REDBACK SPORTS AUDIT

ASSIGNMENT

AUDIT ASSIGNMENT

SUBMITTED BY

SADEED ABID

MBA 1.5
2191042

SUBMITTED TO

MAJID ASGHAR

CONTENT

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ASSIGNMENT

1. Introduction…………………………………………………………………………..03

2. Assessment Of Business Risk …………………………………………….………….03

3. Administration ……………………...…………………….......……………………...03

4. Regulation…………………...……………...……………………...…………………04

5. Expenditure & Maintenance …………………………………………...…………….04

6. Cash Position…………………………………………………………….……………04

7. Capacity Of Its Facilities…………...…………………………………....……………05

8. Competition And Marketing Expenses:………..…………………….….…...……….05

9. Government Initiative ……………….…………………………………........……….05

10. Planned Expansion And Possible Future Flotation:……………………….…….…....06

11. Risk Of Material Mis-statement Evaluation:………..…………..…………..……….06

12. Company Lacks An Audit Committee:…….……………...…………………........….07

13. Multiple Revenue Streams:……………………………………………………..…….07

14. Capital Expenditure And Operating Expenditure:…………………………....……....08

15. Grant……………………………………………………………………………..........08

16. Introduction Of New System…………………………………………………………08

17. Evaluation Of The Matters ……………...…………………………………………....10

18. Conclusion & Discussion …………….……………………………………………....13

19. Similarity Report Of Assignment …………………………………………………....16

 INTRODUCTION:

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The initial segment of these preparation notes has been set up in connection to the audit of
RedBack sports co. The audit arranging will commence in a matter of seconds, and these
notes assess the business dangers and the dangers of material misquote to be considered in
arranging the audit. The notes at that point proceed to recommend the chief audit methods
to be utilized in the audit of an administration award which the company got during the
year. The second a part of the informing notes focuses on Emu Gyms Co, especially the
request from the company’s director for our firm to produce an audit or a restricted
assurance review of the company’s monetary statements. The notes end by discussing an
issue that has been raised by the company’s director, in regard to a suspected fraud at the
corporate.

ASSESSMENT OF BUSINESS RISK

 ADMINISTRATION:

The company doesn't need to comply with corporate administration necessities as it's
anything but a recorded element, and it is great to take note of that the board incorporates
two non-official directors who appear to be ready to offer autonomous perspectives on the
system and the board. Be that as it may, the company does not have an audit committee
and the interior audit group is little and ailing in autonomy as they report
straightforwardly to the fund director. This implies the scope of their work is probably
going to be very constrained because of deficient assets, and any recommendations made
could be overlooked by the fund director. In general, this could prompt lacks in controls
and wasteful aspects in business activities. Also, given that the company is hoping to
accomplish a financial exchange posting in the following barely any years, it would be
great practice to execute more grounded administration techniques in the near future. For
instance, having two non-official directors may not be sufficient to meet the corporate
administration necessities in the company’s jurisdiction.

 REGULATIONS:
The company works in an exceptionally controlled industry, and the risk of non-
compliance with different laws and regulations is high.

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The sport and leisure industry has exacting health and security regulations which must be
complied with, and there are ordinary health and wellbeing reviews to guarantee that
regulations are being clung to. On the off chance that the company is seen not as in
compliance with the significant regulations, its working permit could be disavowed, which
would have reputational consequences, and at last could effect on the company's going
concern status. Notwithstanding the risk of non-compliance, it will be costly to diminish this
risk to an adequate level, for instance, through ordinary staff preparing on health and security,
prompting income and benefit suggestions. This is especially applicable to the bolder sporting
exercises, for example, scuba plunging, which the company has as of late begun to offer.

 EXPENDITURE AND MAINTENANCE:

The company's prosperity depends on gyms being furnished with present day equipment, and
different offices, for example, tennis courts being kept up to an exclusive requirement. This
requires a high yearly expenditure, for instance, this year alone $5·5 million has been brought
about on upkeep and fixes. Such high yearly expenditure is a major drain on cash, and the
company could confront liquidity issues if cash inflows from customers are not maintained.

 CASH POSITION:
The company's cash position is anticipated to decay essentially, with the degree of cash
tumbling from $5·6 million to $1·4 million in the year. Simultaneously, income and benefit
before charge are both anticipated to increase, by 17·8% and half separately. While there is
some uncertainty over the honesty of the figures revealed by management, which will be
talked about in the next segment of the instructions noticed, the patterns could demonstrate
that the company is extending too rapidly and overtrading, centering On creating income as
opposed to on overseeing cash streams properly. This is especially concerning given the
company's plans for additional extension in the following hardly any years.
 CAPACITY OF ITS FACILITIES:
There could be issues confronting the company as far as the limit of its offices. Membership
has increased altogether during the year, by 12·4%, and the quantity of pay more only as costs

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arise visits has increased by 5-3%. Although two new sport and leisure focuses have opened
for the current year, this may not be adequate development, and there might be times when
the offices are packed. This may deter members from restoring their membership, and pay
more only as costs arise clients may want to utilize other sport and leisure suppliers if packing
becomes problematical. The 'healthy kids' program, and the government activity to give free
access to the jobless will fuel this issue.

 COMPETITION AND MARKETING EXPENSES:

The industry is competitive, which itself is a business risk, meaning there is pressure on the
company to maintain its market share and customer base. There may be pressure to cut
membership or pay as you go prices, which will impact on profit 14 margins and cash flow.
The company appears to spend a lot on marketing to support its brand. This year, $8·5 million
has been spent on marketing, which equates to 16% of revenue. This is a huge drain on cash
and will impact significantly on the company’s liquidity position.

 GOVERNMENT INITIATIVE TO PROMOTE A HEALTHY LIFESTYLE:

While the company's association with the government activity to elevate a healthy way of life
to jobless individuals is commendable, it may not demonstrate famous with the current sport
and leisure focus members and pay more only as costs arise clients. The activity will put
pressure on the limit of the gyms and could prompt the offices becoming swarmed,
particularly at top time. This could prompt memberships not being restored and pay more only
as costs arise clients moving to different suppliers.
There is additionally, an open-door cost issue for the company, as the $2 million award
receipt doesn't have all the earmarks of being especially productive in terms of the quantity of
long stretches of free access to the gyms which must be accommodated in the following three
years. There is a related risk in that the company's frameworks should be able to do precisely
recording the quantity of free hours which are given under this activity, as this must be
accounted for on a month to month premise. The risk is that the systems do not capture the
necessary information accurately, which could lead to reporting false information to the
government. There is evidence that this system of recording could be overstating the hours of
free access, as according to the finance director, 33,900 free hours have already been

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provided, which in the three-month time frame since the beginning of the activity in
September 20x8 compare to 11,300 hours of the month, which appears to be high as this
suggests around 3,800 individuals have reacted to the activity.

 PLANNED EXPANSION AND POSSIBLE FUTURE FLOTATION:

The extension plans could remove management's consideration from maintaining the
business, particularly if the identification of potential target companies becomes a tedious
procedure throughout the following year. Management controls over existing tasks could
deteriorate while consideration is centered around the arranged extension and conceivable
future buoyancy. In the event that there is pressure from existing investors for the extension to
be effective and buoyancy to occur, management could be forced into making impulsive
choices to increase the pace of improvement of the company's exercises.
New information management framework presenting another information management
framework can make a business risk in that inadequate preparing may have been given or
potentially proper inner controls might not have been structured or executed in connection to
the new framework, expanding the risk of erroneous recording, handling, and detailing of
data. This would negatively affect management's capacity to screen the company's exhibition.
Given that the new framework is connected to the company's accounting programming, there
is a related review risk, which will be talked about in the following segment of these
instructions notes.

 RISK OF MATERIAL MISSTATEMENT EVALUATION:

Management: The company has ambitious expansion plans and is expecting to accomplish a
financial exchange posting inside five years. This can make huge weight on management to
report solid budgetary execution and the risk of profit management are high. This can prompt
a scope of unseemly accounting medications including early recognition of income and other
income and deferral of costs. There is some sign that profit management may have occurred
for the current year, for instance, income is anticipated to increase by 17·8%, though the
quantity of members, who give most of the company's income, has increased by just 12·4%.
Benefit before charge is anticipated to increase by half. These patterns show that income

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could be exaggerated and costs downplayed, the particular purposes behind which are
assessed underneath.

 COMPANY LACKS AN AUDIT COMMITTEE:

The company lacks an audit committee and only has a small internal audit team which is not
operating independently. This has implications for controls over financial reporting, which
could be deficient, and increases control risk. There is a high scope for errors in financial
reporting processes and for deliberate manipulation of balances and transactions, as the
internal audit team does not have sufficient resources for thorough monitoring and reporting.

 MULTIPLE REVENUE STREAMS:

With 85% of income being from members' memberships, there is a risk that income is
recognized incorrectly. There is a risk that the planning of income recognition isn't suitable,
for instance, if a yearly membership is recognized in full when it is gotten by the company,
instead of being recognized over the time of membership, in this way exaggerating income.
There are numerous income streams which complicates the monetary revealing procedure and
increases the risk. Just as members paying a yearly membership, clients can pay for access
under the pay more only as costs arise conspire. Likewise, the free access to the jobless ought
not bring about income recognition, however should be appropriately recorded as it must be
accounted for to the government on a month to month premise. As talked about above, it is
conceivable that the framework isn't recording the free access gave to the jobless precisely,
and that figures might be exaggerated.

 CAPITAL EXPENDITURE AND OPERATING EXPENDITURE:

The company has significant levels of both capital expenditure and upkeep costs. There is a
risk of material error that capital expenditure and working expenditure have not been properly
isolated for accounting purposes. For instance, upkeep costs could be incorrectly promoted
into non-current resources, exaggerating resources and downplaying working costs. This
could be demonstrated by upkeep costs speaking to 10·4% of income this year, compared to
11·7% in the earlier year. Capital expenditure is recorded at $32 million this year compared to

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$20 million in the earlier year; this 15 noteworthy increase can be in any event incompletely
clarified by two new focuses being opened in the year, however the review work should
concentrate on the conceivable exaggeration of the capital expenditure.

 GRANT:
The company has gotten a $2 million award this year, which has been recognized as other
working income. The sum is material, speaking to 29% of anticipated benefit before charge.
The risk of material misstatement identifies with whether this should all have been recognized
as income in the present accounting time frame.
FRS 20 Accounting for Government Grants and Disclosure of Government help necessitates
that government awards are recognized in benefit or misfortune on an efficient premise over
the periods in which the substance recognizes costs for the related costs for which the awards
are proposed to compensate. Redback Sports Co has recognized all the income this year, in
any case, the plan is expected to run for a long time. In this way there is a risk that the
company has recognized the income too soon, and an extent of it ought to stay as conceded
income; this leads to exaggerated benefit and downplayed liabilities. There could be a further
issue in that the particulars of the award may require complete or incomplete reimbursement
if the necessary number of long periods of free access to sport offices isn't met. In the event
that any such terms exist, the company ought to assess whether the terms are prone to be met,
and if not, ought to consider whether it is proper to recognize an arrangement or reveal a
contingent risk in the notes to the financial statements. The risk is consequently this has not
been considered by management, driving conceivably to downplayed liabilities or insufficient
revelation as required by FRS 37 arrangements, contingent liabilities and contingent assets.

 INTRODUCTION OF NEW SYSTEMS:

The introduction of new systems, especially those which interface with the accounting
system, creates a risk of material misstatement. Errors could have been made in the transfer of
data from the old to the new system, and as this system deals with membership information, it
is likely to impact on how revenue is recorded and processed. Not all staff may yet have been
trained in operating the system, leading to a higher risk of error, and controls may not yet
have been fully implemented. This all means that transactions and balances relating to

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members are at risk of misstatement. The $1 million paid to the celebrity athlete is material,
representing 14·4% of projected net profit for the year. Given that the athlete is providing a
service to the company for two years, the cost should be recognized over that two-year period,
with an element of the cost deferred until the 20Y0 financial statements. If all of the expense
has been recognized this year, profit is understated and assets are understated.

 OPERATING EXPENSES:
Working costs incorporate staff costs, which are anticipated to increase by 7%, advertising
costs, which are anticipated to remain at a similar sum compared to 20X8, and upkeep and fix
costs, which have increased by 3·8%. Given the increase in income of 17·8%, and the size of
tasks expanding by the opening of two new focuses, these classes of costs would be required
to increase by a bigger sum this year. It may be the case that costs have been discarded in
blunder, or have been purposely prohibited, along these lines downplaying costs and
exaggerating benefit. These patterns ought to be examined with management, particularly the
staff costs, as this by itself is profoundly material, speaking to 28·9% of anticipated income.

 COMPANY TOOK OUT A SIGNIFICANT LOAN:

During the year, the company took out a critical credit of $30 million; this is material as it
speaks to 23·1% of absolute assets. The credit has been given at a profound discount and there
is a risk of material misstatement in that the fund costs related with this advance may not be
accounted for as per FRS 109 financial Instruments. FRS 109 necessitates that the account
cost related with a profound discount – for this situation the $4 million contrast between the
sum got by Redback Sports Co of $30 million, and the sum repayable on development of the
obligation of $34 million – ought to be amortized over the term of the credit. The risk is that
account costs and non-current liabilities will be downplayed if the proper money cost isn't
accumulated in this financial year.
The managing director of Redback Sports Co, Bob Glider, has made a loan to the company of
$1 million. While this is not material in monetary terms, representing only 0·8% of total
assets, it is material by nature and is a related party transaction according to FRS 24 Related
Party Disclosures given that the loan to the company is from a member of key management
personnel. The relevant disclosures as required by FRS 24 must be made in the notes to the

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financial statements, and there is a risk that the disclosures are incomplete. The necessary
disclosures include information on the nature of the related party transaction, its amount, and
the relevant terms and conditions of the loan.
There is also a risk that interest will not be accrued on the loan. The loan was made on 1 July
20X8, so by the year end interest of $20,000 ($1m x 3% x 8/12) should be accrued. This is not
material in monetary terms to the financial statements as it represents less than 1% of
projected profit before tax, however, audit judgement may conclude that it is material given
the related party nature of the transaction.

 AUDIT PROCEDURES TO BE USED ON THE GRANT:

Obtain the documentation relating to the grant, to confirm the amount, the date the cash was
transferred to the company, the period covered by the grant, and terms on which the grant was
awarded.
Review the terms to confirm whether they contain any conditions relating to potential
repayment of part or all of the grant.
If a required number of hours of free access is not met in the period covered by the grant.
Agree the amount of cash received to the bank statement and cash book.
Perform tests of control on the system used to record the number of free hours of access
which have been used by the unemployed, focusing on how the access is recorded, to ensure
that the recording is complete and accurate and that revenue is not recorded.
Review forecasts and budgets to evaluate the pattern of anticipated use of the initiative by the
unemployed, and to confirm that repayment of the grant is not likely.
Discuss with management the accounting policy used for the receipt of cash, to confirm
understanding that it has all been recognized in full this year, and to understand
management’s rationale for this accounting treatment.
Recalculate the amount which should have been recognized on the basis of recognizing the
grant over the three-year period of the government’s initiative.

EVALUATION OF THE MATTERS TO BE CONSIDERED IN DECIDING WHETHER

TO ACCEPT AN ENGAGEMENT TO PROVIDE EMU GYMS CO WITH AN AUDIT OR
LIMITED ASSURANCE REVIEW

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The fundamental requirements are that a firm must consider:

1. Whether it is competent to perform the engagement and has the capabilities, including
time and resources to do so;
2. Whether the relevant ethical requirements can be complied with; and
3. The integrity of the client, and whether there is information which would lead it to
conclude that the client lacks integrity.

 PERFORMING THE AUDIT OF REDBACK SPORTS CO.:

As far as competence, our firm ought to be competent to play out the review of a little
company or to conduct a constrained affirmation survey of the company's financial
statements. As a firm of contracted confirmed accountants, and playing out the review of
Redback Sports Co. lot bigger company in a similar industry – implies that the firm has the
important information and experience to play out a top notch review or restricted confirmation
audit. The cutoff time by which the work should be completed ought to be confirmed with
Mick Emu. The bank chief has recommended that the advance could be made accessible
inside the following two months, implying that the review or constrained confirmation survey
on the financial statements should be completed at the earliest opportunity. Our firm might
not have enough staff accessible at short notification to play out the work required. The other
issue applicable is the scope of work that is required, this can significantly affect the assets
required. A review will require more work and is in this manner more asset serious, so it
might be progressively hard for our firm to complete a review at short notification compared
to a restricted affirmation survey. What's more, we ought to explain whether the bank chief
anticipates any work to be performed, and conclusions drawn, on the cash stream and benefit
gauges, in which case more assets will should be accessible to complete the commitment.
Huntsman and Co give the finance administration to Emu Gyms Co. This would offer ascent
to a self-audit danger on the grounds that our firm has determined the finance figures which
structure some portion of the financial statements which would then be liable to review or
constrained affirmation survey and may result in over-dependence on the finance figures
remembered for the financial statements. Huntsman and Co ought to consider whether the
finance figure is material to the financial statements, and whether shields can be utilized to
diminish any moral dangers to an adequate level, for instance, using separate groups to give

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the review or constrained affirmation audit and the finance administrations and by having an
autonomous second accomplice to survey the work performed. On the off chance that shields
don't diminish the dangers to an adequate level, at that point the finance administration ought
not be completed notwithstanding the review or constrained confirmation audit.
Providing the payroll service could also be seen as acting on behalf of management, further
impairing the objectivity of the audit or limited assurance review provided on the financial
statements. However, if the payroll service is purely routine transaction processing in its
nature, this is less of a threat. According to the Code, in order to avoid the risk of assuming a
management responsibility, prior to accepting the non-audit service the firm should satisfy
itself that company management: – has designated an individual who possesses suitable skill,
knowledge and experience to be responsible for client decisions and oversee the services; –
will provide oversight of the services and evaluate the adequacy of the results of the services
performed; and – accept responsibility for the actions, if any, to be taken arising from the
results of the services.
There would also be ethical threats arising if our firm were to perform work on the
prospective financial information and also attend the meeting at the bank – this could be
perceived as management involvement and creates an advocacy threat whereby the audit firm
is promoting the interests of the client. There could also be a perception by the bank that by
attending the meeting, our firm is not only supporting our client’s loan application, but also
confirming the ability of the client to repay the 17 loan, which is not the case.
A liability issue could arise for our firm, in the event of the client defaulting on the loan,
unless our firm’s position is made very clear to the bank. If a member of our firm does attend
the meeting with the bank manager, it should be a representative of the firm who has not been
involved with the audit or limited assurance review, and Mick should acknowledge his
responsibility with regard to the preparation of the financial statements. A further potential
ethical issue arises in that our firm audits Redback Sports Co, which could be a competitor of
Emu Gyms Co despite their difference in size. This situation can create a conflict of interest.
According to the ISCA Code of Professional Conduct and Ethics, before accepting a new
client relationship or engagement, the audit firm should identify circumstances which could
give rise to a conflict of interest and evaluate the significance of any ethical threats raised. In
this case, Huntsman & Co should disclose to both Emu Gyms Co and Redback Sports Co that

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the firm acts for both companies and obtain consent from both companies. The firm should
also use separate teams to carry out work for the two companies and establish appropriate
review procedures by an independent member of the firm. Huntsman & Co should also
remain alert for changes in circumstances which may make the conflict of interest more of an
issue, for example, if Redback Sports Co identified that Emu Gyms Co could be a potential
target company to acquire as part of its planned growth strategy.

 CLIENT DUE DILIGENCE:

Emu Gyms Co is already a client of our firm, as we provide the company with a payroll
service, therefore all of the necessary client due diligence will have taken place. There is
nothing in the note provided by Stella Cross to indicate that client integrity could be a
problem.

 SCOPE AND IN THE NATURE OF PROCEDURES WHICH ARE

PERFORMED:
A review and a restricted confirmation audit vary in their scope and in the idea of methods
that are performed. It isn't the motivation behind either a review or a constrained confirmation
survey to distinguish or anticipate extortion, this is the obligation of management, be that as it
may, apparently the pointers of misrepresentation may have been seen before if either had
been performed. In a review, there is a wide scope in the work performed. Review techniques
are comprehensive, including trial of detail and trial of control, and will cover every single
material part of the financial statements. Given that generally the income from the shop and
bistro deals spoke to 5% and 8% of the company's income, these would speak to a material
wellspring of income and there would have been review trying of the income exchanges,
including trial of detail performed on an example premise. Furthermore, the adjustment in net
edge from 32% to 26% would have alarmed the evaluator to a strange pattern, prompting
extra review strategies being performed. Some portion of the review procedure is archiving
and assessing interior controls, and this would have included an evaluation of the controls
over deals in the shops and bistros and over stock.
Almost certainly, lacks in inner controls, which might be enabling misrepresentation to be
completed unnoticed, would be distinguished by the review procedure and afterward

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communicated to management. Be that as it may, it is conceivable that even with a review

being conducted, the misrepresentation probably won't have been recognized. This is on the
grounds that fakes are generally concealed, and especially if the representatives included have
been colluding to do the misrepresentation, it would be troublesome to identify, particularly if
there has been purposeful distortion of accounting records. Likewise, the sums included are
not profoundly material, the measure of stock held by the company is little, which means this
might not have been delegated a zone with a high risk of material misstatement if a review
had been conducted. The stock held at the shops isn't probably going to be material, and the
stock count probably won't have been gone to by the review group. Likewise, the definite
testing of offers exchanges might not have uncovered the misrepresentation given that the
extortion gives off an impression of being based on robbery of stock. It is conceivable that the
extortion would just have been uncovered through nitty gritty testing of the controls over
development of stock. In the event that a restricted confirmation survey had been done, again
it might have uncovered the extortion, however it is more uncertain compared to a review.
This is on the grounds that a restricted affirmation survey has a smaller scope than a review,
and examination strategies are as a rule restricted to just request and systematic audit. Trial of
controls and itemized trial of detail are not done and hence control lacks would not be gotten
or answered to management, and it isn't likely that stock in the shop and bistro would have
been a need for survey.

 CONCLUSION:
In conclusion, Mick is correct in believing that if the company's financial statements had been
liable to review or restricted confirmation survey before now the speculated misrepresentation
is probably going to have been uncovered by the review, and may have been uncovered by a
constrained affirmation audit. Nonetheless, if the misrepresentation was all around concealed,
it is conceivable that even a review would not have uncovered the exercises of the fraudsters.
The evaluation in relation to Redback Sports Co indicates that the company faces a range of
business risks, for instance, possible overtrading and problems with liquidity.
There are also a number of significant audit risks which will impact on our audit planning, for
example, the accounting treatment which has been applied to a government grant, and
possible understatement of expenses. There is a significant risk of management bias given the

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company’s plans for expansion. In relation to Emu Gyms Co, our firm should be able to
provide a limited assurance review or audit of the company, provided that safeguards are put
in place to reduce ethical threats, in particular self-review in relation to payroll costs, to an
acceptable level. Finally, a discussion has been provided which considers whether an audit or
limited assurance review would have uncovered the fraud which Mick suspects is taking
place.
The assessment in connection to Redback Sports Co demonstrates that the company faces a
scope of business risks, for example, conceivable overtrading, and issues with liquidity. There
are likewise various huge review risks that will effect on our review arranging, for instance,
the accounting treatment which has been applied to a government award, and conceivable
understatement of costs.
There is a huge risk of management inclination given the company's arrangements for
development. In connection to Emu Gyms Co.
Our firm ought to have the option to give a restricted affirmation survey or review of the
company, gave that shields are set up to diminish moral dangers, specifically self-audit in
connection to finance costs, to an adequate level. Finally, a discussion has been provided
which considers whether an audit or limited assurance review would have uncovered the fraud
which Mick suspects is existing.

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Similarity Report Of This Assignment From Turnit-In

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