How to audit hotel accounts

M. V. Kali Prasad

M. V. Kali Prasad suggests answers to the latest CA PE II auditing paper.

WHAT special steps will you take into consideration in auditing the accounts of a hotel?

The general considerations for audit of a hotel are:

i) Study the constitution. That is, whether it is a public or a private limited company. (certain
income-tax benefits to the hotel establishments are available only if it is a public limited
company.)

ii) Examine if the hotel is affiliated to any chain of hotels, whether national or international.

Read the terms of affiliation and ensure compliance. These hotels may be awarded star status
depending on the facilities provided.

Ensure that the facilities are provided as per the star category requirement. (Often an auditor is
asked to issue a certificate to this effect.)

iii) Examine if the hotel has a reciprocal arrangement with another hotel. Understand the
significant accounting and other policies of the hotel, especially with reference to checkout time
of the guests, discount structure, corporate clientele benefits, appropriation and allocation of
overheads into various departments or profit centres, and so on.

iv) Understand the various profit centres identified by the hotel, such as coffee shop, bar,
restaurant, conference halls, banquets, outside catering, and so on.

v) Study the internal control procedures of the hotel with particular reference to

a) purchase of edibles, stores and kitchen, b) consumables such as soaps, shampoos, guest
toiletries, c) occupancy of rooms of the hotel, and so on.

vi) Carry out audit of profit centres independently and confirm the profit or loss at each profit
centre — coffee shop, restaurant, or bar.

vii) Examine the internal control procedures for taking orders, serving food and collection of
bills.

viii) Examine internal control for serving the food with reference to quantity or quality. Income
from this centre would be sale of food, liquor, and so on.

Check the internal control systems for recording the sales. Test-check the bills and their entry.
Match the direct expenditure on this centre consisting of consumption of edibles, condiments,
provisions, vegetables, non-vegetarian items, and so on, and salaries of, among others, the
serving staff, cooks, waiters, cleaners, stewards and cashier.
ix) Arrive at the gross profit for the profit centre and analyse the same with that of the industry as
well as figures of the previous year to satisfy about the reliability.

x) Check the charging of overheads such as depreciation of furniture, kitchen equipment, and so
on, to this profit centre.

Guest rooms: a) Understand the classification of guestrooms as air-conditioned, non air-

conditioned, suites, and so on.

b) Study the internal control procedures for registration of guests, recording of checking in time,
checking out time, number of persons, adults, children, and so on.

It is possible in the case of guest rooms to have a revenue more than hundred per cent of installed
capacity as guests are charged for a full day even if the room is occupied for a part of a day. If a
guest, for instance, occupies a room in the evening and checks out early next morning, the same
room may be allotted to another guest immediately. Both the guests will be charged full day's
tariff.

c) Study the internal control for serving food to the guests inside the rooms.

d) Apportionment of food expenditure to the guestrooms is normally made, depending upon the
management policies of the hotel.

e) Study procedures of the hotel for collection through credit cards.

d) Vouch expenditure and income related to guestrooms. Direct expenditure would be salaries of
room service boys, upkeep and maintenance of guestrooms, depreciation on furniture in
guestrooms, washing and cleaning of linen, cost of air conditioning, and so on. Allocation of
indirect expenditure such as salaries of receptionists, telephone operators, housekeeping
department, and so on, should be done on a consistent basis as per management policies.

Conference halls, banquets, and so on: Evaluate the internal control systems for booking of
conference hall. Examine the authority for allowing of discounts and concessions for booking of
conference hall.

Income from conference hall would be booking charges in general. Cancellation charges of the
conference hall also form a substantial income of a hotel. Examine the procedure for refund of
booking charges and ensure that a competent person authorises the refund.

Direct expenditure on a conference hall shall be the public address systems, salaries of sound
technicians, electricians, and so on.

Electricity charges, depreciation on equipment and furniture should be directly charged off to the
conference hall.

Other points: Hotels also operate certain smaller facilities such as conversion of foreign
exchange, travel desk, shopping area, Beauty parlours, gym, swimming pools, and so on. Study
the arrangement with the hotel for profit sharing and internal controls.
Hotels organise food festivals. See if a separate account is maintained for such special events and
surplus is transferred to the general profit and loss account. Surplus arising out of different profit
centres should be transferred to the general income and expenditure account.

Depreciation on utility buildings, general furniture, interest on loans, debentures and auditor's
fees should be charged off to the general revenue account to arrive at the net profit or loss.

Hotels are long gestation projects and, therefore, payment of interest out of capital is permissible
for these projects. In such a case, ensure that the requirements of Section 208 are complied with.

Particular attention is to be paid to the assets of the hotel, such as kitchen equipment, air-
conditioning plants, sound systems, cutlery and crockery, linen, and so on. Section 227 (4) (A)
requires the auditor to state whether there is a system of periodic verification of fixed assets and
the treatment of material deviations observed during the course of such verifications.

Obtain management representation for the verification of miscellaneous assets such as cutlery
and crockery.

Hotels periodically discard the furniture and cutlery. Examine the policy of the hotel and internal
controls for such transactions.

Vouching and verification

HOW do you vouch/verify the following:

Advertisement expenses: The auditor should understand the norms for a particular industry, such
as FMCG, and acquire sufficient knowledge of the norms (AAS 20).

The auditor should call for the advertisement policy of the entity and satisfy himself about
complying with the norms.

The auditor should examine the agreements with the advertising agencies, if any, to ensure the
rates for advertising. At random, check the proof copy of the particular media where the
advertisement has appeared. If an ad campaign was launched, say for the launch of a new
product, the expenditure should be considered as deferred revenue expenditure.

In this case, the basis on which the period over which it is proposed to be written off would
constitute a complex estimate (AAS 18) and the auditor should examine it carefully and be
satisfied with its justification.

The auditor should examine the budget for advertisement expenditure and allocation for each
media such as press, TV, and so on.

Vouch entries in the cashbook with the relevant receipts issued by the advertising agency or the
media in which it is issued.

The advertisement should be properly classified as marketing, recruitment of staff, legal

requirements, such as quarterly results, and disclosed accordingly as staff costs, and so on.
Obtain a management representation justifying the expenditure.

b) Goodwill: Goodwill is the monetary value of the reputation enjoyed by an entity. The auditor
should adopt following procedure to verify goodwill:

 Check the method of valuation of goodwill.

 If goodwill arises due to admission or retirement of a partner, check the valuation of
goodwill.
 Ensure that goodwill is either brought in or paid out in cash by the partner/s.
 Obtain management representation about the value of goodwill.
 Vouch entries in the books with the receipts issued for the amount of goodwill paid.
 If goodwill is paid in a scheme of amalgamation, the auditor should study the court orders, if
any, to substantiate goodwill.
 Verify the minutes books for the necessary resolutions passed in this regard.
 Ensure compliance with AS 10 and AS 26. AS 10 does not permit goodwill to be recorded in
the books unless it has been paid for in cash. Goodwill should be amortised within a reasonable
period in accordance with requirements of AS 26.
 Verify minutes of the meeting of the board of directors where it was decided to amortise
goodwill.

Negative employees are like a hurricane through a coastal town

BAD bosses can increase the risk of stroke by 33 per cent. Nine out of 10 people say they are
more productive when they're around positive people. Negative employees can scare off every
customer they speak with — for good. The Number One reason why people leave their jobs:
They don't feel appreciated.

Shocked? These are just a few revelations from How Full is Your Bucket? by Tom Rath and
Donald O. Clifton, published by Gallup Press (www.bucketbook.com). "We experience
approximately 20,000 individual moments every day," informs Tom, and asks how you felt after
your last interaction with another person, be it your spouse, best friend, co-worker, or even a
stranger.

"Did that person `fill your bucket' by making you feel more positive? Or did that person `dip
from your bucket', leaving you more negative than before?"

Even the briefest interactions affect your relationships, productivity, health and longevity, write
Rath and Clifton. So, watch out!

We take our encounters for granted, without realising that the results are rarely neutral. The
theory of the dipper and the bucket, as Tom explains dipping into his grandfather Don's wisdom,
states that each of us has an invisible bucket. "It is constantly emptied or filled, depending on
what others say or do to us.

When our bucket is full, we feel great. When it's empty, we feel awful."

We also have an invisible dipper, adds Tom. "When we use that dipper to fill other people's
buckets — by saying or doing things to increase their positive emotions — we also fill our own
bucket." Isn't that magical?

But what about the opposite, that is, dipping into others' buckets and decreasing their positive
emotions? In that case, "we diminish ourselves."

So simple is this philosophy that you can get enlightenment in your bathroom!

While every drop into the bucket makes us stronger and more optimistic, "an empty bucket
poisons our outlook, saps our energy, and undermines our will." Destruction doesn't happen
dramatically, all of a sudden; negativity is a slow killer.

A useful strategy is to ask yourself, before each interaction, if you're adding to or dipping from
another's bucket. "Consider your most recent interactions. Have you poked fun at someone?
Touched on an insecurity? Blatantly pointed out something that person does wrong?

If so, try and push the `pause' button in your head next time." What to do with "persistently
negative or hurtful people" who simply won't change? They've got long-handled dippers, points
out Tom. Steer clear of them, "for your own well-being and emotional health."

Next strategy is to shine a light on what is right. Also, "make best friends" at work by noticing
when others do a great job.

Give unexpectedly, advises Tom, and the gift needn't be something tangible; "it can be a gift of
trust or responsibility."

The book reports the findings of a survey that covered 4 million employees worldwide, in 10,000
business units and 30 industries.

It found that individuals who receive regular recognition and praise, "increase their individual
productivity, increase engagement among their colleagues, are more likely to stay with their
organisation, receive higher loyalty and satisfaction scores from customers, and have better
safety records and fewer accidents on the job."

Harsh though it may sound, but where productivity is concerned, "it would be better for
organisations if people who were overly negative stayed home".

They come to work only to be counterproductive. "We all know these types of people. They
walk around the office with glazed looks or move from cubicle to cubicle stirring up trouble with
whining, complaining, and even paranoia," explains Tom.

It would be wrong to presume that disengaged employees simply sit in their cubicles; they are
more likely to do "plenty of things each day to bring others down with their own sinking ship."
There's more deadly stuff: "It is possible for just one or two people to poison an entire
workplace... Negative employees can tear through a workplace like a hurricane racing through a
coastal town."

I began with how bad bosses can increase the risk of stroke by 33 per cent; but with negative
employees, I may hazard a guess that the risk of stroke for good bosses can be a much higher
percentage! A filling read!