Terai Bank Limited provided a long-term loan amounting to Rs. 250 Million to Relax Hotel Pvt. Limited for hotel operation. The hotel is unable to repay installment (principal & interest) as per repayment schedule. Accordingly, you are appointed the Bank for special review of the income of the hotel to ensure whether income procedures are duly complied with and the amount has been fully accounted for. As a special reviewer how would you plan your review work?
An efficient and effective review can only be performed if this has been thoroughly and properly planned. The planning stage of the review should be used to establish an overall strategy for the review.
Adequate planning will ensure that appropriate attention is given to crucial areas of the review and that potential problems are identified on a timely basis. At the planning stage the engagement partner should assign the necessary staffs who possess the skills and ability required in order to ensure the review is carried out efficiently and in accordance with the Nepal Standards on Auditing.
At the planning stage the overall audit strategy is developed. The audit strategy sets the scope, timing and direction of the review. At this stage the reviewer will develop the detailed review plan which will help identify problem areas and important review areas.
Once the strategy has been established, then the reviewer is able to develop the more detailed review plan to address the matters identified in the overall strategy.
Contents of the Plan
The review plan should document the nature, timing and extent of the procedures to be adopted which should be sufficient and effective enough to be able to assess the risks associated with review engagements.
The detailed plan should also contain a description of the nature, timing and extent of planned further audit procedures at the assertion level for each material class of transactions, account balances and disclosures.
Finally, the review plan should also contain details of other procedures to be adopted so that the review can be carried out effectively.
Typical contents of the detailed plan are:
Nature of the business and what it does
Risk and problematic areas (both business risk and financial statement risk)
Details of any complexities associated with the assignment
Specific accounting and auditing standards relevant to the assignment
Planned review procedures
Details of sampling techniques
Key personnel employed at the clients
For the purpose of this review of the income of the hotel and purpose of assignment an audit program with detailed procedures should also be developed to conduct the review work efficiently and effectively. Audit procedures inter alia includes amongst the following:
i. Whether rack rates has been maintained for different types of rooms (Suit/Deluxe/Superior etc.), banquette rates are formalized with recipe and other rates are formalized & approved competent authority.
ii. Whether there are formal discount rates. If discount rate is in excess of formal rate, whether this is approved the competent authority.
iii. Whether rate agreements has been entered with regular official & individual parties and duly signed of both parties. If yes agreed rates have been applied or otherwise to ensure how the rate is formalized in such cases.
iv. Whether complimentary service provided to guests are within the power of approving authority.
v. Whether the billing are made on timely basis and accounted accordingly on departure of guest with evidence of acceptance guests. If bill is to be forwarded to customer through mail, is it forwarded on timely basis?
vi. Whether there is clear cut credit policy and credit facility provided only to eligible guest backing with deposition of advance.
vii. Whether revenue as per income of auditor`s report, accounting system and VAT return has been matched. In case of difference, is proper reconciliation has been made.
viii. Whether rates have been reviewed as per formal policy of hotel and approved the competent authority.
ix. Whether record of revenue charged has been reflected in the concerned ledger folios of the guest.
x. Whether accounting system (Software/Manual) for revenue is commensurable with volume of transactions of the hotel.
xi. Check the closing procedures of the hotel during physical presence on sample night audits.
xii. Make the surprise check on different point of sales and observed if any evidences of concealing the income (not issuing bill, providing huge discounts, undervaluing the bill etc.)
xiii. Check the recovery rate from debtors and utilization of cash.