# Audit of Hotels

## A. Internal Controls (IC)

### Key Risk: Pilferage

Pilferage is the greatest problem in any hotel - importance of IC cannot be undermined.

### Management's Responsibility

Management must introduce controls that minimise leakage as far as possible.

### Evidence of IC Success

Success of internal controls is evidenced by:

Preparation of regular trading account for each sales point (restaurant, bar, room service, etc.)
Detailed scrutiny of profit percentages
Any deviation from anticipated levels is investigated

### Auditor's Role

Auditor should:

Obtain regular trading accounts for period under review
Examine them
Obtain explanations for any deviations

## B. Room Sales and Hall Bookings

### Source of Charges

Charge for room sales is normally posted to guest bills by the receptionist
Source of these entries is the guest register

### Audit Tests

Carry out tests to ensure that correct number of guests are charged for the correct period
Any difference between rates charged on bills and standard room rate should be investigated
Ensure differential rates have been properly authorised

## C. Inventory Control

### Why Critical?

Hotel inventories (especially food and beverage) are both readily portable AND saleable - high pilferage risk.

### Documentation Controls

All movements and transfers of inventories must be properly documented to enable control over each store. Auditor should test that all documentation is processed accurately.

### Specific Controls

All movement and transfer of inventories must be properly documented
Areas where inventories are kept must be locked; key retained by department manager
Keys released only to trusted personnel; unauthorised persons not permitted
Many hotels use specialised professional valuers to count and value inventories on a continuous basis throughout the year

### Year-End Verification

Auditor should ensure that all inventories are valued at year-end
Auditor should himself be present at year-end physical verification

## D. Travel Agents and Shops

### Travel Agent Receivables

For ledgers coming through travel agents, bills are usually made on travel agents
Auditor should ensure money is recovered from travel agents as per terms of credit allowed

### Commission Verification

Commission paid to travel agents should be checked as per agreement

Worked example

### Example 1

Example - Trading Account Analysis (Restaurant):

Hotel restaurant trading account for quarter:

Cost of food consumed: Rs 5,00,000
Expected GP margin: 65% (industry norm)
Expected sales: Rs 14,28,571
Actual sales reported: Rs 11,00,000 (only 45% GP)

Auditor must investigate:

Pilferage of stock?
Free supplies to staff/management not recorded?
Under-billing to guests?
Cash sales not deposited?

### Example 2

Example - Room Rate Variance:

Hotel standard rate: Rs 8,000/night for Executive Room. Audit sample shows:

10 nights billed at Rs 5,000 each

Auditor verifies:

Were these corporate/contracted rates - check approved corporate contracts
Were these complimentary upgrades - check authorisation by Front Office Manager
Discounts authorised by competent authority per delegation matrix
Without proper authorisation - report as revenue leakage

### Example 3

Example - Travel Agent Receivables:

Guest checks in via Travel Agent 'XYZ Travels' for 5 nights @ Rs 6,000 = Rs 30,000.

Bill raised on XYZ Travels (not guest)
Credit terms: 30 days
Commission to XYZ Travels: 10% as per agreement

Auditor verifies:

Net receivable from XYZ Travels: Rs 30,000 - Rs 3,000 (commission) = Rs 27,000
Whether Rs 27,000 received within 30 days
Commission rate matches signed agreement (not adhoc)

⚠️ Common exam mistakes

Not being present at year-end physical verification of inventories (mandatory for auditor)
Failing to reconcile occupancy register with billed room nights - missed revenue
Not investigating gross profit deviations in food and beverage trading accounts
Accepting commission rates to travel agents without checking against signed agreements
Allowing unauthorised personnel access to food/beverage stores - high pilferage risk
Not following up on overdue receivables from travel agents - provisioning required

Reference:

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