In this chapter, we will discuss the Audit of Hotels.
There are many types of facilities that are provided by the hotels to their customers these days. Hotels generate their income from room rent, room service, laundry, restaurants, swimming pool, bar-room, sports room, health clubs, conference halls and banquet hall for marriages, parties and seminars. In addition to these, few hotels are also letting out shops to companies to promote and sell their products and services.
Audit of Hotels
An Auditor should consider the following points while conducting Audit of Hotels −
Detail of Applicable Law
For audit of hotels, it is very crucial and important for an Auditor to go through the following laws normally applicable to the hotel industry −
|List of Applicable Law||Subject||Levy On|
|Luxury Tax Act||State Act||Room Rent for luxury provided|
|Service Tax||Central Act||On Restaurants, Dry-cleaning service, Banquet revenue and room rent
Note − Service Tax on room rent and restaurant are charged on some specific conditions.
|State Excise Act||State Act||On liquor and regulated sale/service of liquor.|
|Food safety & Standard Act, 2006. Prevention of Food Adulteration Rules, 2010||Central Act||For hygiene and quality of food|
|Central Excise Act||Central Act||On pastries and cakes.|
|Value Added Tax (VAT)||State Act||On food and other goods.|
|Standards of Weight and Measures Act, 1976||Central Act||To establish standards of weight and measures.|
|Contract Labour (Regulation and Abolition) Act||Central Act||On employing contract labor.|
|Shops and Establishment Act and the Catering Establishments Act||State Act||To regulate the working of hotels.|
The Companies Act, 2013 may also be applicable to hotels in case if the status of hotel is like a company. Whereas, the Income Tax Act, 1961 will be levied in all the cases irrespective of whatever the status of that hotel is.
- An Auditor should determine the scope of his audit from his letter of appointment. It should be seen whether he is asked to express his opinion on financial statements only or some additional responsibility being assigned to him.
- An Auditor should obtain list of books of accounts, documents and registers maintained by hotel.
- He should see whether relevant hotels have independent status or a part of chains of hotels.
- An Auditor should study the Memorandum of Articles and the Memorandum of Association.
- He should obtain the title deed and other related documents to verify the land and building.
- He should also obtain Minutes of meeting of the Board of Directors to note down the important decisions relating to accounts, finance and audit.
Point of Sale (POS)
In order to conduct audit of a hotel, an Auditor should study, verify and vouch books of accounts, keeping in mind the different points of sale.
Points of Sale
Let us now understand the different points of sale.
Revenue from Room Rent
An Auditor has to carefully examine the following points regarding revenue from room rent −
- One of the main revenue generation points in hotel industry is room rent. The billing is done through accounting software (most of the hotels are using PMS software which is very popular in hotel industries).
- Room rent is charged on the basis of fixed tariff according to the category of room.
- Discounts may be offered to customers; this depends on various factors like season, holidays and other things. Special discount is also offered to groups of students, delegates, corporate customers, VIP customers, etc.
- Complementary rooms are provided by hotels for some special guests and hotel staff.
- An Auditor has to get the structure of discount and he should also ensure that the discount offered is within permissible limit or not. Authorization from appropriate authority should be done on discounts.
- An Auditor should verify the Luxury Tax on the room rent charged. In some states, the Luxury Tax is charged on actual room revenue received from the customers and in some states it is chargeable on the published rack rate.
- In most of the states, Luxury Tax is chargeable on complementary rooms also.
- Exemption on Luxury Tax is provided in case where complementary rooms are provided to the hotel staff.
- An Auditor has to verify that all collected Luxury Tax is deposited with state within time.
- He should verify the retention charges which are collected from customers due to either cancellation of a reservation or due to non-arrival upon reservation.
- An Auditor should verify applicable law of Luxury Tax regarding retention charges; in a few states, Luxury Tax is applicable on retention charges also.
Revenue from Food & Beverages (Restaurants)
The following points need to be considered by an Auditor to examine the revenue coming from Food and Beverages in Restaurants −
- There are two types of sale at restaurants; one is to the resident customer and the second is to walk-in customers.
- An Auditor should verify that the sale to resident customer is recorded in the combined bill and a cash receipt is issued in case of sale to walk-in customers.
- VAT should be charged on the bill as per applicable rate.
- Service Tax is also chargeable as per applicable rate on food bills in case where the restaurant is air-conditioned and restaurants providing liquor to customers. An Auditor should verify the amount of VAT and Service Tax according to the applicable rate.
- An Auditor should examine that all collected VAT and Service Tax have been deposited with government within time or not.
Revenue from Food & Beverages (Room Service)
The Revenue from the sale of Food and Beverages through room service is also a very common feature and an Auditor should consider the following and verify the revenue −
- All generated bill should be accounted for in the main bill of the resident customer.
- An Auditor should examine the KOT (Kitchen Order Ticket) to verify the F&B bills.
- Applicable VAT and Service Tax should be charged on bills.
- An Auditor should verify the rate of service charges if any applicable on F&B bills.
Food & Beverages Revenue from Minibar
Food & Beverages Revenue from Minibar The revenue from the food and beverages from the minibar also needs to be verified by the Auditor; the following points need to be considered for the same.
- Most hotels keep minibar stocked with liquor, soft drinks and snacks, etc.
- Billing of these items is based on self-declaration by the Guest through filling up of the form kept in the minibar.
- The minibar attendant checks the consumption and bills.
- The Auditor should verify the daily report of consumptions and stock of these items and should match with the billing to guest.
Revenue from Banquets
An Auditor needs to consider the following points and verify the revenue from Banquets −
- Normally, rate offered is a composite rate for food and beverages and rent of hall.
- Composite rate as above is based on per person.
- If actual cover (means per person) is less than the contracted rate, billing is done on minimum guaranteed covers. For example, banquet rent including F&B is Rs. 1,00,000/- for 100 persons and the per person rate is Rs. 1,000/-..
- If the actual number of persons is 90, then the hotel will charge Rs. 1,00,000/- at the minimum guaranteed rate.
- If the actual number of persons is 120, then the hotel will charge Rs. 1,00,000 + 1,000 x 20 = 1,20,000/-.
- Service Tax and VAT both are chargeable on composite rate.
- If the rent of banquet hall and the F&B charges are separate, Service Tax and VAT will be charged accordingly.
Revenue from Business Centre
An Auditor needs to consider the following points and verify the revenue from Business Centre −
- Business centre services means meeting room, fax service, photocopy service and secretarial services, etc.
- An Auditor should carefully examine the business centre services because these services are manually tracked to billing; if manual tracking through appointment register is missed, billing will be omitted.
An Auditor needs to consider the following points and verify Arcade Revenues −
- Hotels provide shopping space at a fixed monthly rent at lobby of hotel or any other public area.
- An Auditor should verify the rent deed, contract deed, cash book, bank book, cash receipt counter foil to verify this revenue.
Revenue from Car Hire
An Auditor needs to consider the following points and verify the Revenue from Car Hire −
- Car facility is provided by hotels to their guest through dedicated travel agencies.
- Whenever guests hire cars, charges are posted to the guest folio.
- A hotel gets commission from travel agency which is based on the charges earned by the travel agency.
- An Auditor should examine the bills issued to customers and the amount paid to the travel agencies.
Revenue from Telephone & Internet
An Auditor needs to consider the following points and verify the Revenue from Telephone and Internet −
- Telephone bills are charged through EPABX system and internet service is charged through internet service providing system.
- For internet charges, Service Tax is charged.
- In some states like Kerala, Luxury Tax is charged on telephone bills.
Revenue from Housekeeping
This revenue is normally charged for sale of wardrobes and baby-sitting, etc.
Revenue from Laundry
An Auditor needs to consider the following points and verify the revenue from Laundry −
- Laundry service is provided to employees of hotel and resident guests.
- Billing is done through accounting software according to the rate provided.
- An Auditor should get the rate list to verify the rates and the billing should be verified with the housekeeping record.
Revenue from Beauty Parlors and Health Clubs
An Auditor needs to consider the following points and verify the Revenue from Beauty Parlors and Health Clubs −
- These facilities are provided to resident guests, walk-in guests or through membership.
- An Auditor should verify the rate charged for service provided and guest attendance register.
- He should ensure the all services should be charged and recovered from customers.
Revenue from Sale of Scrap and Disposal of Empties
An Auditor needs to consider the following points and verify the Revenue from Sale of Scrap and Disposal of Empties −
- Scrap and empties can be sold on the basis of contract price or on the basis of onetime evaluation at the time of sale.
- An Auditor should verify the agreement for contract price in case where there is a time bound agreement between hotels and scrap buyer.
- Sale of dry scrap is also very important in hotels like sale of empty cans, bottles and other containers.
- He should verify the outward register, weighing slips, etc. and the rate charged for the same.
- An Auditor should verify the cash receipt & cash book, etc.
Audit of Expenses
An Auditor needs to consider the following points and verify the Revenue from Expenses −
- An Auditor should verify the appointment letter, policy of increment, time record, salary register, cash book and bank book to verify the salary payments of employees.
- He should verify all purchases through requisition slip, quotations, purchase order, inward register, quality control verification record and stock ledger.
- Every purchase should be passed by appropriate authority in this regard.
- Vouching should be done properly and should be verified with documentary evidences.
- At times, there may be a contract between a seller and a buyer (hotel) to sell a particular product at the same rate for a specific period like a week or a month, especially in case where the supply of material is done on daily basis like milk, bakery products, fresh vegetables, etc. The Auditor should verify purchases on the basis of such agreement.
- An Auditor should apply all other precautions and experience to audit the expenses as he does in any other industries.
- Verification of purchases, consumption and stocking is very crucial in hotel industry and it is a real challenge for an Auditor to verify all these very carefully. An Auditor should apply all his experience and knowledge to do audit of it.