Ask Question, Ask an Expert


Ask Accounting Basics Expert


You are the 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
Share capital                                      500                 500
Retained earnings                               680                 730
Total equity                                       1180                810



Since 4X Heavy Ltd is a new client of KCA outline the steps which you will initially undertake as part of taking on this client.


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) Find out overall audit strategy


a) Identify 2 key account balances which are at highest risk of misstatement

b) Describe why these are the highest risk

c) Design 4 substantive audit tests to do the work performed on each of the identified  2 key account balances.

d) For each of the 4 substantive audit test designed identify key assertion it addresses.


(a) Based on the above create 4 recommendations to management on completion of audit.

This  assignment requires 3000 words.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M92738
  • Price:- $70

Priced at Now at $70, Verified Solution

Have any Question? 

Related Questions in Accounting Basics

Accounting and businesshow does the business maintain its

ACCOUNTING AND BUSINESS How does the business maintain its financial records? Who does the accounting for the business? What accounting or records is used? Who periodically reviews and analyzes the accounting records? Wh ...

Francis moved in with her mother beatrice when beatrices

Francis moved in with her mother, Beatrice, when Beatrice's health started to fail. Francis cared for her mother as a devoted child and never expected anything in return. When Beatrice needed to move to a nursing home, s ...

Assignment detailsas at the 1stmay katy perry establishes a

Assignment Details: As at the 1stMay, Katy Perry establishes a new business Katie's Bridal Services as a sole trader. The business will hire out bridal gowns and other accessories as well as provide professional services ...

Writing assignmentthe writing assignment has to be between

Writing Assignment The writing assignment has to be between 650-700 words. With 2-3 references to follow, one in particular has to be from the book we are studying out of: Intermediate accounting (7th ed.). Spiceland, Se ...

1 which of the following scenarios will qualify under

1. Which of the following scenarios will qualify under Section 351 as a nontaxable corporate formation? For those that do not qualify, what requirement of section 351 do they violate? a. Giner, Mary Ann, and Mrs. Howell ...

Practice questionswhat are the main problems associated

Practice questions: What are the main problems associated with strategic management accounting?

Using financial statement disclosures to infer bad debt

Using Financial Statement Disclosures to Infer Bad Debt Expense The 2009 annual report for Sears Holding Corporation contained the following Description Using Financial Statement Disclosures to Infer Bad Debt Expense The ...

Bull what three transaction cycles exist in all

• What three transaction cycles exist in all businesses? • Name the major subsystems of the expenditure cycle. • Identify and distinguish between the physical and financial components of the expenditure cycle. • Name the ...

Titania co sells p 400000 of 12 bonds on june 1 2010 the

Titania Co. sells P 400,000 of 12% bonds on June 1, 2010. The bonds pay interest or December 1 and June 1. The due date of the bonds is June 1, 2014. The bonds yield 10% On October 1, 2011, Titania buys back P 120,000 wo ...

Accounting for business decisions group assignment the

Accounting for Business Decisions Group Assignment The assignment will require the group to undertake research using the website of the Australian Stock Exchange (ASX) and/or the Company whose industry is Food, Beverage ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate