During the audit of MNO Hospitality Ltd., a large chain of luxury hotels, for the financial year 2024-25, the statutory auditor examined revenue…

During the audit of MNO Hospitality Ltd., a large chain of luxury hotels, for the financial year 2024-25, the statutory auditor examined revenue streams from restaurants, rooms and banquet operations. While reviewing restaurant operations, it was noted that the entity prepares weekly trading accounts, however, significant fluctuations in gross profit margins were observed in two outlets. Management attributed these variations to “seasonal factors,” but no supporting evidence was provided. Further, Kitchen Order Tickets (KOTs) were not consistently preserved and only selective bills could be traced to supporting records. In respect of room revenue, the auditor observed that discounted room rates were frequently applied without documented approval. Additionally, housekeeping occupancy reports were not retained and reconciliation between guest register and bills could be performed only for limited dates. Due to the absence of primary records such as Kitchen Order Tickets (KOTs), housekeeping occupancy reports and complete guest-wise billing trails, the audit team was unable to obtain sufficient appropriate audit evidence through direct verification. Consequently, the auditor was compelled to place significant reliance on management-generated reports, including system-based occupancy summaries, revenue analytics and consolidated outlet-wise performance statements. However, it was observed that these reports were internally generated and not supported by effective underlying controls over their preparation and maintenance. Further, many of the explanations regarding fluctuations in revenue, occupancy levels, and discounting practices were obtained through oral representations from hotel staff and management personnel, without adequate documentary corroboration. In several instances, only photocopies or system extracts of records were made available in place of original documents and no alternative audit procedures could fully compensate for the lack of reliable primary evidence. This situation significantly impacted the reliability and sufficiency of audit evidence, thereby increasing audit risk and requiring the auditor to exercise heightened professional skepticism. In the banquet segment, it was observed that several events were conducted before the year-end, but the related invoices were raised only after the year-end due to delays in finalising settlements. The auditor noted inconsistency in accounting treatment, as in some cases revenue for such events was recognised in the current year without raising invoices, raising concerns regarding the existence of trade receivables. In other cases, invoices raised after year-end were included in receivables as at the reporting date without adequate supporting documentation. Further, proper cut-off procedures were not followed, as there was no reconciliation between event records and invoicing data around year-end. This created ambiguity regarding completeness of revenue and existence of receivables, indicating a potential cut-off error and risk of material misstatement in the financial statements.