Limited Contract Compliance Audit Qdoba
INTERNAL AUDIT REPORT Limited Contract Compliance Audit Qdoba Restaurant Corporation February 2018 December 31, 2019 Issue Date: May 28, 2020 Report No. 2020-07 INTERNAL AUDIT Qdoba Restaurant Corporation February 2018 December 2019 TABLE OF CONTENTS Executive Summary ................................................................................................................................................ 3 Background ............................................................................................................................................................. 4 Audit Scope and Methodology ............................................................................................................................... 5 Appendix A: Risk Ratings ....................................................................................................................................... 6 2 Qdoba Restaurant Corporation February 2018 December 2019 Executive Summary Internal Audit (IA) completed an audit of the Concession Lease Agreement between Qdoba Restaurant Corporation and the Port of Seattle (Port). The Period audited was February 1, 2018 through December 31, 2019. The audit was performed to determine whether Qdoba Restaurant Corporation complied with significant provisions of the Agreement, including whether reported gross revenues and percentage fees were complete and accurate. We concluded that the Lessee materially complied with the significant terms in the Agreement. No issues were identified requiring management response. We extend our appreciation to management and staff of the Airport Dining and Retail and the Accounting and Financial Reporting Departments for their assistance and cooperation during the audit. Glenn Fernandes, CPA Director, Internal Audit RESPONSIBLE MANAGEMENT TEAM Jim Schone, Director, Aviation Business Development Dawn Hunter, Senior Manager Airport Dining and Retail 3 Qdoba Restaurant Corporation February 2018 December 2019 Background Qdoba Restaurant Corporation, headquartered in California, was founded in 1995. Trading as Qdoba Mexican Eats, it now has 740 restaurants in the United States and Canada. The Port of Seattle (Port) entered into a Concession Lease Agreement (Agreement No 002096) with Qdoba Restaurant Corporation, on August 10 2016, with an occupancy date of March 17, 2017. The lease expires on August 30, 2027. As per this Agreement, which was the one covered in the scope of this audit, the first agreement year was February 2018 to December 2018. The second agreement year was January to December 2019. The terms of the Agreement provide for an initial Minimum Annual Guarantee (MAG) which is equals to $ 510,000 per annum, payable in advance on the 1st day of the month. For subsequent years, the MAG is equal to 85% of the total amount paid to the Port for the previous Agreement Year. Additionally, the Agreement requires a Percentage Fee that is calculated on a graduated scale as shown in the table below. The Percentage Fee, if applicable, is due by the 15th of the following month. Annual Gross Sales Percentage of Gross Sales Less than $ 3,400,000 15.0% $ 3,400,000 - $ 5,500,000 17.5% More than $ 5,500,000 20.0% The table below reflects the Gross Revenues as reported by Qdoba and the Minimum Rent and Percentage Fees as billed by the Port of Seattle: Year Gross Revenue Minimum Rent Percentage Fees Total Rent 2018 1 6,228,878 467,500 555,776 1,023,276 2019 7,199,177 510,000 708,472 1,218,472 Total $13,428,055 $ 977,500 $1,264,248 $2,241,748 Source: Qdoba Monthly Revenue Reports; Peoplesoft Financials, AFR YE documents 1 The 2018 figures are for 11 months starting from February to December 2018 4 Qdoba Restaurant Corporation February 2018 December 2019 Audit Scope and Methodology We conducted the engagement in accordance with Generally Accepted Government Auditing Standards and the International Standards for the Professional Practice of Internal Auditing. Those standards require that we plan and conduct an engagement to obtain sufficient and appropriate evidence to provide a reasonable basis for our findings and conclusions based on our engagement objectives. We believe that the evidence obtained provides a reasonable basis for our conclusions based on our engagement objectives. The Agreement reviewed during this audit was Agreement number 002096 and the period was February 2018 through December 2019. After identifying significant provisions in the Agreement, we performed the following audit procedures: Revenue Completeness and Accuracy Traced concession payments to Port records to verify payments were received by Agreement dates. Agreed revenue reported to the Port, to the Concessionaire's monthly revenue reports, charge sheets, and to independently audited schedules. Analyzed deductions in the data sheets (General Ledger) to determine whether they were properly classified and correctly deducted from the gross revenues, as provided in the Lease Agreement Compliance Reviewed the Concessionaire's Rent Security Deposit for compliance with the Lease Agreement, Port of Seattle Policy (Port RE-2) and Washington State Law (RCW 53.08.085). 5 Qdoba Restaurant Corporation February 2018 December 2019 Appendix A: Risk Ratings Findings identified during the audit are assigned a risk rating, as outlined in the table below. Only one of the criteria needs to be met for a finding to be rated High, Medium, or Low. Findings rated Low will be evaluated and may or may not be reflected in the final report. Financial Internal Commission/ Rating Compliance Public Stewardship Controls Management High probability Non-compliance Missing or not for external audit Requires with Laws, Port High Significant followed issues and / or immediate Policies, negative public attention Contracts perception Partial Potential for Partial controls compliance with external audit Requires Medium Moderate Laws, Port issues and / or Not functioning attention Policies negative public effectively Contracts perception Functioning as Low probability intended but Mostly complies Does not for external audit could be with Laws, Port require Low Minimal issues and/or enhanced to Policies, immediate negative public improve Contracts attention perception efficiency 6
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