Audit & Assurance for Hospitality

Completeness is the hard assertion in hospitality. Revenue arrives as thousands of small transactions, and the risk is not that recorded sales are wrong but that some sales were never recorded at all.

We start at the system of record. Daily sales summaries from the POS, and the night audit from the property management system on the lodging side, get agreed to the revenue posted in the general ledger for a sample of days across the year.

From there we work the other direction, from cash and card settlement back to the ledger. Merchant processor settlement reports, bank deposits, and the deposit log should reconcile to recorded sales, and unexplained differences are where unrecorded revenue hides.

Third-party delivery has made this harder. Aggregator platforms report gross order value, commissions, promotions, and remittances on their own cycle, so we reconcile those statements separately rather than letting a net deposit stand in for gross revenue.

Comps, voids, discounts, and refunds get analyzed as a population rather than sampled casually. A void rate that moves by shift, by terminal, or by employee is both a revenue question and a control question.

Room revenue carries its own tests. Occupancy and average daily rate get recomputed from the property management system, and complimentary and house-use rooms, no-shows, and rate overrides get the same attention we give voids.

We reconcile reported sales to the sales, occupancy, and lodging tax returns actually filed, because those returns are an independent statement of revenue that management has already signed.

Cutoff testing around period end closes the loop, since a day of sales recorded on the wrong side of the line moves both revenue and the cash balance.

Cash is the defining control risk in this industry, and it is where we spend the most walkthrough time on a hospitality engagement.

Segregation of duties comes first. The person who rings sales should not also count the drawer, prepare the deposit, and reconcile it to the POS, and in most single-location operations those duties have quietly collapsed into one role.

We follow the money through its four stages, receiving, depositing, recording, and reconciling, and identify who can touch it at each stage and who reviews the result.

The POS-to-deposit reconciliation is the control we test most closely. It should be prepared daily, reviewed by someone who did not prepare it, and leave a documented trail of how any over or short was resolved.

Comps, voids, discounts, and refunds need manager approval with a stated reason before they post, and the system should tie each one to a named individual rather than a shared manager code.

Exception reporting is what makes those approvals real. We check whether anyone actually reads the void and discount exception reports, and whether repeat patterns by employee, terminal, or shift get investigated.

Where headcount will never support full separation of duties, we identify compensating controls an owner or general manager can realistically perform, such as personally reviewing the daily reconciliation and the exception report.

Observations go into a management letter written to be acted on, and where a deficiency rises to a significant deficiency or material weakness, we communicate it in writing as the standards require.

Inventory is rarely the largest number on a restaurant balance sheet, but it drives cost of sales, and when it is material we have to be there for the count.

Under AU-C 501, the auditor attends physical inventory counting when inventory is material, evaluates management’s count instructions, observes the count procedures, inspects the goods, and performs independent test counts.

General inconvenience to the auditor does not make attendance impracticable, so we schedule around your service calendar and count at period end rather than skipping it.

We read the count instructions before the count rather than during it, looking at how count sheets are controlled, how areas are assigned, whether counters are independent of the storeroom, and how partial units are handled.

Bar and beverage stock gets particular attention, because partial bottles, kegs, and high-value spirits are the easiest items to miscount and among the easiest to lose.

Test counts run in both directions, from the sheet to the shelf and from the shelf to the sheet, which is the only way to catch overstatement and omission in the same pass.

Valuation is tested separately from existence. We trace unit costs to recent vendor invoices, check that the costing method is applied consistently, and look for freight, rebates, and credits that belong in or out of the carried cost.

Purchase cutoff around the count date is tested against receiving records, because goods received and not invoiced, or invoiced and not received, distort both inventory and cost of sales.

Waste, spoilage, and shrinkage trends are reviewed alongside the count, and where a location shows a persistent usage variance we raise it as a control matter rather than an inventory adjustment.

Gift cards and loyalty programs are the estimate most often carried at whatever the point-of-sale report says, which is exactly why they draw audit attention.

A gift card sale is not revenue. It is a contract liability, and it stays a liability until the card is redeemed or the accounting for customers’ unexercised rights allows part of it to be recognized.

Under ASC 606, an entity that expects to be entitled to a breakage amount recognizes that expected breakage as revenue in proportion to the pattern of rights actually exercised by customers, rather than writing the balance off on a schedule of its own choosing.

Where the entity does not expect to be entitled to breakage, the amount is recognized only when the likelihood of redemption becomes remote.

Either way it is an accounting estimate, so we test the redemption history behind it, whether the data set is long enough to support a pattern, and whether the rate applied is the rate that history actually shows.

Unclaimed property law then overrides part of this. Where a state requires unredeemed balances to be remitted as abandoned property, ASC 606 is explicit that those amounts are not recognized as revenue and a liability to the state is recorded instead.

Roughly half of the states require unredeemed gift card balances to be turned over after a dormancy period, commonly three to five years of inactivity, so where the cards were sold matters as much as how many were sold.

Loyalty programs reach the same place through a different door. Points that give a customer a material right are a separate performance obligation, and the deferral rests on estimated redemption we test the same way.

We also agree the liability to the card processor’s outstanding balance file rather than to an internally maintained schedule, and review the aging of that file for balances that should already have been escheated.

Multi-unit operators and hotel owners rarely keep one clean set of books. The hard reporting questions come out of the structure far more often than out of the operations.

The first question is scope: which entities belong in the reporting entity, which are variable interest entities, and which qualify for the private company election that keeps a common-control leasing arrangement off the consolidated statements.

The second is elimination. Intercompany rent, management fees, shared services, and loans between the operating company and the property entities have to be identified and removed, and what remains has to be disclosed as related-party activity.

Related-party disclosure matters commercially here, not just technically, because a below-market lease from an owner-affiliated entity flatters the unit-level results a buyer or lender is trying to read.

Leases are the third piece. Under ASC 842, effective for private companies for fiscal years beginning after December 15, 2021, operating leases sit on the balance sheet as a right-of-use asset and a lease liability, one set per location.

Percentage rent is the wrinkle hospitality adds. Rent contingent on sales is a variable lease payment that does not depend on an index or a rate, so it is excluded from the lease liability and expensed as incurred rather than capitalized.

That split has to be documented lease by lease, along with the classification, discount rate, and term judgments, including renewal options you are reasonably certain to exercise.

Percentage rent also creates a reporting obligation of its own. Landlords routinely require a certified sales report, and where the sales figures behind it come out of statements we have audited or reviewed, the landlord already has an independent basis for them.

Hotel owners face the parallel exercise under a management agreement, where owner audit rights, base and incentive fee calculations, and reporting under the Uniform System of Accounts for the Lodging Industry, whose 12th revised edition is effective January 1, 2026, all become testable subject matter.