Impact of COVID-19 on the hospitality industry and its effect on audit

ME PoV Fall 2020 issue

The global spread of COVID-19 caused multiple countries to impose a complete lockdown, isolation periods and closure of all non-essential businesses, thereby creating a storm exposing businesses and economies to various challenges. From remote working arrangements, laying off employees and disruption in operations, the pandemic has forced businesses around the globe to step back and revamp their strategies to adjust to the new normal. Businesses that were able to treat this threat as an opportunity succeeded while others, unable to adapt, fell short. The impact of this pandemic varies by segment. Businesses heavily reliant on travel and human interaction are the hardest hit, while the indispensable segments (for example, pharmacy, food retail, essential services) remained resilient. This report focuses on the COVID-19 impact on the hospitality industry and its effect on audit procedures to ensure fair presentation of financial statements. 

Impact of COVID-19 on the hospitality industry and its effect on audit

The hospitality industry during the pandemic: An overview

Exponential reduction in personal and business travel has imposed significant pressure on the hospitality industry resulting in lower occupancy and revenue per available room. 

The near-complete lockdown imposed to battle the pandemic led to a 98 percent decline in international tourists globally in May 2020 compared to 2019.1 A 56 percent year-on-year drop in tourist arrivals globally between January and May was also noted. This translates into a fall of 300 million tourists and US$320 bn lost in international tourism receipts, more than thrice the loss during the global economic crisis of 2009. Industry stakeholders face significant hurdles: oversupply, decreasing room rates, negative consumer sentiment, restrictions on travel and postponement of major global events leading to severe operational and liquidity issues. The hotel owners have thus been forced to curtail costs by implementing measures such as reduced employees and/or salaries, forced leave, leave without pay and full or partial closure of hotels. 

According to market data agency Smith Travel Research, occupancy rates in the Middle East were relatively healthy in January at 73.3 percent with an average daily rate (ADR) of US$149. However, imposed travel restrictions and lockdowns shrunk average occupancy in June to 47.3 percent and ADR to US$121, a year-on-year decline of 28 percent and 17 percent, respectively.

The above snapshot of the average occupancy and average daily rates in different markets within the region in June 2020 depicts the significant impact the pandemic has had on the industry. 


Road to recovery

Increasing concern as to the implications on the travel and tourism sector, coupled with a challenging economic outlook for the GCC region will have a major impact on the recovery of this industry, which is largely dependent on a number of factors such as:

  • Recovery of oil and gas prices;
  • Efforts of governments to monitor and contain the spread of COVID-19 to support and facilitate major events such as Expo 2020 and FIFA World Cup 2022;
  • Availability of a vaccine;
  • Uplift of regional and international travel ban to and from key source markets; and
  • Improvement of traveler and guest confidence.

For the short term, many beach hotels and resorts have offered ‘’staycation’’/ “daycation” deals and discounts to entice foot traffic. As hotels reopen, aggressive room rates to achieve high occupancy coupled with an increased supply of hotels in the region could negatively impact profitability and diminish owners’ returns given that the purchasing power of tourists is likely to remain bleak. For hotels, hygiene and safety are critical factors in generating future demand. This will likely increase health and safety spend; however, hoteliers cannot compromise on these costs for sustaining their business. These factors are a key consideration whilst budgeting and forecasting going forward. 

Audit implications

For hoteliers and hotel investors, COVID-19 has rushed through the industry like a flood. As the virus subsides, it will reveal a transformed hospitality landscape with a need to adjust operations. Accordingly, audit procedures would need to be tailored to deal with this impact. Key considerations at different stages of the audit are summarized below:


As part of the planning and risk assessment procedures, the audit team will need to obtain an understanding of the entity through management inquiries, analytical procedures, observation and inspection. Impact on changes to key supplier arrangements, termination of management agreements with operators, lease concessions obtained or given, changes to existing financing facilities and changes to legal and regulatory environment will need evaluation. The audit team would need to ensure professional skepticism due to increased possibility of fraud because of financial or emotional pressure, an opportunity that could arise due to a breakdown in monitoring controls and rationalization. While it is always important to have early discussions with management to determine if controls are changing or there is an expectation that the controls we are planning to test is changing, it is very critical to do so now as there could be changes to the ways of working.

The audit team would need to be mindful of the increase in risk of default from travel agents and corporates leading to bad debts, impairment of long-lived assets due to significant reduction in the expected future cash flows and the ability of the hotels to continue as a going concern.

Internal controls

While testing internal controls, the audit team should place special emphasis on any changes in the performance of the controls especially during the pandemic. Further, due to shortage of staff, there could be a breakdown of controls such as daily revenue reconciliations, verification of rate variance report, housekeeping, review of void checks and rebates provided, payment processing and month-end reporting due to the inability of individuals to perform control duties. With regards to controls over estimates, the audit team would need to consider the failure on the part of management to consider the impact of new uncertainties and market volatility on accounting estimates and judgements. Additional consideration should also be given to the impact on segregation of duties, automated controls and the effectiveness of the systems to adapt to employees working remotely.

Furthermore, if the audit team is relying on operating effectiveness of controls tested in prior years that address risks other than significant risks under a rotation plan approach, they need to understand whether there have now been significant changes to that control as it is no longer appropriate to rely on audit evidence about the operating effectiveness of the control obtained in previous audits.

We can view this as an opportunity to provide management with insights on their control environment that they will value as they go through this difficult period. They can ensure that their audit approach aids and challenges entities react appropriately and build resilient control environments to form a foundation to their ongoing operations.

Group audits

To satisfy the requirements of ISA 600–Group Audits with regards to directing and supervising of component auditors, consideration should be given to whether the group engagement team can carry out their responsibilities virtually through video conferencing instead of on site visits and reviews.


The audit team would need to plan additional procedures to evaluate significant assumptions made by management, particularly estimates based on forward-looking forecasts. For example, future cash flows and discount rates used in the impairment model or judgements used in the expected credit loss model to assess the loss allowance on trade receivables. Further, with regards to substantive analytical procedures, when the derived expectation is based on the assumption that account balances are consistent with historical performance, the expectation may no longer be valid and a different type of substantive procedure may need to be performed.

Physical counts might need to be done remotely with adequate safeguards to ensure appropriateness of the count. Lastly, the audit evidence obtained should be critically evaluated i.e. changes in the nature of evidence received may result in additional consideration as to its reliability.


Assessment of going concern: Audit teams need to assess the going concern and whether these circumstances will result in prolonged operational disruption that will, in turn, erode the financial position of the hotel, thus leading to issues relating to liquidity, and indicating that the hotel is unable to meet its obligations in the foreseeable future. Adequate disclosures related to going concern should be provided in the financial statements.

Audit opinion

Implications on the auditor’s report to be considered may include:

  • For public interest entities, requirement of a Key Audit Matter related to additional audit work owing to the pandemic;
  • A material uncertainty in relation to a going concern;
  • A qualification, or adverse opinion, in respect of inadequate disclosures, or going concern uncertainties, in the financial statements;
  • A qualified opinion or a disclaimer of opinion because of scope limitation when unable to obtain sufficient appropriate audit evidence. For instance, when physical inventory count could not be attended to in person.



Auditors may reckon that the current circumstances may bring about an opportunity to do things differently, by using new, or flexing the use of existing technology. There could continue to be restrictions on travel to client premises and audits might need to be performed remotely. The audit profession was already on a path of digital transformation and this investment has allowed many firms to adapt to the new circumstances relatively more quickly than other industries. Greater use of analytics can be implemented to enable remote auditing and redeployment of staff to areas of business requiring extra resources thereby ensuring an efficient and effective audit with value added insights to the client.



by Jude Rodrigues, Partner and Krishna Kumar, Senior Manager, Audit & Assurance, Deloitte Middle East



  1. Impact Of COVID-19 on Global Tourism Made Clear as UNWTO Counts the Cost of Standstill published by UN World Tourism Organization on 28 July 2020.
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