The Usefulness of Auditing in the Context of Analyzing the of Sands Hotel and Casino - Case Study Example

Running Head: auditing Auditing of the of the of the Introduction The US congress has accepted the fact that gambling in the form of legal gambling has the potential to add economic value to several states in a significant manner. Legalization of gambling has been appreciated and embraced by majority of Americans. However, legalization of gambling is still under the scrutiny and surveillance mainly because of the amount of money associated with it requiring adequate measures and controls. Casino style gaming legislation involves series of opposition and controversies along with a number of standards through which the long term feasibility and authorization can be measured in an effective manner. The authorization of gambling is not an issue for a number of states in the US but the major issue is in the form of developing quality audit programs to measure and analyze the operations of the casinos in a systematic manner (Arens, 2012). A number of states in the US have stated the fact that gambling and especially casinos promote economic development. Nevada’s statute declares that gaming industry is vital for the state development and general welfare of people while New Jersey’s statute states that casinos promotes tourism, resort, and recreational activities leading to the creation of economic value in the long run. There is no doubt that several states in the US have promoted casinos in a legal manner but the obvious question surrounding the operations of casinos is in the form of use of auditing tools in order to assess and analyze the overall success factors associated with it. In order to do so, the major purpose of the discussion is to analyze the usefulness of auditing in the context of analyzing the case study of Sands Hotel and Casino. This will help in understanding the relevance and importance of auditing in making business operations fair and transparent. An Overview of Auditing Auditing refers to a systematic review and examination of books, accounts, journals, documents, and vouchers of organizations to analyze and assess the validity and reliability of financial statements in terms of absolute trueness and fairness. Additionally, auditing is considered as an independent examination of data, statements, records, and performance of organizations. Auditing is a complex process requiring high degree of honesty and understanding of the financial statements. An auditor is required to analyze and assess the evidences along with evaluating the same on the basis of the skilled judgment. Additionally, an auditor needs to offer clear and true verdict of his findings through a systematic report that has to be signed along with the explanations for a proper understanding (Abbott, et al, 2010) Auditing can be categorized into the internal and external auditing. Internal auditing is conducted by the auditors who are appointed within the organization while external auditing is conducted by external auditors who are not a part of the organization. It can be said that both internal and external auditors play an important and crucial role in determining the accuracy and transparency of financial statements in a systematic manner. Auditing helps stakeholders in taking financial decisions that are useful in terms of analyzing the growth and performance of companies in a critical manner. Auditing also helps in understanding the worth of organizations in a systematic and organized manner. It offers third party assurance that is important in taking crucial decisions in the short as well as in the long run. Auditing is also concerned with risk management, governance, and absolute effectiveness and fairness of accounting statements (Abdolmohammadi, et al, 2004). The next part of the discussion offers an overview of the stated company in an illustrative manner. An Overview of Sands Hotel and Casino Sands Hotel and Casino is one of the highly attractive casinos in the US attracting a number of tourists in a significant manner. The hotel has been boasting its control measures that are important and useful in safeguarding the money handling in an effective manner. Most companies cannot implement and use control measures being used by the hotel mainly because of the amount of money required facilitating the system in an efficient manner. Many of the control systems being used by the hotel is recommended by the State of New Jersey but the hotel also has few control measures that have been initiated and maintained on their own part to safeguard the business processes and activities. It needs to be mentioned that implementation of regulatory measures is not an issue within the gaming and gambling industry considering the fact that there is always high degree of surveillance associated with those measures making them fruitful in regards to safety and other factors. To regulate the gaming industry, the New Jersey Casino Control Commission was established analyzing the regulatory measures being used by the hotels. In last few years, the hotel has performed well in terms of managing the gambling business along with being alert in terms of managing the business operations in an efficient manner. Apart from this, the company has been vocal and open in terms of sharing its financial position through its financial statements. Overall, it can be said that the company has been managing the casino business quite well that has been the major source of income and profit. The next part of the discussion presents an overview of client situation in terms of analyzing the business process and situation in a critical manner. This will also help in assessing the audit requirements in a critical manner. An Overview of Sands Hotel and Casino’s Situation The hotel started operating in early 80s and in the year 1982 posted gross revenue that was $184 million and out of this $144 came from the casino business while the remaining came from hotel operations. This suggested that majority of the revenue was generated from the casino business while the hotel business was supporting the revenue generation method. One of the striking features of the hotel was based on the fact that both hotel and casino were run as separate profit centers suggesting that accurate profit being generated from the stated categories were easy to identify and analyze from accounting point of view. The unique feature of the hotel was also based on the fact that the size of the finance department was quite large compared to the size of other departments. There were around 2600 employees in the organization and out of that more than 400 worked for the finance department. There can be two key features associated with this kind of employment. Firstly, large number of employees in the finance department highlights the fact that there is high frequency of financial data and information requiring skilled staff to manage and analyze them in an effective manner. Secondly, the amount of data can be hard to analyze and manage and thus requiring high amount of skilled and capable employees to ascertain key financial results. However, the organization stated that large number of employees in the finance department were mainly because of the fact that the organization wanted responsibility for cash control and record booking. The management and movement of cash made sure that the organization was successful in keeping its share along with offering the share to the State through effective management and surveillance. However, it is important to assess the financial statements from auditing point of view. Assessment of Income Statement The income statement presented in the case study of years 1980, 1981, and 1982. As per the statement, there is an increase of revenue in gaming in the year 1981 and 1982. The most striking factor has been the increase in the revenue in the year 1981 that is almost $64 million and subsequently an increase of around 450 million in the following year. This shows that the increase in the revenue in gaming has been phenomenal in these two years. There can be a number of factors behind it that can be increase in the number of people in the casino, high profit generation at the casino, or high profit margin. However, operating expenses of the organization have been quite high resulting in losses in the year 1980 and 1981. The organization was successful in posting profit in 1982 that was quite high considering the high amount of losses incurred in the previous years and high operating expenses in the same year. In order to analyze the validity and reliability of the income statement, it is important to verify the summary calculation by calculating the total revenue from the revenue line and total expense from the expense line. After that, it is important to verify the difference between the income and expense that will help in understanding and verifying the equity section. Once this process is over, it is important to review the details leading to revenue and expenses. In this regard, it is important to verify ledger activities along with the assessment of evidences being offered to support the entries in the ledger. This will help in analyzing the source of income and expense. Additionally, sampling process can be done by selecting few transactions and referring to the relevant documents. In the case of Sands Hotel and Casino, it can be said that the major source of income has been gaming while major source of expense is operating but the discussed process can be used to analyze those entries. Assessment of the Balance Sheet Analyzing balance sheet can be considered as an important step in terms of analyzing the financial performance and health of organizations. It is important to analyze the assets and liabilities in a critical and organized manner. First of all, it is important to ascertain the cash and cash equivalent by analyzing the cash book and bank statement. In the case of the stated organization, it can be said that there is no significant increase in the cash and temporary investment. This shows that the company has not increased the overall cash amount in last one year. In terms of land, building, and furniture; it can be said that there is no significant amount of increase in the value of land and building but there has been an increase in the amount of furniture suggesting the fact that furniture of good amount has been purchased by the organization. In this regard, it is important to check the entries for buying assets. In terms of the liabilities, it can be said that there has been an increase in the amount of liabilities over the year. Increase of amount in accounts payable, salaries and wages, taxes and license, and long term debts suggest that the organization is liable to pay large amount of money to many. This questions the solvency of the company as higher volume of liabilities has significant amount of impact on the solvency rate of organizations in the short as well as in the long run. In order to analyze the balance sheet, it is further important to analyze the entries by assessing the supporting documents in a critical manner. Furthermore, each entry needs to be analyzed as per the GAAP and accounting standards. Inappropriate entries need to be analyzed and questioned and based on that audit should be conduct. In the context of the discussed case, it can be said that the amount of receivables has increased along with the amount payable and debts in an alarming manner that needs to be analyzed well. Audit Checklist: Required Procedures Before analyzing the checklist for auditing, it is important to analyze the function of audit in regards to the gaming industry. One of the prime responsibilities of the internal auditing is to assure compliance with the Minimum Internal Control System (MICS) along with fulfilling other responsibilities in the form of operational reviews, financial reviews, and IT reviews. Internal audit reports to the board of directors and CEO or CFO overlooks the administrative purpose. The primary audit function in regards to the casino includes Currency Transaction Reporting, Slots, Table Games, Cashiering, Credit and Collections, Sensitive Keys, Surveillance, Race and Sports book, Keno, Bingo, and Entertainment Tax, Information Technology while in case of hotels, it includes Hotel, Food and Beverage, Retail, Leases, Rewards Programs, Purchasing/Warehouse, Player Comps, Payroll, Construction, Travel and Entertainment, Special Projects, and requests from management. It needs to be mentioned that control in casino is primarily built around safeguarding cash by safeguarding the liquidity. Handling of cash needs to be recorded and managed well in an honest and transparent manner. The New Jersey Casino Control Commission appoints employees to keep an eye on the control measures along with reporting suspicious activities if any. Reasonable attempts have been introduced by a number of States in the form of monitoring amount exceeding $100000 within 24 hour period and reporting the same on a Currency Transaction Form to the IRS. Title 31 and Regulation 6A has been used prevent money laundering along with keeping a close eye on the liquidity issue associated with the casinos in terms of effective management and controlling using effective measures. These are some of the effective criteria needed to be fulfilled before conducting the audit (Abernathy, et al, 2014). Additionally, to start the audit checklist, it is important to compliance with internal and external standards. The audit checklist should start with what kind of audit needs to be conducted from organizational perspective. In this regard, three kinds of audit can be conducted revolving around the management, operations, and finance. The management audit validates the company’s structure and strategic plan. Auditing the management function ensures that business plans and activities are sound and strategic in nature. Additionally, it helps in analyzing the goals and objectives of the business. It is important for the auditors to analyze the organizational chart along with identifying the reporting system to assess the management functions in a critical and systematic manner. In the context of the hotel, it can be said that the organizational chart is very much hierarchal in nature with board of directors designated as per their skills and experiences (Ettredge and Fuerherm, 2014). In terms of the financial department, the organizational chart is very systematic in nature suggesting the fact that vice president of finance controls the entire process while the managers, assistant managers, clerks, cashiers, and supervisors report to their higher authority. However, the decision making is restricted only to the vice president to whom everyone seems to be reporting. In this regard, it can be said that the management audit seems to be right on track with every employee knowing whom to report. This also suggests that the management is responsible and proactive in nature helping employees to make the information sharing system much more organized and systematic in nature. However, this is only from the management perspective and the entire audit checklist is much more complex requiring an analysis of the operations and financial audit in a critical manner. This will help in understanding the audit check list in a systematic manner (Arens, 2012). Operational audit measures the performance of the business especially by analyzing the operational functions of organizations. Operational audit checklist includes delivery of goods and services, training employees, validity and reliability of training methods and programs, and relationship with customers. All these checklists are important from organization’s operational perspective. In the context of the discussed Casino, it can be said that the operational framework is quite robust where each activity is recorded and controlled using effective measures. All the employees are trained and skilled enough to carry out the operational work. Additionally, in order to strengthen the operational framework, employees are offered training round the clock in order to make them comfortable with the demand of the casino operations. Training and development programs being used by the casino have been successful enough to create value for the stakeholders in a desired way during those years (Abernathy, et al, 2014). One of the most important checklists while conducting audit is related to the financials. Financial statements play an important and crucial role in highlighting the growth, performance, and health of any organization. Financial audit focuses on analyzing the financial entries along with verifying the company accounts in a critical manner. Accounting system and entries are analyzed in terms of accuracy and compliance to GAAP and accurate accounting standards. Financial audit also helps in analyzing whether taxes are paid on time and the company has been performing as per the expectations. It also helps in identifying the financial practices being undertaken to offer financial insights to various stakeholders. In the context of the financial audit, a lot has been discussed in the previous section. Based on that, it can be said that the organization has been doing well in terms of following and fulfilling the financial audit criteria. However, financial audit checklist for casino needs to be discussed. Financial Audit Checklist Financial audit checklist involves careful selection of methods and objectives needed to be fulfilled in order to analyze and assess the financial activities of the scrutinized organization. Audit duties include gaming regulatory compliance along with daily vault reconciliation document verification, procedure compliance, and daily report, and income journal creation. It is important to perform daily casino revenue audits along with analyzing cash summaries, and journal entries for revenue reports. It needs to be mentioned that large amount of revenue is generated everyday in casinos and thus, it becomes important to analyze the source of revenue along with documenting them in the cash book and journal ledger. Later, it is feasible to analyze the cash summaries by verifying and cross checking the revenue amount. In addition, it is important to conduct audit to determine the accuracy of all documentation along with balancing them. This will help in understanding the accuracy and authenticity of all documents. Additionally, it is important to cross check relevant documents supporting the revenue generation process. It needs to be mentioned that gaming industry attracts high consumption of food and beverage that also need to be analyzed in terms of revenue being generated by them. Manual and computer entries needs to be checked and cross checked along with verifying right details. This should be done on everyday basis to avoid any issue pertaining to the recording and classification of data and information. All audits should be conducted by following the audit checklist and exceptions should be clearly stated. Information should be maintained in a statistical manner which needs to be reconciled into the daily, monthly, and yearly documents. Compliance issues should be clearly stated along with risk factors if any in order to safeguard the business operations from any issue. Developing Recommendations As stated and discussed before, Sands Hotel and Casino uses high quality control measures to manage its business operations in an efficient manner. The organization has a dedicated and skilled team of employees capable of managing the operational framework in an organized manner. Additionally, every transaction is classified and recorded making things easy and simple in terms of highlighting the current situation. There is no scope of mishandling of cash or equivalents and close circuit cameras record each and every transaction and moves of people. Employees supervising and keeping a close eye on customers are highly skilled and trained to analyze and underpin any issue or cheating. Additionally, very few people are allowed to handle the cash transaction and employees responsible for managing the cash needs to be transparent in their handling approach. Additionally, issue of chips is the sole decision of the management making it difficult for customers to default payments. As the vice president of finance stated, it is almost impossible to record each and every transaction but it would be helpful if this can be done. However, this requires high volume of data and information storage and management that may be a cumbersome task. Additionally, computer system needs to be strong enough to gather wide arrays of data and information. From operations point of view, it is highly recommended to use an integrated and robust computer system having the potential to analyze and integrate wide source of data. From accounting point of view, it is recommended to classify and record data on everyday basis along with maintaining records to support the data being used for financials. From auditing point of view, it is recommended to appoint internal as well as external auditors and auditing team should conduct audit in a mystery and surprising manner to assess the trueness, transparency, and honesty factors. Conclusion Based on the discussion, it can be said that Sands Hotel and Casino did well in early 80s in terms of highlighting high growth and development through a systematic approach. Effective and efficient measures were taken that helped the organization to increase the revenue. After posting loss in early years, the company posted high profit in subsequent years that helped in strengthening the operational and functional framework in a systematic manner. Additionally, the organization identified the financial processes and its intricacies and complexities and based on that increased the size of its financial department by including large numbers of employees. This helped the organization in managing the operational and financial processes considering the fact that both these processes yielded high volume of data and information requiring immediate attention. Additionally, the organization also focused on improving the training quality along with being innovative in terms of managing the internal and external challenges. This helped in managing the management, operational, and financial challenges along with fulfilling the requirements for their audits in the short as well as in the long run. The organization needs to build a large database where large volume of data and information can be stored. Apart from this, the company has been successful in managing its financial obligation by fulfilling the criteria set by the New Jersey Casino Control Commission. References Arens, E (2012) Beasley; Auditing and Assurance Services; 14th Edition; Prentice Hall. Abbott, et al (2010). Serving two masters: The association between audit committee internal audit oversight and internal audit activities. Accounting Horizons (March): 1-24 Abdolmohammadi, M, et al (2004). An investigation of the attributes of top industry audit specialists. Behavioral Research in Accounting (16): 1-18. Abernathy, J. L, et al (2014). The association between characteristics of audit committee accounting experts, audit committee chairs, and financial reporting timeliness. Advances in Accounting: Incorporating Advances in International Accounting 30(2): 283-297. Ettredge, M and Fuerherm, H (2014). Fee pressure and audit quality. Accounting, Organizations and Society 39(4): 247-263. Read More