TOPIC

AUDIT OF THE TAJ MAHAL PALACE HOTEL

IN PARTIAL FULFILMENT OF THE REQUIREMENT UNDER SEMESTER BASED
CREDIT & GRADING SYSTEM FOR POST GRADUATE SEMESTER - III
Program under faculty of commerce
MASTER OF COMMERCE (EVENING)

SYDENHAM COLLEGE OF COMMERCE & ECONOMICS

SUBMITTED BY:
AKASH MAHADEV TOKE
ROLL NO: 37
PROJECT GUIDE:

PROF. VIJAY CHAWALE

SYDENHAM COLLEGE OF COMMERCE & ECONOMICS
2015-2016

DECLARATION
I Mr. AKASH TOKE the student of M.Com- II (Evening) 3rd Semester (20152016), hereby declare that I have completed the project on AUDIT OF THE TAJ
MAHAL PALACE HOTEL. The information submitted is true and original to the

best of my knowledge.

Signature of student:
_________________
AKASH MAHADEV TOKE
Roll No: 37

CERTIFICATE
This is to certify that Mr. AKASH MAHADEV TOKE of M.Com-II (Evening)
Semester-III (2015-2016) has successfully completed the Project on AUDIT OF THE
TAJ MAHAL PALACE HOTEL

under the guidance of Prof. VIJAY CHAWALE .

1) Project Guide: ___________________

2) Internal Examiner: ________________
3) External Examiner: ________________

DATE: ____________________
PLACE: ___________________

ACKNOWLEDGEMENT
3

I would firstly like to thank the UNIVERSITY OF MUMBAI for

giving us the liberty of choosing such topic which will be benefited
to us in future. I would like to thanks the Principal of Sydenham
College Dr. Annasaheb Khemnar for giving me the opportunity to
study in this esteemed college and doing the course of
Accountancy. I would like to express my sincere gratitude and
thanks to Prof. VIJAY CHAWALE who is my project guide, as She
has been the guiding light for this project and has also provided
me with the best of my knowledge, advice and encouragement
which helped me in successful completion of my project.
My colleagues and specially my parents who have also supported
and encouraged me, the success of this project to the large extent
is also dedicated to them.
I would also like to thank all those who have helped me and whom I have forgotten
to mention in this space

SIGNATURE OF STUDENT: ____________

AUDIT OF THE TAJ MAHAL PALACE HOTEL

INDEX
Sr. No.

Topic

INTRODUCTION

2
3

Page No.
7

INTERNAL , OPERATION & STATUTORY AUDIT APPROACH FOR

HOTEL
RATIO ANALYSIS
Indian Hotels Company Limited
QUESTIONNAIRE FOR ANALYSIS
COLLECTIONS & AUDIT STEPS

ANALYSIS OF DAILY CONSUMPTION / COST OF MENU ITEMS

15

16

QUESTIONNAIRE FOR ANALYSIS OF MATERIAL PURCHASES &

VENDORS PAYMENTS
OTHER ROUTINE AUDIT PROCEDURE

HOTEL AUDIT PROGRAMME

19

Type
9

PublicAUDIT
companyPROGRAMME CHECKLIST
SAMPLE

25

10
Traded
as

LAWS/STATUTES
APPLICABLE
TO HOTEL INDUSTRY
BSE: 500850,NSE:
INDHOTEL

30

Industry

11

AUDITORS
REPORTS
Hospitality and tourism

---

16

BIBLIOGRAPHY

34

1903

Founder

Jamsetji Tata

Headquarters

Mumbai, Maharashtra, India

Key people

MD & CEO
Rakesh Sarna, (1 September 2014 Present) [1]

Revenue

1924.79 crore(US$290 million) (FY2012-13)[2]

[3]

Operating

453.34 crore (US$68 million)(FY2012-13)[2][3]

income
Net income

1924.79 crore(US$290 million) (FY2012-13)[2]

[3]

Parent

Tata Group

Website

www.tajhotels.com

DAILY

SALES

&

10

Founded

OF

11

18

The Taj Mahal Palace Hotel is a five-star hotel located in the Colaba region
of Mumbai, Maharashtra, India, next to the Gateway of India.
Part of the Taj Hotels, Resorts and Palaces, this hotel is considered the flagship property of the
group and contains 560 rooms and 44 suites. There are some 1,500 staff including 35 butlers.
From a historical and architectural point of view, the two buildings that make up the hotel, the Taj
Mahal Palace and the Tower are two distinct buildings, built at different times and in different
architectural designs.
The hotel, which many claim offers the highest level of service in India, has hosted many notable
guests, from presidents to captains of industry and stars of show business.

Internal, Operations & Statutory Audit Approach for Hotel

This audit program is intended for use in the operations and statutory audit of a hotel. It can be
used for audit of hotels with annual turnover in the range of 1 to 10 crores.
Hotel business is characterized by:
Uneven sales pattern; normally weekend sales will be higher than those on weekdays.
Cost of input items like groceries and vegetables varies considerably on frequent basis.
Non-predictability of daily business resulting in food wastages.
There is high attrition rate for employees (waiters).
Large number and value of transactions in cash.
These necessitate different audit approach to be adopted by auditors.
Control over cash transactions and system implemented to ensure all customers are billed
needs to be evaluated in detail.
Monitoring mechanism over purchase of input material items, daily consumption and wastage
needs to be analyzed.
It is advisable to analyze movement in gross margin on monthly or even fortnightly basis.
For any hotel a strict control and continuous monitoring by the management over input material
costs and daily wastages is required to maintain high gross margin. A gross margin report should
be prepared weekly / fortnightly / monthly basis, based on volume of operations. Following
format is suggested as an example for the report. Analyzing this repot will provide important
areas of focus during audit.
Few key points for consideration in analysis:
Check how the gross margin has varied in the audit period
Which input material items are showing consistent percentage against net sales
Which input material items have higher percent variation i.e. high delta
Closing stock is maintained at consistent level during all months

Ratio Analysis
Ratio analysis is an important analytical tool for reviewing financial data for any company. This
ratio analysis technique holds more relevance in hotel industry due to its peculiar business model.
As such following key ratios need to be analyzed to evaluate financial results of hotel operations
over a period.
1.

Gross margin to sales

Gross margin = Sales Direct Expenses

2.

Consumption to sales
Consumption = Opening stock + Purchases + Direct expenses closing stock of groceries
Consumption will focus only on the usage of groceries as part of hotels daily food serving
cost. Direct expenses will include salaries of employees in kitchen department.

3.

Net margin to sales

Net margin = Sales (Direct + Indirect Expenses)

4.

Sales value per employee

5.

Percentage of daily wastage to sales value

6.

Direct expenses to Indirect expenses ratio

7.

Indirect expenses to sales

10

1.

Questionnaire for analysis of process of daily sales & collections and audit steps
Sr.
No.
1.

2.

3.

4.

5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.

Question

Response

Which payment options are provided to the

customers by hotel?
Normally sales will be realized in cash, credit / debit
card payment or Sodexho passes.
Does hotel prepares Daily Sales Statement showing
sales bifurcated into above payment options?
A sample format of the same is attached below:
.
Based on daily sales statement or entries in books
prepare sales graph.
For monthly audit, it is suggested to prepare daily
sales amounts graph, for quarterly it can be weekly
amounts and for the year it may be monthly. Graph
will indicate movement in sales and also the average
sales achieved during the period.
Whether Daily Cash Reconciliation Statement
showing opening balance, days cash collection, bank
deposits, other payments and final closing balance is
prepared?
What is the minimum fixed cash balance maintained
with cashier at all time?
Whether minimum and maximum cash balance to be
maintained at any time is specified by the
management?
Who is responsible for verifying physical cash
balance and tallying it with cash reconciliation
statement at the close of hotel?
Whether physical cash verification is done at every
cashier shift change?
How the small differences in cash (excess / short) are
accounted for?
Document process description in brief from taking
down order till collection of invoice.
Which software is used to generate invoices?
Who is responsible for entering new menu item or
updating price of existing menu items in invoice
system?
Who is responsible for determining price of
individual item in menu card?
How often menu item prices are revised?
What is the invoice series?
Does adjustment to invoice is recorded on same copy
manually or whether the incorrect invoice is
cancelled and fresh invoice is raised?
If the existing incorrect invoice is corrected manually,
11

Sr.
No.
18.
19.
20.

21.
22.
23.

24.

25.
26.
27.
28.
30.
31.
32.
33.

Question

Response

how invoice in the system is updated?

Whether manual invoices are allowed under certain
cases? If yes what is the control over such invoice
books?
Who is authorized to allow discount to customers and
what is the limit set?
How many carbon copies are made in waiters order
book and how it is distributed?
Normally it should be at least in triplicate; one for
kitchen, one to cashier for preparing invoice and one
to be retained in the order book.
What is the check procedure to ensure all menu items
served to customer through multiple order slips are
billed?
Does any random checking of waiter order slip and
actual invoice is done?
Whether invoicing software can record customer
payment option also?
It may not be known at the time of raising invoice
whether customer will pay through cash or card.
However facility to record mode of payment after
payment is received will help in reconciliation of
daily sales at close of business.
Which reports can be extracted from the invoicing
software?
For analysis and better control, menu item wise sales
report showing quantity and sales value will be most
useful.
Other reports can be day wise or month wise sales,
item master list etc.
Who is responsible for extracting the daily card
collections report from card swiping machine?
Which is the card collection bank has been tied up by
the hotel?
What is the percentage of fee charged by bank?
What is the general time lag between date of card
sales and actual credit in bank account?
Who is responsible for regularly checking card sales
effected and its actual credit in bank?
What is the action taken if bank has not given credit
within normal time for card sales?
There are how many instances of delayed credit by
bank?
Ensure that for card sales, gross amount is booked as
sales and bank commission / fee (based on value of
invoice) is debited to the card collection charges
account.
12

Sr.
No.
34.

35.
36.
37.

38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.

Question

Response

Normally hotel should debit bank card collection

account on the day sales are effected and credit sales
account.
When bank credit the account, bank account is
debited with actual amount, bank commission / fees
account is debited and bank card collection account is
credited.
Who maintains Sodexho passes received from
customers?
What is the duration for realizing passes against cash
and what is percentage of commission charged?
Whether days cash collection is entirely deposited
into the bank account?
Ensure that the cash collected in a day is deposited
into the bank account at regular interval and large
cash balance is not maintained frequently. Verify
deposit slips and bank statement entry for cash
deposit.
Who is responsible for cash deposit in bank account?
Whether any expenses are allowed from days cash
collection?
Whether cash insurance has been taken? If yes, what
is the cash insurance value?
Whether hotel sales attract VAT?
Whether hotel has applied for composition scheme?
If composition scheme is not applied, whether VAT
credit from procurement is available and availed?
VAT is charged at appropriate percentage in every
invoice and VAT liability is recorded in books on
daily basis?
What is the basis for accounts department to record
daily sales?
Check daily sales entries passed in the books of
accounts.
Ensure that VAT liability is showing correct amount.
Total liability to net sales percentage should match
the applicable percentage applicable to hotel.
On sample basis check whether actual credit for card
sales is received in the bank account within specified
days.
Ensure that the bank credit matches with the days
card sales less fixed percentage of bank fee.
On sample basis vouch daily invoices and match total
of invoices with daily sales statement and sales
booking.
Based on invoice sample, vouch invoices and
corresponding waiter order notes to ensure that
proper amount for menu order served to customers is
13

Sr.
No.
52.

Question

Response

charged to them.
Where billing software is used, verify that latest
approved prices for all menu card items are available
in the invoice generation system and there is no
manual intervention for pricing in invoicing system.

14

2.

Analysis of daily consumption / cost of menu items

Sr.
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

11.
12.
13.

Question

Response

Which document is prepared for issues to be made to

kitchen?
Who is responsible for maintaining inventory?
How the rate of issues is derived? (Method: FIFO,
Average cost)
What is the periodicity of verifying stock of input
items by stores?
Whether cost of individual menu item per dish served
has been worked out?
Whether quantitative details are also available in cost
working?
E.g. Number of rice plates from 1 Kg. of rice.
How often this cost is evaluated considering frequent
changes in input groceries?
What is the expected gross margin percentage fixed
for various menu items?
How the issues are monitored against actual
requirements from kitchen?
Whether Daily wastage report is prepared by kitchen
manager on daily basis; showing excess quantity of
food, reasons for the same and expected sales value
for such quantity.
Calculate wastage cost as a percent to daily
consumption cost and to sales amount.
Whether daily quantity requirement of major input
items (major in terms of both quantity and value)
have been worked out based on past months data?
Prepare Consumption statement for daily issues for
selected number of days. (quantity issued multiplied
by weighted average rate)
Compare the consumption cost with particular days
sales.

15

3.

Questionnaire for analysis of process of material purchases & vendor payments

Sr.
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.

Question

Response

Whether Purchase order (PO) is raised for all grocery

and other input material purchases?
Who is preparing the PO and who is approving the
same?
Whether invoicing system also provides PO and other
features?
Whether stores department has defined any minimum
quantity for all types of input materials?
How purchases are controlled considering that many
items are perishable in nature?
Whether purchase quantity or periodicity of purchase
for few grocery items is fixed?
Who takes delivery of groceries and who verifies it
against PO?
Which document is prepared at the time of receiving
of groceries?
Whether person receiving checks quantity as well as
rate against PO?
Whether any discount scheme is arranged with the
suppliers based on volume of purchases?
How the record of inventory of items as balance on
hand, receipts, issues and closing balance as also
price information is maintained? Is it excel based or
any software is used?
Whether all purchases attract VAT? What are the VAT
percentages applicable in grocery purchases?
Are there fixed vendors for individual items? What is
the normal credit period available?
Whether credit period is available from vendors?
What is general time lag between receipt of groceries
and invoice booking by accounts?
Whether accounts department verifies PO and vendor
invoice for quantity and rate?
What is the amount fixed for stores petty cash
balance towards cash purchases?
Whether accounts department directly delivers
cheque to vendor or hands it to stores after issuing?
Check the entries for booking of supplier invoices in
the books on accounts. Ensure correct account head
has been used consistently.
On sample basis check PO, GRN, invoice booking by
accounts and final payments.
Identify major items of grocery. Check purchase
order periodicity, quantity of purchase at one time
and price over a period of 3 months.
Check if the vendors are being changed frequently
16

23.
24.

25.
26.

for the above items of grocery. If so check whether

there is major price deviation between these vendors.
Check if the vendor invoices are getting booked
within reasonable time from receipt date of grocery
items.
Where VAT credit is available, ensure that VAT on
purchases is booked properly under VAT receivable
account. Verify the set off entries for the same as per
VAT returm.
Ensure that payment to vendors is made on payment
due date (according to the credit period available)
Trace the cheques issued to vendors in the bank
statement.

17

Other routine audit procedures:

Steps for analysis and verification of other expenses and related payments
1.
2.
3.
4.
5.
6.
7.

Scrutinize other indirect expenses from trial balance

Ensure that correct expense account head is debited.
Check applicability of TDS. Normally TDS sections applicable will be towards
Advertising, Contract, Rent and Salary.
Ensure that TDS is deducted at appropriate rate (Tax + Surcharge + PE Cess + SE Cess)
Verify the payment for such expenses. Check that most of the expenses are paid through
bank payment.
For salary TDS, obtain pay structure details. Obtain investment declaration / proofs.
Review the working of salary TDS and ensure that per month deduction is correct.
Ensure tax deducted is paid to the credit of government within the due date. Verify the
challan details and payment entry from bank statement.

Steps for analysis and verification of set off and payment of VAT
1.
2.
3.
4.

Check VAT charged to customers through hotel invoices is booked as liability.

VAT on hotel sales is paid to government within due date.
Verify challan and payment entry from bank statement.
Verify the VAT return and check the working of set off when it is applicable.

Regular checks and balances

1.
2.
3.

Obtain and verify monthly bank reconciliation statements.

Obtain account statements from major suppliers. Criteria for number of suppliers to be
based on volume of transactions and value.
As all the sales are against cash, large amount of debtors are not expected. Only card sales
amount from bank is to be received for last 2-3 working days of month / year.

18

HOTEL AUDIT PROGRAMME

SCOPE OF AUDIT WORK IN RESPECT OF HOTELS/RESTAURANTS
INTERNAL CONTROL
PARTICULARS

CONTENT OF
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.
19

REMARKS

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

20

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/storescontracts 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 :
21

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
22

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.
a)

BOOKS OR ACCOUNTS AND MONTHLY

REPORTS :

b)

Review of position of maintenance of Books of

Accounts and suggestions for updating.

c)

Review of monthly trial balance

d)

Review of Management information system reports for

accuracy

e)

Review of sub-ledgers for advances with General

Ledger for reconciliation.

f)
g)
h)
i)
j)

k)
H.

Reconciliation of City ledger with General Ledger.

Review of periodical inter-unit balances reconciliation.
Review of Bank reconciliation statements.
Review of Credit balances of Customers, Contractors,
suppliers and employees for adjustments.
Review of outstanding liabilities for adjustments.
Review of advances and their adjustments/realisation.

a)
b)
I.

against staff for purchases

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

Scrutiny of General ledger for required adjustments.

INSURANCE

Review of various Insurance covers taken for their

adequacy
23

Review of Insurance claims lodged with the Insurance

Companies and follow up action.
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

24

SAMPLE AUDIT PROGRAMME CHECKLIST

Client: ______________________

Schedule No: ______________

Audit Period: _________________

Date: _______________________

AUDIT OF FIXED ASSETS

Audit Objectives
1.
2.
3.

4.
5.
6.

7.

Fixed assets, recorded in books, are actually in existence, owned by the entity and are used in
operations.
No unrecorded fixed asset is in existence.
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.
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.
Valuation of fixed assets is appropriate keeping in view the generally accepted accounting
principles and these principles have been consistently applied.
All the assets obtained on finance lease, on or after 1st 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.
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.
25

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, reperform 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.
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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, reperform 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.

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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.

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STOCK VALUATION
1.
2.
3.
4.
5.
6.

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.
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.
Independently determine lower of net realisable value and cost for certain important items of
inventory and ensure that their valuation is correct.
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.
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.
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.

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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,
1987
Luxury Tax Act

Central Act

The Prevention of Food

Adulteration Act, 1954
Central Excise Act, 1944
State Excise Act

Central Act

Service Tax (levied under

the Finance Act, 1994)
Shops and Establishments
Act
Sales Tax Act

Central Act

Standards of Weights and

Measures Act, 1976

Central Act

State Act

Central Act
State Act

State Act
State Act

For levy of tax on expenditure

incurred in certain hotels.
For levy of tax on luxury provided in
the hotel.
For maintenance of hygiene and
quality of food
Excise duty on pastries and cakes.
State excise laws for levy of excise
duty on liquor.
For levy of tax on Banquet Hall hire
Mandap etc.
For regulating the working of the
hotels.
For levy of tax on sale of food and
other goods
To establish standards of weights and
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
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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.

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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.

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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.

BIBLIOGRAPHY
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www.businessdictionary.com
www.trueandfair.org.uk
www.accountingtools.com
www.business-case-analysis.com
www.tajhotels.com

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