= curren CASE3:7 (vm, (30 Marks : 45 Minutes) You are an audit senior at Thom & Stephens, a firm of registered auditors based in Somerset West, and you have recently been assigned to the audit of Getfit (Pty) Lid for its financial year ending 30 June 2023, ‘The performance materiality figure set for planning and performing the 2023 audit is R1 milion. ‘The following workpapers relating to the auditor's understanding of the entity and its environment are available for your review: Reference Workpaper Number Client overview c-001 Risk register (extract) C115 YOU ARE REQUIRED TO: (a) Considering the performance materiality figure of R1 million, discuss the impact that the information documented on workpaper C-001 will have on your assessment of the risk of material misstatement in the financial statements of Getfit (Pty) Ltd for its financial year ending 30 June 2023, as follows: (i) Attthe financial statement level; and (ii) Atthe assertion level for: * Revenue Property, plant and equipment * Inventory. (22) (b) Having considered workpaper C-115, state, with reasons, the effect that the information contained in the extract of the risk register provided will have on your audit planning. @) e age 107 Powered by (@ CamScannerAuoit PLANNING: CASE 3: 7 (continued) Client: Getft (Pty) Ltd Year-end: 30/06/2023 Prepared by: Ken Carbo Date: 12/06/2023 C-001 Reviewed by: Date: 113 ‘Subject: Client overview Nature of business Getfit (Pty) Ltd operates in the health and fitness industry and owns 12 health clubs, employs 209 permanent staff, and has more than 30,000 members. The clubs operate in all the major centres ‘of South Africa. ‘The 12 Getfit health clubs offer ‘state-of-the-art’ fitness equipment, swimming pools, and the services of biokineticists and physiotherapists. Eight of the 12 health clubs operate from leased Premises with remaining lease terms ranging between 7 and 11 years. The remaining four Properties are owned by Getft (Pty) Ltd. A range of membership options are available: ‘+ Membership contracts ranging from 6 months to 24 months: 20% of the total amount due in terms of the contract is payable upfront, while the balance is payable in equal monthly instalments. The longer the term of the contract, the lower the monthly membership fee. ‘* Month-to-month membership plan: A once-off joining fee is paid (which equates to ‘approximately one month's membership fee) — but this is waived from time to time (e.g. due to a special promotion, as was the case from March to June 2023). In terms of this membership option, members are invoiced on a monthly basis (at a higher rate than contract members), and membership can be cancelled with 30 days notice. ‘Walk-in visits are also possible, in which case the individual wishing to make use of the health club ‘must pay for the visit in full at the health club reception desk prior to admission. Introduction of new ‘no-frills’ health clubs: At the board meeting in January 2023 it was noted that the health and fitness market is overtraded in certain cities, and that the disposable income of the current members is declining. Accordingly, the board resolved to rebrand three of the health clubs as ‘no-frills’ gyms — which would mean that some of the more expensive to maintain facilities (e.g., swimming pools and saunas) will be closed down. The vacant space arising as a result will be rented out to third parties, and the membership fees at these health clubs will be reduced by up to 25%, The rebranded gyms will be opened on 1 August 2023, Management structure ‘The board of directors of Getfit (Pty) Ltd comprises: Managing director ‘Mr Ab Tone Corporate services director Ms Betty Hart Marketing director Mr Sleek Starr The size of the board is small due to the decentralised management style that is followed. Each health club has a general manager who is responsible for its day-to-day operations. To ensure that the focus of the general managers is aligned to that of the company, they each receive an annual bonus based on: + The profit (before tax) reported by their health club forthe financial year; and The number of new members signed by their health club during the year. Powered by (@ CamScannerCnarren? CASE 3: 7 (continued) Client: Getfit (Pty) Lid Year-end: 30/06/2023 Prepared by: Ken Carbo Date: 12/06/2023 C-001 Reviewed by: Date: 213 ‘Subject: Client overview shareholders ‘The shareholders of Gettit (Pty) Ltd are: Mr Ab Tone 25% of the issued ordinary shares XY Venture Capital 49% of the issued ordinary shares 26 high net worth individuals 26% of the issued ordinary shares In 2016 Mr Tone opened the company's first health club in Somerset West, and due to his commitment and close involvement, it proved to be highly successful and profitable. Consequently, he opened up more health clubs from 2018 to 2020, While these health clubs were successful in drawing members, the opening of these clubs in quick succession placed significant strain on the company’s liquidity. Accordingly, in 2021 Mr Tone (initially the only shareholder) saved the company from commercial insolvency by raising equity financing from XY Venture Capital and wealthy individuals (whom he knew as members of the health clubs), but this significantly diluted his shareholding in the company. Therefore, while Getfit (Pty) Ltd currently has adequate liquidity to fund its operations, Mr Tone lost much of his passion for the business and in April 2022 opened up a golf shop in George, where he now spends most of his time. ‘Accounting system Each health club has an accountant and maintains its own accounting records. ‘An off-the-shelf accounting software package suitable for use on a single personal computer was purchased and successfully utilised by the company's first health club in Somerset West. With every subsequent opening of a new health club, the same software was purchased and installed on the accountant’s personal computer at the club. In order to produce the company’s annual financial statements: * each club accountant prints out the trial balance of the health club (for which s/he is responsible) for the financial year (once all entries and adjustments for the year have been recorded), and scans and emails itto the head office accountant (Mick Muscle); «the head office accountant captures the amounts from these trial balances onto an MS Excel spreadsheet, together with those from the head office trial balance; and ‘+ the spreadsheet is then used to ‘add together’ like amounts from each trial balance to arrive at the company's financial information for the year. ‘A firm of professional accountants is appointed to compile the company's financial statements in terms of IFRS. A sophisticated member services software package is also in use, located on the computer server ‘at head office, which maintains data on a membership database and generates the monthly invoices. Each health club's computer system has online access to the member services software package and membership database. Powered by (@ CamScanner‘Auorr PLANNING. CASE 3: 7 (continued) Year-end: 30/06/2023 Client. Getht (Py) Lid Date: 12/06/2023, C-001 Prepared by: Ken Carbo Date aA Reviewed by: Subject: Client overview Key financial information 3wsiz023 | soiei20z2 | 30V6/2021 Root Audited Audited (itmenthsy |__’000 R’000 Revenue 71,950 75,100 70,970 Profit before tax 4,174 3,050 5,280 Membership numbers: Contract members 11,984 12,118 11,744 Month-to-month members l 25,551 19,887 47,187 fa real ‘3415/2023 | 30/6/2022 | 30/6/2021 The company’s major assets Draft Audited Audited eee Notes R000 R’000 R’000 Property, plant and equipment 1 104,187 111,142 120,999 Current assets Inventories 2 900 850 925 Trade receivables 3 3,875 1411 547 Cash and cash equivalents 10.433, 12,388 13,101 Notes 1. The following depreciation rates are applied to the major classes of property, plant and equipment: * Buildings (including leasehold improvements) are depreciated over periods ranging from 25 to 50 years; + Fitness equipment is depreciated over 12 years; and * Office furniture and motor vehicles are depreciated using the wear and tear rates allowed for income tax deduction purposes. 2. Inventories comprise of company branded products (e.g., T-shirts and gym bags) and consumables (e.g. pool chemicals). Other than a few items which are displayed in glass cabinets in the health clubs, the company’s branded products are stored under the counter at health club reception desks, available for sale. 3. The trade receivables balance relates to members who a fees. Powered by re in arrears with their membership camScannercunerend CASE 3: 7 (continued) Client: Geffit (Pty) Ltd Year-end: 30/06/2 3 1023 Prepared by: Ken Carbo Date: 15/06/2023 C-115 Reviewed by: Date: 4" ‘Subject: Risk register (extract) ‘The following are two of the risks, from those documented in the risk register of Gettit (Pty) Ltd, which we have identified will require consideration during the planning of the audit: 5 Likelihood Procedures Risk of | impact | implomentedto | Rest | Risk owner Norsonptane J initiate sk one H M * Obtain legal advice L Managing with health ang bout applicable director safety laws and naan regulations. regulations. «Based on legal advice received, ‘document the laws. and regulations relating to health and safety. For professional w iW | + Allbookings for T_| Cub services (€.9. professional services general massages) rendered should be made at managers not included as part the club reception of the membership desk and the details plans, the fee levied of the booking (incl. is not recorded in member's details) the company's should be recorded records and the ‘on the member cash paid by services system and members are ‘service booking misappropriated by form’ issued. staff. «Staff should not render any services provided with the ‘company's offical ‘service booking form’. * The club general manager should regularly (ona surprise basis) check that: - Thereisa ‘service booking form’ for every member receiving professional services; and = The bookings per the member services system are reconciled to receipts per the ccash book Powered by (@ CamScanner