Solved by verified expert :ASSIGNMENT
TRIMESTER
2, 2013
AUDITING
AND ASSURANCE – ACC300
BACKGROUND
You
are an Audit Senior of Kamal Chartered Accountants (KCA) a boutique 3 partner
firm with 20 staff. It is 16 July 2013 and your firm has engaged in the tender
to become the external auditor of 4X Heavy Ltd for the 30 June 2013 audit. 4X
Heavy Ltd is a company that runs multiple Fitness Centres throughout NSW,
Australia and has been in operation since 1991.
Pammy
Ngo, one of KCA’s Audit Managers was formerly a Fitness Instructor at 4X Heavy
Ltd and coincidently joined KCA on 16 February 2013 prior to tender. 4X Heavy
Ltd are initiating an aggressive expansion in 2013, with management having
plans to list the company on the ASX within the next 5 years.
The
2013 financial year saw 4X Heavy Ltd encounter strong competition from new
fitness gyms entering the market as with facing the new popular fitness regime
“Ya Ya Yoga”, which is a regime exclusive to Ya Ya Fitness Gyms. Other Notable
operational challenges for 4X Heavy Ltd faced in 2012/2013 were but not limited
to:
– 4X Heavy Ltd borrowed substantially
from KNVB Bank in order to purchase the equipment required for its gyms. The
finance involved a mixture of both leases over the equipment where KNVB
continued to hold legal title as well as some equipment on chattel mortgages
where 4X Heavy holds legal title. Overriding these finance arrangements is a
covenant from KNVB requiring 4X Heavy Ltd to maintain a debt to equity ratio of
no more than 2.5:1 at each reporting date.
– In order to rapidly grow its
membership base and revenue stream, 4X Heavy has built a substantial network of
fitness instructors to recruit new members to the gym. These fitness
instructors are remunerated on a commission basis at 15% of the value of the membership
subscription signed up from each new customer. Each month the fitness instructors
are required to provide the finance department of 4X Heavy with a claim sheet
showing details of each new member to support the commission claimed. The finance
department checks this against membership contracts previously provided by the
fitness instructor when the new customer signed up prior to payment.
– Management of 4X Heavy perceived
that the number of finance staff at 4X Heavy was an excess to the requirements
of the business. As a consequence an accounts payable clerk and financial
accountant were made redundant from the business during the year. This resulted
in the business only having one accounts payable clerk to maintain purchases and
monitor payables whilst all review of monthly reconciliations were left to the financial
controller. A number of 4X Heavy suppliers have complained about the slowness
at which 4X Heavy has been paying its invoices.
.An internal audit review of
operations during the year found that the volume of people entering and working out at the gym has
increased but appears to be inconsistent with membership numbers and revenues
generated. A further analysis has shown that repairs and maintenance expense as
a percentage of sales has increased in 2012/13 compared with the previous
financial year.
– Management of 4X Heavy have started
to notice that an increasing trend of customers have been leaving the gym and
joining competitors who have been offering the latest state of the art gym
equipment as shown on late night infomercials featuring Chucky Norris. 4X Heavy
is finding it difficult to rearrange its finance with KNVB in order to upgrade
their existing equipment to react to this trend.
Your
recent review of management financial data for 2012/13 has shown the following
key statistics:
Financial
Data
2013
2012
members
1324
1128
new members
212
54
members existing
100
38
membership fee per year
$960
$940
membership revenue
984880
1053986
sales commissions expence
44980
34670
Balance Sheet
30/06/2013
30/06/2012
$’000
$’000
Current Assets
cash assets
600
590
inventory
50
40
other current assets
10
10
total current assets
660
640
Non-current Assets
Property, plant and equipment
3480
2800
Total Non- Current assets
3480
2800
Total assets
4140
3440
Current Liabilities
Accounts Payable
430
350
unearned revenue
120
90
lease liability
350
310
Total current liabilities
900
750
Non-current liabilities
Lease liability
500
460
secured bank loan
1560
1000
Total non-current liabilities
2060
1460
Total liablities
2960
2210
Net asstes
1180
1230
Equity
Share capital
500
500
Retained earnings
680
730
Total equity
1180
810
QUESTIONS
PART
A (12 marks)
Since
4X Heavy Ltd is a new client of KCA outline the steps that you would initially
undertake as part of taking on this client.
PART
B (8 Marks)
Based
on the facts specific to 4X Heavy Ltd:
(a)
Identify the audit inherent risk and rate the risk as low, medium or high.
(b)
Identify the audits control risk
(c)
Evaluate control and inherent risk
(d)
Determine overall audit strategy
PART
C (16 Marks)
a)
Identify 2 key account balances that are at highest risk of misstatement
b)
Explain why these are the highest risk
c)
Design 4 substantive audit tests to carry out the work performed on each of the
identified 2 key account balances.
d)
For each of the 4 substantive audit test designed identify the key assertion it
addresses.
PART
D (4 Marks)
(a) Based on the above make 4
recommendations to management on completion of audit.
This
assignment requires 3000 words.
