Initial Aspects :

1. While auditing the financial statements of a hotel, an auditor should ensure that all Standards on Auditing (SAs) are adhered to like any other audits.

2. Though specific requirements of these Standards on Audit (SAs) have not been articulated in this document as they apply uniformly for all audits, some critical objectives an auditor should adhere are given below.

• Obtain preliminary knowledge of industry, nature of business ownership, management & operations, and decide whether the level of knowledge of business is adequate to perform the audit.

• SA 300, “Planning an Audit of Financial Statements” requires an auditor to establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.

• SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment” requires an auditor to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement. This will help the auditor to reduce the risk of material misstatement to an acceptably low level.

• SA 330, “The Auditor’s Responses to Assessed Risks” deals with nature, timing and extent of planned further audit procedures at the assertion level.

• Any other planned audit procedures that are required to be carried out so that engagement is in compliance with SAs.

• Audit process has to be divided into risk assessment, risk response and reporting.

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Procedure for Audit of Revenue and Receivable :Various Streams of Revenue, Its Controls and Audit Considerations and Procedures :

 

1. Room Revenue : 

•  Check whether the Rates that are updated in the PMS are either done centrally by Central reservation network or if done in PMS are reviewed and signed off by the Reservation Manager.

• Check whether all ad hoc rates / discounts offered on contracted rate or on BAR based reservations are being reviewed by reservations of the day report and signed off by Revenue Manager.

• Check For all guest checked in, the Duty Manager, at the end of the shift, should ensure that registration card duly filled up with all required fields are made and signed off by guest.

• Check Rates offered are reviewed and signed off by FOM through rate variance report.

•  Verifiy whether the Duty manager reviews rooms occupied at the time of night date change and ensures that all rooms have been charged.

• Verifiy whether All manual postings are reviewed and signed off by the Duty Manager.

• Verify whether All allowances made are signed off with reasons at the end of the shift by Duty Manager. FOM generates a report on daily basis and signs off after reviewing the allowances with reasons.

• Income audit ensures that cash receipts, EDC batch closing and city ledger settlements are tallying with daily PMS trial balance of guest ledgers.

• Complimentary and house use rooms are listed and reviewed for authorization on a daily basis.

• All waivers of retention for cancellations / no shows  charges for late check outs / early check ins are all documented and signed off.

• Income audit ensures that income as per PMS flows into GL and accounting happens correctly.

 

2.Food and Beverage Revenue (Including Banquet Revenue)

• Check whether the Finance through F&B Control department ensures that menu rates are appropriately approved as per levels of authority of the hotel.

•  Check Menu approved are updated in menu master of the POS and there are no mistakes.

•  Check whether the F&B Manager reviews open food items (off menu items) along with item modified report and ensures price offered is reasonable and in line with policy and comparable with similar item.

•  Check whther the F&B Manager ensures that POS level exceptions are reviewed and signed off like void KOTs, void bills, NCKOT (complimentary food), entertainment bills, discounts and missing KOTs if any.

• Verifiy Where due to some POS system failure, manual KOTs are used, serial continuity of KOTs and its link to billing should be ensured at the end of the shift.

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3. Other revenues like Laundry, Telephone, Internet etc.

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•  Check whether the Finance department through income audit ensures that menu rates are appropriately approved as per levels of authority of the company.

•  Check whether the Menu approved are updated in menu master of the POS and there are no mistakes.

•  Verifiy All POS controls to the extent applicable for F&B will be applied.

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Procedure for Audit of Fixed Assests   :

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1. Trace and verify opening balances of fixed assets from previous year audited financial statements.

2. Review significant expenditure related to fixed assets incurred during the year to ensure that the expenditure resulting in increase in capacity of existing fixed assets as also expenditure incurred on purchase of new fixed assets have been properly capitalized.

3. Obtain a list of fixed assets disposed off during the period and verify computation of profits/loss, if any, on the same on sample basis.

4. Verify the items of fixed assets, retired from active use and held for disposal, have been stated at the lower of their net book value and net realisable value and are shown separately in the financial statements. Also verify that any expected loss has been recognized immediately in the statement of profit and loss.

5. Ensure that depreciation on fixed assets has been charged at the rates which are not lower than the rates prescribed and applicable statute, if any, to the enterprise, Eg: Rates prescribed in schedule XIV to the Companies Act, 1956, would be relevant to the companies registered under the Act.

6. In case depreciation on fixed assets has been charged at rates higher than those prescribed in the applicable statute on the grounds of lower useful life, the report of the technical expert must be verified.

7. Perform analytical review procedures on computation of depreciation on major fixed assets as also on useful life of the assets.

8. Verify that the fixed assets register has been duly maintained and updated on regular basis. Further, various balances appearing in the fixed asset register should be reconciled with the books of accounts.

 9.  Physical Verification of various fixed assets should be carried out and discrepancies noticed, if any, should be properly analyzed and            reconciled.

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Procedure for Audit of Stock   :

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1. Obtain a copy of the stocktaking instructions to ensure that these instructions are adequate from the control viewpoint and also ensure hat these instructions have been duly complied with.

2. Identify all stock locations to ensure the coverage of all locations in the stocktaking process.

3. Identify important items from the stock sheets and physically verify them. Discrepancies notice, if any, should be properly documented.

4. Select certain items of inventory on random basis and ensure that these appear properly in the stock sheets.

5. Identify important items of inventory from the stock ledger and confirm their balances in the stock sheets.

6. Select certain items of inventory from the stock sheets (other than those covered referred in 5 above) and trace their balances in the stock ledger.

7. Ensure that the stock sheets are referenced/numbered in a manner which ensures their completeness.

8. Obtain details of cut-off procedures used on inventories from all documents pertaining to movement of stocks.

9. Identify any damaged or slow/non-moving stock, as also stocks in excess of current requirements.

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Procedure for Audit of Debtors :

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1. Examine the relevant records to ensure validity, accuracy and recoverability of debtor balances.

2. The balances of debtors shown in the schedules must be tallied with those shown in the ledger accounts. Further, the total of schedules must be tallied with the control account of debtors as appearing in the ledger accounts. Any differences in this regard should be clearly examined and analysed.

3. In case of significant debtors, the correspondence and other documentary evidence must also be verified to ensure their validity and accuracy.

4. For larger balances, subsequent realizations might also be verified.

5. Bad debts written off or excessive discounts or unusual allowances should be verified from the relevant correspondence.

6. Review city ledger and front office reconciliation for the year and investigate any unusual or significant items in the reconciliation.

7. Ensure that year-end charges made to guests have been adjusted for credit notes/allowances given in the next accounting year.

8. Examine credit balances in Sundry Debtors Account and after verifying correctness thereof ensure that these are grouped under creditors.

9. Obtain explanations from the management with regard to doubtful debts and verify the same with the corroborative evidence available. Further, it should be ensured that provision for doubtful debts is adequate.

10. Obtain an aging analysis of guest balances to identify old debts in respect of which provision has not been made, check all correspondence in relation thereto, and obtain explanations from the management before deciding upon whether a provision ought to be made

11. Assess the effectiveness of credit control; the measures taken to ensure credit-worthiness of the significant debtor groups such as corporates, travel agents and long-staying guests before extending credits.

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Procedure for Audit of Payroll:

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1. Perform walk-through test to examine the accounting system and internal control with regard to payroll.

2. Identify and test controls on which reliance is to be placed.

3. In case of accounting and/or internal control system has undergone a change during the year, re-perform tests as stated in (1) and (2) above to the extent required and document the same.

4. Apply necessary tests on the systems and controls, designed to prevent errors and frauds, to obtain the desired level of confidence. In case desired level of confidence cannot be obtained by applying these tests, the impact on the accounts and audit must be ascertained and the auditor should consider applying the additional tests.

5. Examine and review the segregation of duties with in the payroll department and the EDP department.

6. Carry out analytical review of payroll costs using key performance indicators.

7. Make comparison of current year payroll costs with the budgeted costs as also with the cost for the previous year.

8. Apply trend analysis on payroll costs incurred and benefit received by the department.

9. Compute a ratio of profit as a percentage of payroll costs for each department and compare the same with prior years as also with industry standards.

10. Obtain necessary information and explanation from the management for major variances, if any, noticed at steps 7 to 9 and ensure that all the information and explanations for variances are consistent with the relevant available information.

11. Check the relevant documents relating to fresh appointments and for resignations.

12. Review payroll sheets to identify unusual items and significant variances and obtain explanations from the management for such unusual items and variances.

13. Analyse relationship between casual labour cost and monthly occupancy rate, compare the same with previous year figures and industry standards and obtain explanation from management for significant variances.

14. Verify that timely payment of payroll related statutory dues such as tax deducted at source, provident fund, ESIC, etc., has been made.

15. Review the correctness of various calculations done by actuaries with regard to retirement benefit and ascertain reasonableness of assumptions used.

16. Examine the following documents for their relevance to the period under audit:

    • Contracts with unions

    • Other employment contracts

    • Employee benefit plans

    • Post retirement benefits

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