know what to expect, but for those who knows or maybe for the ones that never been in an audit, here is an audit to high-level give your expectations about what’s coming your way from an audit perspective.
Mohamed Metwally, Metwally CPA PLLC (01:33):
So I’m going to kick it off here by saying what is audit versus review? So we get that a lot. Some states require review financial statements. Some states require audit financial statements, especially for opening balance sheet audit or review. So you can work with your legal to determine if you are in need of audit or review. But what is that? So audit from an auditor perspective is we provide a reasonable assurance that the financial statements are free of material misstatements. And it’s reasonable assurance.
Mohamed Metwally, Metwally CPA PLLC (02:14):
Now in review, we provide limited assurance. What is the difference between reasonable assurance and limited assurance? Well, in reasonable assurance, which is audit, we really dig deep down into your books and we audit substantive. That means I will get a sample of selections, and then I will start asking for supporting documentation, invoices, agreements, bills, bank statements. So it’s really, really in-depth testing. This is audit. In the other hand, review is way more lighter than audit because we’re not really required to dig deep down into your books. We want to see that the numbers are really tying out to supporting documentation at a high level. I don’t have the samples. I don’t have to test every single account. I just want to make sure that your financials are GAAP. There is no weird account or anything that catches my eyes, but other disclosure are sufficient. But there is no testing or in depth testing, I should say like an audit.
Mohamed Metwally, Metwally CPA PLLC (03:32):
So if you got a chance to be like, “Okay, an audit or review?” Definitely my recommendation. If you’re eligible or the requirement is relaxed and you can get away with a review, to go with a review. So which one you need, you will probably have to work with your legal team. Make sure you’re meeting the requirements. And if it’s a review, that’d be great. If audit, then is what it is.
Mohamed Metwally, Metwally CPA PLLC (03:58):
Auditor’s work, as I mentioned, it’s significantly less in review that an audit. And therefore, of course the cost will be less. And I get that a lot. Some people ask, “Okay, you just audit the numbers, right?” No, we audit more than just numbers. It’s not just financial statements. We’re required to audit more than just the numbers presented in the financial statements. We’re required to assess your going concern. Are you going to be in the business in the next six or 12 months? We require to look into your laws and regulations compliance. Did you file your tax return? And so on and so forth. So audit is way in depth. In nutshell, if you got the option to do review, then that’d be great. If not, then it is audit.
Mohamed Metwally, Metwally CPA PLLC (04:50):
So audit standards. We do an AICPA, PCAOB. What kind of audits I need? Of course, if you are in the franchise world, it most likely will be AICPA, which is private companies, unless you’re public. Once you have that public SEC, then you’re going to go to the public company’s guidance, which is PCAOB. PCAOB is a lot more in depth than just the private AICPA standards, so it requires a lot of disclosures and requires a lot of presentations. There is a lot into it than just a single AICPA. So really it depends on your situation. But if you are a listed company, then most likely you will go with the PCAOB. But if you’re not listed, you’re private, then from what I see in the majority will be the AICPA. That stands for American Institution of Certified Public Accountants.
Tom DuFore, Big Sky Franchise Team (05:50):
Mo, this is Tom. Just to jump in real quick, most of the folks that will be interested in this are going to be privately held. Almost all of them will be. So that that’ll be the focus, for sure.
Mohamed Metwally, Metwally CPA PLLC (06:02):
Yeah. So it’s going to be the AICPA guidance. So that’s what we’re going to be… And that’s the majority of the franchise world. So we will be focusing in the AICPA. And this audit, this presentations only trigger the AICPA guidance. We’re not covering PCAOB or any other standards. That is just FYI. That is a yellow book. This is for your state or county. There’s something called single audit. This is for the federal. If you get that federal contract. [inaudible 00:06:33] is most common, and then there is the international standard, which is IFRS.
Mohamed Metwally, Metwally CPA PLLC (06:41):
What is audit? Now we’re talking audit phases. So there’s three audit phases that we have as an auditor to go through. Every audit got its own requirement. This is audit standards, audit procedures that we require to perform based on again, AICPA standards. So the first thing at high level is planning. Planning is more of, I want to assess the risk of the engagement. So the whole target is, am I going to go into a company that is going to go bankrupt in the next two, three months? Am I going to audit a company that never filed a tax return, it’s not in compliance with laws and regs? Am I going to audit a company that there is a fraud investigation going on?
Mohamed Metwally, Metwally CPA PLLC (07:39):
This give me an idea, not the numbers, it’s basically what is this engagement in regards to risk assessment. So that’s the planning. I’m going to ask questions. You expect your auditor to send you maybe a questionnaire about your going concern. And I will talk more about that. Or it will have walkthrough meetings, and what is walk through meeting? Well, we want to assess your risk. We want to see if you have controls or processes in place to detect or catch a misstatement before even happening. So if you’re doing a bank rec every month, that’s a control. If you see anything weird in your bank rec, you’ll be like, okay, you’re going to get a bookkeeper and be like, “Okay, what’s going on in here?” That’s a control. That’s what we consider a control. So that’s the planning. We just need high level. We want to understand this engagement. We want to understand the risk. That will help us determine where is this engagement going to fit between the risk assessment metrics. So is it high risk engagement, is it moderate risk, is it low risk, and so on and so forth.
Mohamed Metwally, Metwally CPA PLLC (08:51):
The second phase is testing, and that’s good stuff. This is what are you going to see this list coming your way, asking for, “Hey, provide the invoices, bank statements, bills, agreements, and all this stuff.” And basically, the higher the risk in step one or phase one, the more samples we require to audit. So if you have strong controls, if you have process in place, if you have been audited before, all that factored in to get you to be a low risk and therefore reduce your sample size. So if I’m going and looking into your revenue, I’m saying, “Okay, I see that the reality is there is as that is 50 transactions. So I’m going to just tweak five of those.” Well, if you’re low risk, it can be five or 10. So that’s why planning is very important because we will build on that, on audit.
Mohamed Metwally, Metwally CPA PLLC (09:53):
So that’s testing. We basically test every single line item in the balance sheet that meets owner to reality. And audit is as I mentioned in the beginning of this webinar, we talked about audit is providing a reasonable assurance. I’m not providing 100% positive assurance. I’m just saying reasonable assurance. And in the word reasonable, that means I have a materiality threshold. So anything below materiality, from my perspective, it will not resolve in a qualified opinion. Anything above that threshold will actually qualify my opinion, but as long as you’re working with your auditor, as long as you have this relationship of, okay, there is something here we missed, but we can go ahead and propose an adjustment entry, that we can adjust it to get it back on track, you should be fine.
Mohamed Metwally, Metwally CPA PLLC (10:52):
When we qualify based on adjusting is based on, okay, there is material misstatement all over the balance sheet or income statement, so all over the financials that I can’t even determine where is it. It’s all over the place. Or if there is fraud going on, or if there is unjustified transactions. So that is transactions that the client can come up with supported documentation or reasonable explanation. But we’re human. We all do mistakes. As long as you feel, “Oh yeah, right. I missed that one or I overlooked that one and I’m willing to work with the auditor to get it corrected,” we call that corrected misstatement. So that does not qualify or does not change my opinion. The only time we qualify or change my opinion is when there is a material misstatement that we can’t determine how to fix it because it’s all over the place, or the client refuses to correct. At that point, that can qualify you. So this is testing.
Mohamed Metwally, Metwally CPA PLLC (11:59):
And then the last step is reporting. Reporting is as important as planning and testing because that’s what you get your report. That’s where you’re going to attach that to the FDD. Good example, and we’ve seen it all over the place, states now push back on the ASC 606. “Hey, that is no enough disclosure. I want to know about how’s that revenue recognition implemented.” So that was a big deal because we didn’t really know a couple of years ago, how to add that disclosure to satisfy the state’s requirement. And that’s why it’s very important once you get your report together, to take a deep close look into your footnote disclosure, your numbers, make sure everything is lining up, make sure you’re disclosing everything.
Mohamed Metwally, Metwally CPA PLLC (12:54):
And there is a lot of disclosure in the reporting that is very important to the reader that you probably as an owner or a member that you want to send this message to whoever reading your report. So if you have losses, you didn’t sell any franchise, you’ve got bunch of expenses, that result into losses in your financial statements. And now as an auditor, we have to disclose something called going concern. And I’m going to do that. So at that point, do you want to say, “Look, I know I’m having losses, but in the same time, I’m willing to contribute more funds to get myself back on track, or I’m going to cut expenses. Those are the first year or two, there were a lot of professional fees, legal fees and so on, but I’m not expecting that to continue in the future.” So there’s a lot of messages that business owners can send to the reader and make it even more clear to whoever reading these financials. Any questions so far? Tom, good?
Tom DuFore, Big Sky Franchise Team (14:02):
Yes. I think that sounds great. I don’t know if we have some… We’ve got several folks on here. If there are questions, you can certainly type it into the chat box or use the hand raise feature. I’ll unmute you so you can talk by the way as we go through this. But go ahead for now, Mo. Let’s keep it rolling.
Mohamed Metwally, Metwally CPA PLLC (14:25):
Awesome. So that is planning. And the first thing in planning we do, we can get your permanent files. So what is permanent files? Those are your formation, your franchise formation documents. So your state registration, your EIN letter that you got from the IRS. If you have a partnership, your partnership agreement. You have debt so we need to see the loan. If you have an FDD, we want to see the FDD. If you have a franchise agreement, we need to see the franchise agreement. This is very important and the first year audit will be difficult because you have to gather all this information, but those we call it permanent because it’s permanent. So next year you wouldn’t have to, unless you change the auditor, of course, but you wouldn’t have to provide those, but you will have to provide anything new.
Mohamed Metwally, Metwally CPA PLLC (15:18):
So once you get that set up it’s once and for all, that’s it, you’re not going to do that again. And it’s very important to have those handy because those give me an idea about, “Okay, I have everything I need to start my audit.” So the permanent files are step one, an annual audit, get your company documentation ready for an audit, get all your company’s formation, partnership agreement, EIN, any documentation, FDD, any other legal documentation into your folder to be ready for the audit.
Mohamed Metwally, Metwally CPA PLLC (15:51):
As I’ve mentioned, assessing the risk of materials statements, and I’m going to just touch bases on these four areas. There is a lot into that, but those are the main ones that nobody knows. And when you go to an audit, you’re expecting your auditor to just jump in, get a bunch of numbers, ask for a bunch of requests, ask for a bunch of supporting documentation, invoices, and agreements. And that’s it. Audit is more than that. And it’s good for the business as well, because you really want to know your financial position. You want to know, is there a going concern? Am I going to go out of business soon, or there is any financial indication that I’m in financial trouble?
Mohamed Metwally, Metwally CPA PLLC (16:30):
And the audit can wait in this regard. It can come and say, “Look, I see going concern risk.” And I’ll explain what is going concern. So going concern is basically as an accountant, we have a principle called that we assume this company will be in operation in the next six to 12 months. So we’re going with the assumption that the business is stable and will be continue in operation in the next six to 12 months. If there is anything that raise doubt about the assumption, we have to know about it. So what are those things? Well, if you have recurring losses. Year over year, you’re making losses, that give me a red flag. If you have huge debt and you don’t have enough cash, will you be able to even make your debt payment? Those are red flags that me as an auditor would look at your financials and be like, “Okay, I see a going concern risk here.” That can be mitigated though.
Mohamed Metwally, Metwally CPA PLLC (17:33):
So we have a risk, and that’s something you can work on even before the audit. “Okay, I have a going concern risk. I might have recurring losses. What I need to do?” And that’s what we call management evaluation and a plan to mitigate that risk. So if you’re going to come up with a Word document or a spreadsheet or whatever, and put into details your thoughts about going concern. Is it a really legit risk? Well, any company, the first two, three years get losses. That’s not something unique about your company. You can explain that, “Hey, I have positive because I haven’t sold a franchise yet, but I’m willing to contribute more funds into this,” if you’re able to force and, “Hey, this is what’s going on that I can actually be in business in the next six to 12 months. I have enough cash, I’m contributing more funds. I’m looking to sell some assets. I’m looking to get loans.” All these solutions that can give the auditor an indication that, okay, yeah, that is a going concern risk, but there is a plan in place. That’s basically what we’re trying to get to.
Mohamed Metwally, Metwally CPA PLLC (18:44):
And once we know, okay, there’s a plan in place, then we can say, “Okay, we will have to put that in your disclosure. That’s going to be in your financial statement notes.” So that’s why I’m saying financial statement notes are very important because they can tell the reader something about the company.
Mohamed Metwally, Metwally CPA PLLC (19:01):
And second thing is related parties. That’s very common. Nobody knows what is that. You get all these questions about, “What is related parties? What does that mean?” Well, if you have a franchise and you have another company that owned by the same period. So let’s say you’re a single guy, you got two companies. You’ve got your franchise company and you got the core business company, and you have shared expenses. So you’ll share office for the two businesses. You sit in the same room, your employees sit in the same room, you do everything with shared expenses. And you’re paying from one bank account, which is inside the core business, but in reality you have to share these expenses.
Mohamed Metwally, Metwally CPA PLLC (19:41):
So there is transactions between these two entities. There is a transaction between the franchise and the core business. And we need to disclose those. We need to make sure that the reader know that there is related party transaction. There’s no risk here, but the risk is not disclosing, and the risk is there is not business transactions. So we can just say, “Okay,. I’m sealing something to my franchise for five bucks,” where you can sell it outside for 50 bucks. That’s how the risk come along. So that’s why we have to put into consideration that, okay, there is related parties. We have to disclose those. We have to make sure those are legit business transactions.
Mohamed Metwally, Metwally CPA PLLC (20:28):
And we have to sufficiently disclose them in the financial statements so the reader would know that, okay, there is related parties but we know what is those, what kind of transaction those are. Those are expenses, there’s revenue going on. What’s going on here? I don’t see the revenue transactions often. I see expenses transactions, which makes sense, because as I mentioned, there is marketing expenses that you have to allocate. You have rent expense that you probably allocate. Payroll you have to allocate. So there is a lot of shared expenses that you can actually disclose and allocate.
Mohamed Metwally, Metwally CPA PLLC (21:06):
Laws and regs. Okay. Those you have to be in compliance. I get people like, “I didn’t know that I have to file my tax return.” We as auditors, we need to make sure you are in compliance with all applicable laws and regulations. So IRS is one of them, and big one of them. So you can just, “Okay. Yeah. I have my tax return ready. Is there any other state or federal inspection I have to go through or laws and regs that you have to be in compliance with in the top of your franchise requirement and IRS?” If there is, well we need to see those and you have to disclose those. “Yeah, I have a description here. I have something that I have to file with the state separate.” Then we need to submit documentation that you are in compliant.
Mohamed Metwally, Metwally CPA PLLC (22:02):
Last thing here is fraud assessment. And those not in a smaller scale because the owner most likely involved in the day-to-day operation, but it’s required. So when you get that questioning about, is there any fraud or do you know anything going on that would raise a suspicion about fraud activities? All this it’s basic questioning that you have to be aware of. And also, it gives you an indication about, “Okay, well, I can set up a process in my business that catch any fraud activities.” When you grow and you have more than one or two employees, how are you going to monitor the whole thing? So here is where audit can add value other than just auditing your books and issuing a report. It give you a hint about, “Okay, what I need to do, what I need to put in place so I can either detect or prevent a fraud and material misstatement.”
Mohamed Metwally, Metwally CPA PLLC (23:04):
So go through the questionnaire and start thinking about, “Oh, I can implement this.” So one common control or process, bank rec, double signatures. If you have someone issuing a check, you require that the check has a second signature, so two people actually looking over the disbursement, not just one. That’s a common thing in the fraud activities that you can implement to prevent any misstatement.
Mohamed Metwally, Metwally CPA PLLC (23:35):
Inherent trace and control risks. So what is those? Again, we are in a planning. The whole goal is to assess the risk. And I want to spend a little time and planning, but that’s basically give us an indication about how risky is the engagement. Second phase is testing and in testing, again, we get your general ledger that should be tied to your trial balance. Trial balance should be tied to your balance sheet or income statement. And then we select the samples. Balance sheet accounts, like cash, account receivable, we do that on a confirmation basis. We send out confirmation to your bank directly. And if we don’t get confirmation, we do something called alternative procedures, which is supporting documentation. So we will tie that in our invoices and subsequent payments and so on and so forth.
Mohamed Metwally, Metwally CPA PLLC (24:29):
Another type of testing we call the analytics and that’s like a trade analysis. And that’s something you can suggest if there is an account, like AR you get the confirmation and you feel like the auditor is requesting a huge sample, you can suggest, “Hey, does it make sense for you to just do trend analysis?” Because AR going up, I’m expecting my revenue to go up as well. So if you can capture this relationship, that’s called trend analysis. It gives me some comfort, it gives me some assurance that the balance fluctuate in a singular direction, that it should be fluctuating in that direction. So if my revenue’s going up, I’m expecting my AR to go up, my account receivable to go up.” So instead of I’m going into the GL, pulling a sample and doing all that substantive heavy work, I can just do a trend analysis or ratio analysis. So that’s something you can suggest to your auditor, “Hey, how about doing trend analysis or ratio analysis?”
Mohamed Metwally, Metwally CPA PLLC (25:31):
And again, this is a last thing I have in a phase, that’s the reporting and completion, so we get the result of the audit. Again, as long as you’re working with your auditor, as long as there is a mutual understanding, I don’t think the auditor would modify an opinion, unless there is a misstatement all over the place, there is a fraud activity is going on, or the client or the partner, or the member refuses to cooperate and refuse to adjust their books accordingly.
Mohamed Metwally, Metwally CPA PLLC (26:05):
Last thing, after we put that together, we get the financial statement draft, along with the disclosure. You have to approve those, so for the auditor to issue. Once we get those back, then we issue the report, and that can be attached to your FDD.
Mohamed Metwally, Metwally CPA PLLC (26:25):
So audit adding value. Okay. You look at audit as someone come to your business, select a bunch of transaction and ask for supporting documentation. But how really audit can add value to your business? You look at it like exciting. And that’s something in our office that we implement. I don’t want to just go to your books and select the samples and audit them. I want to be able to help you out. I want to be able to be like, “Look, if you implement that control or process, you can really manage the business better. And in the same time reduce your risks, and at the same time, reduce your sample size. And therefore, reduce your fees, audit fees.”
Mohamed Metwally, Metwally CPA PLLC (27:09):
So how to do that? Okay. Control environment. Cash. Bank rec happens every month. So you get the bookkeeper, the bookkeeper jump in, do the bank rec, send you the rec and you look over the rec and you formally sign off on it. That’s a control that I can rely on. I can say, “Oh, they do the bank rec every month.” So I don’t have to go crazy and go confirm every single month or every single account. I can just select a couple instead of five. So that cuts my time and therefore cuts my audit fees. If there is any control in AR, so someone has to be doing AR aging schedule every month. So you get the AR aging, making sure that nothing is beyond 90 days late, because once you go above 90 days late, that means we have to reserve for bad debt. That’s the AR. So you’ve got someone running the AR aging. Anything above 90, you have to go call them, “Hey, this invoice is late. Please provide us money or come up with a payment plan or something in place,” so it won’t trigger a reserve in your end.
Mohamed Metwally, Metwally CPA PLLC (28:27):
And then just correct unknown misstatement, discover fraud, if any. So audit too will help you because if there is… and I’m talking about maybe a bigger company, not just one or two, when the owner is handoff. Now it adds value because if there’s any fraud activities, you can catch it. While the audit is again, it’s a reasonable assurance, it can’t catch every single thing, but it can give you an indication that, okay, well we don’t feel comfortable about this area. So you might need to look at that. So that’s value added to you. Get your financials in order to reflect the real picture of your business.
Mohamed Metwally, Metwally CPA PLLC (29:05):
So basically, your financials now are GAAP compliant. You can’t take those financials and it’s reflecting the actual position, or at least reasonable assurance that your financials are reflecting the reality. It’s not cash basis. It’s a GAAP basis. So it’s giving you a good idea about where you’re at financially. “Do I have enough cash to survive? Do I need to increase? Do I need to look over getting more debt or sell an asset to strength my financial position and so on?” So look at it that way and you can see the audit really add value.
Mohamed Metwally, Metwally CPA PLLC (29:52):
Preparing for the audit. Accurate books, accurate books, accurate books. That’s just every auditor’s nightmare. Once you go into an audit, your books should be good to go. So how do I make sure? Monthly, every month gets someone to look over your books. Get a CPA to look over them, to make sure they are good to go. Bookkeeper is a must. I guess owners sometimes you feel like, okay, I can do it myself. I can do it myself. And then you’re basically doing everything and you drop the books, which is the most important part. And then you get to the audit and you’d be like, “Oh man, my books are not in order.” And that will result in higher audit fees. That will result in a lot of misstatements.
Mohamed Metwally, Metwally CPA PLLC (30:36):
So get someone on a monthly basis, or depends on of course the volume of your activities, but get someone to look over that every month for you, at least. Permanent files, you should already have a folder that has those permanent files, your formation, your IRS, your FDDs, your franchise agreements, your debt agreements. You should have a permanent folder that has all these permanent files. Control performance. Again, take credit. That will reduce your audit fees. If you’re already doing a monthly bank rec, say that to your auditor, “Hey, we’re doing a bank rec here, every month and it’s signed off by or signed off by the owner, signed off by the manager. Can we take a credit for that and reduce my sample size? We’re doing an AR rec. Hey, we’re doing AR.” Say that to your auditor.
Mohamed Metwally, Metwally CPA PLLC (31:30):
Financial statement prepared. So make sure every month to prepare your financial statements. Your bookkeeper should be able to produce every month a financial statement. Go over that. Sign off on it. Make sure you sign off and document that. It’s not hard, you can do it electronically. Get the bookkeeper, create a folder for you to keep all these documents handy for the audit. Supporting documentation, of course, that’s a big one. Invoices, bills, agreements, receipts. I would highly recommend you go electronic for this. Most people use, I’m not advertising QuickBooks, but you can use any of those bookkeeping services that do electronic feed. So basically you’re tying your bank account to QuickBooks and they speak the same language so every week or so you can see all the transactions going into QuickBooks.
Mohamed Metwally, Metwally CPA PLLC (32:24):
And now just to systematically saving your invoices, saving your bank statements, saving your bills, saving your agreement sheets, and all that, that will make your audit goes way smoother instead of coming, getting the samples and you’re going to just go there, spinning your wheels, try to figure it out what is this invoice, or what is does mean? That’s pretty much it for me. I know I’m over the 30 minutes. So I’ll open it for questions, guys. Any questions for me, Tom?
Tom DuFore, Big Sky Franchise Team (32:57):
Yeah. Yeah. Thank you, Mo. That was great. That was great information. We do have a couple of questions that came in. One question was regarding states which will require the audit, what are the criteria to be approved as a franchisor, is a question?
Mohamed Metwally, Metwally CPA PLLC (33:14):
Okay, so you need an audit. It depends on the state, of course, but you need an opening balance sheet audit. So that’s a requirement that you need. The first year will be what we call the opening balance sheet. So basically you just started out, you deposit money into your bank account, and now you have cash and equity. So that reduce balance sheet, only balance sheet because you haven’t sold anything and you haven’t incurred any expenses. So you have no expenses. You have no revenue yet. So there is no income statement. There is no P and L, but there is a balance sheet. And it goes through the same exact process. And of course, it’s a list of other fees, but because they’re only two accounts, but it goes through the same process that I just mentioned. The same phases, the same report, because it’s an audit and it’s the auditor responsibility to issue an accurate auditor report.
Mohamed Metwally, Metwally CPA PLLC (34:16):
So you basically deposit the money, you have an opening balance sheet, and then, you have cash and you have equity. You get your balance sheet set up, and then with financial statement disclosure, you have to disclose everything ASC 606 has to be in there. You have to disclose your cash. You have to disclose just the regular audit. But the only difference you’ll only have cash and equity in your balance sheet.
Tom DuFore, Big Sky Franchise Team (34:46):
Thank you, Mo. And a question came in. Is there a cost or an estimated range? I’d imagine it maybe depends on the type of business or how long it’s been operating, but do you have any ballparks you could use?
Mohamed Metwally, Metwally CPA PLLC (35:01):
It depends really on how… There is a lot of factors, I would say. First of all, how accurate is your books? Second, how big is your company? So it usually fluctuate with your franchise revenue. So if you’re selling franchise, that going to trigger 606. A lot of disclosure, a lot of testing. But for opening balance sheet, that can vary from one and a half K to two K, that’s an opening balance sheet kind of range. It goes up as you have initial fees coming in that requires disclosure and requires of course, audit. And you go up from there. But it really depends on how many accounts you have and the activities you have as well.
Mohamed Metwally, Metwally CPA PLLC (35:53):
So I would highly recommend the franchise company keep it simple. That will reduce your audit fees, and in the same time, you’re still meeting your requirements. So keep it simple. Don’t mingle things within the franchise. Keep separate books, completely separate books for the franchise, and that will reduce your audit fees.
Tom DuFore, Big Sky Franchise Team (36:17):
Great. Great. Thank you very much. Additional questions for Mo, I know I have one maybe to ask. In terms of timing, is there a typical timeline this takes to get prepared and maybe a window of time?
Mohamed Metwally, Metwally CPA PLLC (36:37):
It depends on the auditor, who’s doing the audit. I can only speak up for myself. So if your books are accurate and if your books are ready to go, and we have this kickoff meeting in the beginning where I tell you, “Okay, here’s my list. Here’s my request list. I need 1, 2, 3, 4. Here is my questionnaires, and I can go back to target these areas right here.” Yeah, right there. So going concern questionnaire, related parties, general questions that give me ideas. So the faster you give me back my request list, my supporting documentation, your permanent files, and the faster you give me these questionnaires, the sooner I can finish the audit, because I have everything I need.
Mohamed Metwally, Metwally CPA PLLC (37:28):
So in a small audit, yeah, I can take between… An opening balance sheet wouldn’t take, I would say a week, three business days to five business days. Once we get the confirmation back from the bank, once we get your planning up and running, once we get the report approved by you, we should be fine and up. A larger one with franchise going on, selling franchise and there’s royalties and all that, it might take more than that, depending on how responsive is the client. Unfortunately, sometimes you get within the day-to-day operation and you totally forget about the audit. But if the client is really responsive, one to two weeks, and we’re talking about if you are in the 100K, 500K range, it will be about two weeks, give or take.
Tom DuFore, Big Sky Franchise Team (38:20):
Okay. That’s great. That’s great. So essentially, the higher revenue, the more transactions, the longer it will end up-
Mohamed Metwally, Metwally CPA PLLC (38:29):
Tom DuFore, Big Sky Franchise Team (38:29):
It’ll just take you longer to go through that?
Mohamed Metwally, Metwally CPA PLLC (38:31):
Tom DuFore, Big Sky Franchise Team (38:33):
Okay, great. That’s very helpful. So it sounds like maybe for an emerging brand or a new franchise, or that maybe one to two week window for a brand that’s just getting started sounds pretty realistic there.
Mohamed Metwally, Metwally CPA PLLC (38:47):
Tom DuFore, Big Sky Franchise Team (38:49):
I think it’s a great point with what you shared here, even for a new franchise brand. All of these things still have to be gone through and reviewed. So I think this has been great, great information.
Tom DuFore, Big Sky Franchise Team (39:02):
Mo, thank you again for being on the show and on our weekly webinar series and allowing us to have a chance to share it on our podcast too. If you’re interested in reaching out to Mo, you can reach him at metwallycpa.com. That’s M-E-T-W-A-L-L-Y cpa.com. And it’s in the show notes too. Mo, thank you again for being here. And that’s the episode today, folks. So please make sure you subscribe to our podcast and please, please, please give us a review as we’re still early on in this. Remember, if you or anyone you know might be ready to franchise our business, please contact us at bigskyfranchise.com. Thanks for tuning in, and we look forward to having you back on the next episode.