Internal Audit Consulting Service for Hotel Industry

Updated on April 10, 2024 05:25:54 PM

Working of Internal Audit in the Hotel Industry is completely based on the nature of the company. There are various categories of industries and with each industry we have a different procedure to conduct Internal Audit. Working of Internal Audit in the Hotel Industry is completely based on the nature of the company. There are various categories of industries and with each industry we have a different procedure to conduct Internal Audit.

The hotel industry, a sector that is constantly evolving and dynamic, caters to the accommodation needs of travelers offering diverse services and experiences, internal audits are essential for operational excellence and guest satisfaction.

Obtain a primary knowledge about the hotel industry, nature of ownership, management and operation, and then decide on the basis of knowledge whether to perform an audit or not.

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What are the Standards for Auditing in the Hotel Industry?

While auditing, an auditor should ensure that all SA (Standards of audits) are adhered. Below given are the list of standards for auditing in hotel industry:

  • SA 300, "Planning an audit of financial statements" includes all the expenditure, revenue management, and other financial expenses.
  • SA 315, "Identifying & Assessing the risk of misstatement through understanding the entity and its environment" requires an auditor to assess the risk of misstatement which could be due to fraud or error at the financial level.
  • SA 330 " The Auditor’s Responses to Assessed Risks" deals with the nature, timings and extent of planned further audits.
  • The audit process needs to be divided into risk assessment, risk response, and reporting.
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Parameters of Internal Audit in Hotel Industry

Below given are the parameters responsible for execution of Internal Audit in Hotel Industry:

1) Risk Assessment and Internal Control

It is required to mitigate the potential risks and review risk management practices adopted by the organizations. Also, to identify the risks faced by the organization.

In hotel industry, the risks that require immediate focus are listed below-

Revenue related risks: Non-recognition of room revenue by providing unauthorized occupancy without showing in PMS. Incorrect rate charged or non recognition of cash settlement made by the accountant.

Expenditure related risks: Mismatch between the expenditure and the payment made due to non-adherence. Incorrect recognition license fees payable to owners or management fees payable to managing companies. Non-recognition of time period cost like: liquor license cost, municipal property taxes.

Fixed Assets related risks: Incorrect classification of assets. Capital item wrongly charged to revenue. Delay in capitalization.

2) Financial report control

It is important to assess the internal control over financial processes to govern and evaluate on the basis of expenditure. Review the budgeting and forecasting processes.

Ideally a hotel is responsible for accounting of all transactions other than revenue is done in real time there is an inventory module integrated with the financial module. Most hotels generate financial reporting packages through spreadsheet softwares.

Revenue assurance controls:

Primarily in hotel revenue assurance controls happen in both room revenue and f&b revenue. The revenue assurance is ensured on a daily basis by night/day audit process.

3) Audit of Revenue and its control:

  • Room revenue
  • Retention Charges (due to cancellation/ no show up),
  • Food and beverage revenue (from restaurants, minibars, banquets,etc.)
  • Communication revenue (both telephone and internet),
  • Car hire income,
  • Business center revenue,
  • Arcade revenue,
  • Health clubs/ Spas/ Beauty parlor revenues,
  • Laundry revenues,
  • Housekeeping Bills,
  • Disposal of empties/ sale of scrap etc.

Hotels use a real estate management software to maintain, allocate, and bill guests for room-related services. The hotel sells rooms based on reservations that come in directly or through reservations networks.

4) Audit on Expenditures:

Room related expenditure (this also includes travel agent commission) that primarily includes newspapers, magazines, tv channel subscription, complementary guest transfer, etc.

Travel agent’s commission is accounted for on the basis of their profile attached with the reservation. While auditing, the auditor must ensure following factors:

  • One must not pay higher commission.
  • Commission is not paid to a dummy travel agent.
  • Travel agents who are not eligible for commission are not being paid.

Upselling commission- An activity by which the guests are persuaded to book for a higher category room than what they have originally booked. However, there is not any physical proof to show that the guests have been persuaded to change their room unless the reservation has been sent via email.

Complimentary airport transfers- Some hotels provide the facility of complimentary transfers for a certain category of the guests. Hotels may hire cars for external service providers which need to be accounted as expenditure.

Guest amenities- The role of an auditor involves the accounting of expenditure and consumption based on issues from stores to housekeeping. Comparison of cost amenities per occupied room indicates average cost.

Guest damage- Compensation is a rare occurrence, but it is even based on it. Auditors can review the system of review of guests by the hotel and see whether any of them will result in possible damage claims and evaluate the need for provisioning.

5) Information Technology Application level controls:

The information technology audit is necessary to assess the data privacy and protection practices. Also, reviews the IT infrastructure, systems and data security measures.

In the hotel industry PMS, POS, Bank office systems including financial books are significant applications used to maintain the records of each and every single detail.

The audit should document the link between key ITGC and key automated accounting procedure and system generated reports used in key manual controls or in generating journal entries.

ITGC should be conducted over computer operations, access to programs and data, change management and program development.

6) Beverage cost and control:

  • Primarily, the food and beverage cost consists of groceries, crockery/ glassware, silverware (CGS), fuel, etc.
  • Normal audit checks required to be done for material issues are to be carried out in case of hotels as well.
  • In hotels, daily food cost reports are prepared considering direct material issued (perishables and groceries).
  • Most expenses except banquet sundry expenses are normally controlled through a material management system.

Purchase

Various control procedures are adopted in the area of procurement should be aimed mainly at minimizing the risk of incurring excessive expenditure which may take place as a result of the conclusion of contracts at rates that are not competitive or purchasing goods that are not up to specifications, despite having adequate stock or receiving goods that are not up to specifications.

Receipts of materials

The following precautions should be observed when receiving equipment in the store or kitchen:

  • Proper inspection of the material received should be done by a responsible person at the time of receipt.
  • It is important to maintain proper control over the preparation of the goods received and maintain the serial number.

7) Other maintenance costs and its controls:

An audit of these costs should verify that there is a system in place to guarantee that all services rendered are recorded in the books, regardless of whether or not invoices for such services are received.

Typically, in a hotel, utilities like electricity bills, diesel / furnace oil used for genset, boiler (for generating steam / hot water) are all monitored and maintained by the engineering department. These bills are also certified by the engineering department.

Rental: Audit should ensure that all the terms and conditions of the agreement have been complied and rent provision is made in books as per the same. Care should be taken if the rent payable is a percentage of gross revenue or gross operating profit as all items to be considered for payment have been considered correctly.

Payroll costs: Payroll costs should be audited to ensure that there are adequate processes in place to properly track and account for them. This includes ensuring that all time period costs are accrued in the books and that there is no risk of any misstatements in the account balances or class of transactions.

Incirulation Inventory: As explained elsewhere, incirculation inventory of linen, CGS etc, should be audited to ensure that all those items which are issued from stores have been accounted as consumption.

There are risks of some hotels taking some stock as ‘To be returned’ and use some CGS items for some functions and returns.

Conclusion

Internal auditing in the Hotel Industry is a vital component of operational excellence, guest satisfaction, and financial prudence in the hotel industry's dynamic landscape. As a comprehensive assessment mechanism, internal auditing delves into every facet of hotel operations from guest services to financial transactions, ensuring alignment with industry standards and regulations.

By inspecting areas such as revenue management, inventory control, quality of service, and compliance with safety protocols, internal audits fortify hotel’s ability to provide exceptional guest experiences while safeguarding assets.

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FAQs on Internal Audit in Hotel Industry

What areas are typically audited in hotels?

Internal audits in hotels encompass diverse areas such as revenue management, front desk operations, housekeeping processes, food and beverages management, procurement practices, guest satisfaction protocols, and financial record keeping.

What is the role of an internal auditor in the hospitality sector?

An internal auditor in the hospitality sector evaluates operational processes, financial transactions, and compliance with industry standards. Their role is to ensure efficiency, identify risks, improve guest experiences and uphold financial integrity within hotels and related establishments.

How often should hotels conduct internal audits?

The frequency of internal audits varies based on the size, complexity and operational intensity of the hotel. Typically, hotels conduct regular audits annually or quarterly to maintain a proactive approach to identifying and rectifying operational financial discrepancies.

What is a night audit in the hotel industry?

Night audit in the hotel industry is a crucial end-of-day accounting process conducted during the overall shift. It involves reconciling financial transactions, room occupancy, and guest charges to ensure accurate records and prepare for the next day’s operations.

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