Spring 2012 issue of Horizons

Hospitality & Gaming – continued

Transparency in regard to reported sales/usage can be attained by granting the licensor access to the licensee’s sales/usage reporting system or developing substantive procedures to detect deficiencies in historical sales/usage reporting. The auditors should also consider how the licensee could potentially understate sales/usage and develop audit procedures accordingly. In the case of licensee retailers where, in general, percentage of net sales is the basis for determining the licensing fee, auditors should agree external reporting to general ledger activity and bank deposit activity to determine completeness. In order to further verify proper reporting and fee remittance, the auditor should recalculate the licensing fees and agree the amounts to licensee reporting and to the amounts received by the licensor. Brand Image and Resource Compromise In many industries, such as hospitality, retail, or manufacturing, brand image is critical and just as important as the licensor’s products or services. Conversely, in other industries, such as agriculture and mining, the protection and enrichment of raw resources are critical to the licensor. In all cases, all licensors have particular assets, whether tangible or intangible, they want protected from licensee compromise. Through coordination with licensor management, auditors can develop and execute additional quality procedures to test the licensee’s compliance with company-directed operating procedures and other specified areas such as: customer service standards, product/service quality standards and local/national area advertising spend requirements. Continuous Monitoring Licensor management should not only consider the control framework and audit procedures required to mitigate key risks, but should also consider the development of a continuous monitoring program over identified licensing risks.

Additionally, many license agreements require licensees to remit standard fees for certain types of expenses. Examples of additional fees may include: • Required spend over advertising and marketing • Required expenses for product or service quality • Annual fees retained for future capital investment • Required expenses toward workplace safety Auditors should assess both the licensee’s and licensor’s internal control framework around sales/ usage reporting. The auditors should document and understand how sales/usage data is being captured, reconciled, and ultimately reported by the licensee. Additionally, the auditor must determine whether controls are in place at the licensor level to detect inaccurate licensee reporting. Transparency is integral to satisfying licensor concerns over accurate reporting.

Raise Your Expectations

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