HOTEL AUDIT PROGRAMME

SCOPE OF AUDIT WORK IN RESPECT OF HOTELS/RESTAURANTS

INTERNAL CONTROL

PARTICULARS CONTENT OF REMARKS

CHECKING

A. REVENUE

I. ROOM REVENUE

a) Checking of guest main bills with reference to

arrival/departure register, tariff, occupancy report levy
of expenditure tax and luxury tax

b) Checking of discounts and allowance with reference to

delegation of powers as well as from propriety angle.

II. FOOD & BEVERAGES

a) Checking of F&B sales bills with reference to menu

rates and levy of sales tax

b) Checking of daily sales summaries with reference to

F&B sales bills and cash tendered at Front Office.

c) Checking of charge vouchers with reference to daily

sales summaries and guest main bills.

d) Checking of F&B cash and charge vouchers with KOTs

e) Checking of BWS sales with reference to consumption

f) Scrutiny of Internal checks/controls for adequacy

g) Review of existing menu rates whether rates are raised

in accordance with cost of production.

III. BANQUETS:

a) Checking of Banquet bills with reference to function

forms acknowledged by the parties, rates charged in
accordance with prescribed rates agreed rates in
accordance with delegation of powers including charge
of sales tax and expenditure tax checking of bills with
Banquet KOTs and posting of bills into bill register.

b) Scrutiny of internal checks/ controls for adequacy

IV. LICENCE FEE :

a) Checking of bills raised on licencees with reference to

agreements including charge of electricity wherever
applicable.
b) Scrutiny of individual licence files for ascertaining
whether laid down procedure for allotments of space
have been followed including fixation of licence fee.

c) Review of disputed cases of recovery of licence fee and

action taken.

V. MISCELLANEOUS RECEIPTS :

a) Swimming pool

b) Kabari Sales

c) Telephone etc.

With reference to guest main bills raised.

B. EXPENDITURE :

I. OPERATIONAL EXPENDITURE :

a) Consumption of Provision & Beverages :

i) Kitchen consumption register checking of receipts

from the main stores and consumption with reference to
sales.

ii) Bar stock-cum-consumption register with reference to

picking sheets and receipts of bar items from the main
stores.

iii) Comparison of monthly BWS and cigar and cigarettes

cost with laid down standards and cost in other hotels.

b) Employees remuneration and benefits :

i) Salary bills with reference to attendance and leaves

records and personnel files etc.

ii) Pay fixation in respect of promotion cases

iii) Payment of DA whether in accordance with orders on

the subject

iv) Medical benefits in accordance with rules framed by

Hqrs.

v) Payment of bonus in accordance with Bonus Act or

other orders of the Management.

vi) Overtime allowance analysis for suggestions, if any.

c) Power and Fuel Payment with reference to the bills,

consumption of fuel as per records suggestions if any,
on savings in electricity and fuel.

d) Repairs & Maintenance Payment with reference to

bills review of consumpti8on of materials/stores-
contracts awarded for R&M to outside parties with
reference to laid down procedures Comparative study
of R&M cost with other hotels.
e) Up-keep service cost payment with reference to bills.

f) House Keeping :

i) Review of stock-cum-consumption register and linen

and blanket register with reference to receipts and
consumption.

ii) Review of consumption of various stores items with

reference to rooms and F&B sales.

iii) Scrutiny of procedure followed for write-off of linen and

blankets.

g) Write-off and Breakages Scrutiny of system followed

for write off and breakages of crockery, cutlery,
glassware and kitchen utensils whether register is
maintained (approved write off norms see page No. 6)

h) Telephone & Telex Expenditure Review of expenditure

on telephone and telex etc. vis-a-vis income alongwith
internal check/controls and suggestions for further
controls if any.

i) Decoration and flowers Recovery from guests and

payment to suppliers review.

II. ADMINISTRATIVE EXPENDITURE :

TA, DA & Conveyance, printing and stationery, postage,

telegram, telephones and telex/fax, advertisement,
publicity and sales promotion, entertainment (with
reference to prescribed norms). Running &
maintenance of vehicles, bank and music, expenses on
cultural shows including income, commission to travel
agents etc. with reference to payment vouchers etc.

C) STORES AND PURCHASE :

a) Scrutiny and review of purchase cases with reference to

laid down Purchase and Store Procedure manual and
delegation of powers.

b) Checking of stores ledgers with stores receipt vouchers

and issue vouchers alongwith authority requisitioning
the stores and cross checking of receipts with security
records.

c) Review of old/obsolete and surplus stores and action

taken for transfer to other units where required or
disposal.

d) Review of minimum, maximum and recording level fixed.

e) Review of overall inventory position and suggestions for

reducing the inventory if any.

D. SUNDRY DEBTORS OUTSTANDING :

a) Checking of posting of guest main bills into parties

accounts in the city ledger with reference to EBR.

b) Review of outstanding period wise

c) Review of court cases and follow up action

d) Review of old outstanding considered non-recoverable

for write-off

e) Review of oustandings with reference to authority letters

of customers.

f) Review of unlinked credit balances and possibility/steps

for adjustments against debit balances.

E. ENGINEERING AND OTHER CONTRACTS :

a) Review and scrutiny of contracts awarded with

reference to delegation of powers and whether
prescribed procedures have been followed.

b) Review of dismantled/surplus material and its disposal /

transfer to other units where required.

F. FUND FLOW :

Review of funds flow statements with actual collection

and utilisation of funds and suggestions, if any for
maximising return/transfer of funds to Hqrs.

G. BOOKS OR ACCOUNTS AND MONTHLY REPORTS :

a) Review of position of maintenance of Books of Accounts

and suggestions for updating.

b) Review of monthly trial balance

c) Review of Management information system reports for

accuracy

d) Review of sub-ledgers for advances with General

Ledger for reconciliation.

e) Reconciliation of City ledger with General Ledger.

f) Review of periodical inter-unit balances reconciliation.

g) Review of Bank reconciliation statements.

h) Review of Credit balances of Customers, Contractors,

suppliers and employees for adjustments.
i) Review of outstanding liabilities for adjustments.

j) Review of advances and their adjustments/realisation.

- against staff for purchases

- against staff for salary/festival/motor
car/scooter/cycle/ advances etc.
- against suppliers
- against contractors etc.

k) Scrutiny of General ledger for required adjustments.

H. INSURANCE
a) Review of various Insurance covers taken for their
adequacy

b) Review of Insurance claims lodged with the Insurance

Companies and follow up action.

I. SECURITY :

a) Review of Hotel property returnable register and

non-returnable register with reference to gate
passes
b) Review of goods incoming register.

Report of deficiencies and suggestions for remedial

measures.

Implementation/follow up action
 SAMPLE AUDIT PROGRAMME CHECKLIST

Client: ______________________ Schedule No: ______________

Audit Period: _________________ Date: _______________________

AUDIT OF FIXED ASSETS

Audit Objectives

1. Fixed assets, recorded in books, are actually in existence, owned by the entity and are
used in operations.
2. No unrecorded fixed asset is in existence.
3. Fixed assets sold, abandoned, or otherwise disposed of have been eliminated from
the financial statements. 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.
4. Subsequent amount spent on existing fixed assets have been capitalised only in a
case where it increases the future benefits from the asset beyond its previously
assessed standard of performance, e.g., where it increases the capacity.
5. Valuation of fixed assets is appropriate keeping in view the generally accepted
accounting principles and these principles have been consistently applied.
6. All the assets obtained on finance lease, on or after 1 st April, 2000, are recognised as
assets in the financial statements as per Accounting Standard (AS) 19, Leases, issued
by the Institute of the Chartered Accountants of India. Operating lease rentals have
been appropriately charged as an expense over the life of lease.
7. Any impairment in the value of fixed assets has been appropriately recognised in the
financial statements.

Audit Procedures

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 incurred on purchase of new fixed assets has been
properly capitalised.
3. Obtain a list of fixed assets disposed of during the period and verify computation of
profit/loss, if any, on the same on sample basis.
4. Verify that 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 recognised 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 in applicable statute, if any, to the enterprise, e.g.,
rates prescribed in Schedule XIV to the Companies Act, 1956, would be relevant for
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 account.
9. Physical verification of various fixed assets should be carried out and discrepancies
noticed, if any, should be properly analysed and reconciled.

PROFIT AND LOSS ACCOUNT

Audit Objectives

1. All the items of revenue and expenses have been properly recorded and recognised.
2. Proper adjustments have been made for expenses accrued / outstanding at the year-
end and for the prepaid expenses.
3. Proper adjustments have been made for income accrued at the year-end and for the
income received in advance.
4. Adequate provision has been created for expected un-collectable portion of debtors
and the individual items have been charged off on becoming un-collectable.
5. Recognition, measurement and disclosure requirements laid down in various
pronouncements of the Institute of the Chartered Accountants of India have been duly
complied with.

Audit Procedures

Sales and Purchase Accounting

1. Perform walk-through tests to examine the system of accounting and internal control
with regard to sales and purchases.
2. Identify and test controls on which reliance is to be placed.
3. In case 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 the desired level of
confidence cannot be obtained by applying these tests, its impact on the accounts and
audit must be ascertained and the auditor should consider applying the additional
tests.
5. Determine significant variances for major heads of revenue and expenditure vis--vis
the budget figures and the corresponding figures for the previous year.
6. Identify unusual items of revenue and expenditure in the profit and loss account.
7. Ascertain/obtain reasons from the management for such variances and unusual items
and these reasons should be properly documented.
8. Obtain corroborative evidence for managements explanations of significant matters.

Analytical Review of Individual Items

9. Compare monthly room rent revenue with the budgeted amount and with the revenue
for the corresponding month of the previous year/period.
10. Compare monthly room rent revenue with the revenue computed on the basis of
industry trends and occupancy rates for the month.
11. Carry out a global check on the room rent revenue by considering industry occupancy
rates (particularly in that market segment) and the room rates charged by the hotel.
12. Obtain necessary information and explanations from the management for major
variances, if any, and ensure that all information and explanations for variances are
consistent with the relevant available information.
13. Compare and analyse monthly relationship of food and beverages revenue with room
rent revenue besides comparing actual food and beverage revenue with budgeted
revenue and revenue for the corresponding month in previous year.
14. Verify reasonableness of banqueting income by comparing the same with the income
for the corresponding previous period and the budgeted income. Any material
variances should be properly analysed and investigated.
15. Assess reasonableness of interest received and interest paid by comparing the same
with the interest computed on the basis of the average balance outstanding and
applicable rates of interest. Further, ensure on test basis that interest has been
received and paid at rates contracted and computation of interest should also be
checked on sample basis.

PAYROLL

Audit Objectives

1. Amounts outstanding at the year-end as also the amounts paid in advance have been
recorded and properly adjusted in the financial statements for the period.
2. Amounts recorded as payroll expenses accurately represent the value of services
received by the entity.
3. Allocation of various expenses to assets, expenses, and other accounts has been done
correctly on reasonable and equitable basis and applied consistently.
4. Accounting principles applied to various employee benefit costs including health
care, pension and other post-retirement benefit costs are appropriate keeping in view
various pronouncements of the Institute of the Chartered Accountants of India such
as Accounting Standard (AS) 15, Accounting for Retirement Benefits in the Financial
Statements of the Employers. It should also be ensured that the accounting principles
have been appropriately disclosed in the notes to the financial statements.

Audit Procedures

Accounting System and Internal Control

1. Perform walk-through test to examine accounting system and internal control with
regard to payroll.
2. Identify and test controls on which reliance is to be placed.
3. In case 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 the desired level of
confidence cannot be obtained by applying these tests, its 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 within the payroll department and EDP
department.
6. Carry out analytical review of payroll costs using key performance indicators.
7. Make comparison of current year payroll cost with the budgeted cost as also with the
cost for the previous year.
8. Apply trend analysis on payroll cost 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 the prior years as also with the industry standards.
10. Obtain necessary information and explanations from the management for major
variances, if any, noticed at steps 7 to 9 and ensure that all information and
explanations for variances are consistent with the relevant available information.
11. Check 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
explanations 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 benefits 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.

STOCK VERIFICATION

1. Obtain a copy of the stocktaking instructions to ensure that these instructions are
adequate from the control viewpoint and also ensure that 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 noticed, 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.
STOCK VALUATION

1. Ensure that the principles relating to valuation of inventories stated in Accounting

Standard (AS) 2, Valuation of Inventories, issued by the Institute of the Chartered
Accountants of India, have been duly complied with.
2. Verify that the principles relating to valuation of inventories have been followed
consistently from year to year, i.e., the valuation principles followed in the current
year are the same as those followed in previous year.
3. Independently determine lower of net realisable value and cost for certain important
items of inventory and ensure that their valuation is correct.
4. Carry out an analytical review on the value of stock by comparing the same with the
budgeted value as also with the value of inventories at the end of the previous year.
5. In case significant variances are found in the valuation of inventories, category-wise
analytical review must be carried out and reasons for variances in value of each
category must be ascertained from the management and properly documented.
6. Verify that appropriate provision has been created on damaged or slow/ non-moving
stock, as also on stocks in excess of current requirements.

DEBTORS

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 realisations 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.
 LAWS/STATUTES APPLICABLE TO HOTEL INDUSTRY

1.31 Apart from the common laws that are generally applicable to any business entity,
such as the Income-tax Act, 1961, the Companies Act, 1956 (if the entity owning
the hotel is a company), and the labour laws, the following statutes require specific
mention as being applicable to the hotel industry:

Expenditure Tax Act, Central Act For levy of tax on expenditure

1987 incurred in certain hotels.
Luxury Tax Act State Act For levy of tax on luxury provided in
the hotel.
The Prevention of Food Central Act For maintenance of hygiene and
Adulteration Act, 1954 quality of food
Central Excise Act, 1944 Central Act Excise duty on pastries and cakes.
State Excise Act State Act State excise laws for levy of excise
duty on liquor.
Service Tax (levied under Central Act For levy of tax on Banquet Hall hire
the Finance Act, 1994) Mandap etc.
Shops and Establishments State Act For regulating the working of the
Act hotels.
Sales Tax Act State Act For levy of tax on sale of food and
other goods
Standards of Weights and Central Act To establish standards of weights and
Measures Act, 1976 measures.

ROOMS

2.13 Rooms generally constitute the biggest source of revenue for a hotel.
Approximately, 60% - 62% of the gross revenue of a hotel comes from room
rent. Normally, contribution from this source of revenue comes out to be more
than 70% due to the low variable costs. The various operations relating to
rooms normally are as follows :

Front Office, including reservations

Bell-desk
Housekeeping
General Administration

Front Office

Reservations

2.14 Normally, a separate person from the front office is made responsible for
making all advance bookings/reservations. Reservations may be made based on
direct inquires from the guests or through other diverse sources such as travel
agents, reservation networks ( in the case of an enterprise operating a chain of
hotels), secretaries of executives and through sales and marketing department.
The person responsible for making reservations normally prepares a list of
bookings for the next day, inter alia, stating room rate to be charged, discount to
be allowed on the standard rate, billing instructions, airport pick-up status and
 expected date and time of departure, etc. the list so prepared is sent to other
departments for taking necessary action at their end.

Filling of Registration Card

2.15 Each guest is required to fill-up a registration card at the front office. The
registration card normally records the name and address of the guest, the
nationality, passport number (in case of a foreign national), the arrival date and
time as also the expected departure date and time. The registration card is
required to be signed by the guest and a responsible office of the hotel. After
the guest has filled-in and signed the registration card, the room number allotted
to the guest as also tariff to be charged is filled-in. The discount allowed to the
customer on the standard rate is also recorded on the registration card. The
discount granted to the customer can be either contractual or based on the
negotiations made across the counter. The arrival of customer is also recorded
in the guest folio of the guest ledger.

Intimation to other operating departments

2.16 At the time a room is sold, the front office intimates the relevant details to the
housekeeping and other operating departments. The basic objective of
intimation is to inform the other operating departments about the sale of room
so that they gear up to provide the required services. While intimating, rooms
with scanty baggage, if known, are highlighted.

Reconciliation of Guest Count as per the housekeeping department with Guest Folio.

2.17 The housekeeping department, which is responsible for the proper upkeep of the
guest areas, more particularly rooms, prepares a guest count report atleast once
a day and sends a copy of the same to the Front Office. The Front Office is
required to compare the report with the guest folio. The discrepancies noticed,
if any, between the two counts are required to be duly reconciled, with a view to
ensure that there is no leakage of revenue. For example, an extra bed
requisitioned after check-in might get recorded from the housekeeping report.

Report of Guests Checking Out

2.18 It is a practice in most of the medium and large hotels to circulate a report of
guest check-outs for the next day to all operating departments. Such a practice
is useful in ensuring that all the charges have been posted to the guest folio
before raising the final bill on the customer and, therefore, reduces the chances
of leakage of revenue.

ROOM REVENUE

4.11 As stated earlier, rooms are the largest source of revenue for a hotel both in terms
of gross revenue and in terms of contribution. The method of checking/analysing
room revenue, therefore, assumes greater significance.
4.12 Letting out of room is usually recorded in more than one record, for example in
the guest folio, housekeeping department report, etc. Normally, more than one
person is involved in the preparation of these records. In view of this, the
possibility of manipulating room sales is normally less since in order to omit a sale
from the records it would be necessary to omit the entry of the guest from all
records. In large hotels, many persons are involved in maintenance of records
relating to room sales and, therefore, intentional omissions become practically
impossible, and unintentional errors or omissions can be detected quickly.

4.13 If control procedures explained above, are actually in existence and have worked
properly to the satisfaction of the auditor, he might not carry out various detailed
checks for the audit of room revenue during the course of the year. In such a case,
the auditor should apply various analytical review procedures for verification of
overall revenue from room rent. While applying analytical review procedures, it
should be noted that rent of rooms might vary depending upon the configuration
and location of the room. The room rent charged for the same room may also
differ from customer to customer and from season to season. Accordingly, it is felt
that proper understanding of the product mix of the hotel would enable the auditor
to fine-tune the analytical review procedures. For carrying out an analytical
review of room revenue, the following procedures might be applied gainfully by
the auditor:

a) Comparison of actual room rent revenue with industry norms;

and
b) Using the information gathered on the product mix to independently arrive at
the room rent revenue and comparing the same with actual room rent.

4.14 Food and beverages income generally moves in tandem with room rent revenue,
since the resident guests usually consume food and/or take drinks at the
restaurant/bar of the hotel during their stay. For instance, a large proportion of
resident guests have their breakfast at the hotel. This relationship between room
rent revenue and food and beverages income would be stronger in case of resorts
that are situated at places away from the city. City based hotels normally also try
to attract customers who are not staying at the hotel for food and beverages. Thus,
the relationship between food and beverages income and room rent revenue may
vary depending upon the type of the hotel.

4.15 The most important aspect of verification of food and beverages income would be
the examination of serial control on paid and unused bills. Control on cash bills
can be exercised through review of the cash summary sheets containing details of
the sales for a particular day/shift. The auditor could also apply surprise on-line
checks on the serial control. The said check might be applied either during the
day or while carrying out audit on the sale of the day that does not fall within the
audit period.
4.16 Under the analytical review procedures, the auditor should review the relationship
between room rent revenue and food and beverages revenue on monthly basis.
The reasons for any exceptional relationship between the two should be
determined and properly analyzed. In some cases, there might be some valid
reasons for change in relationship, for example, a disproportionate increase in the
food and beverages revenue in the month of December could be attributed to
Christmas and New Year celebrations.

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