2018-dec-q1

1.
Business risks
一般 BR 一点 2 分, 这道题 7 分，所以最多写 4 点。
AR 一点 3 分, 最高 16 分，写 6 点。
To: Audit Engagement partner

From: Audit manager
Subject: Redback Co – Audit planning
Introduction
This report is to help with planning the audit of Redback S for the financial
year ending 28 Feb 20X9. This report will evaluate the business risks in
planning audit, evaluate and prioritise the risks of material misstatement in
the audit strategy and audit plan.
A. Business risks 写小标题

Independent board members
Two non-executive directors are rival company CEO and academic specialism.
These two can bring professional skills to the company governance whilst the
rival company CEO will have direct interest conflicts and may acquire business
information for personal use. There has risks in using rival company key
management personnel in the board.
The board does not have an audit committee and a small internal audit
department with two staff, which increase the risks of internal control and
internal audit.
Corporate governance
The company lacks an audit committee, and the internal audit team is small
and lacking in independence, as they report directly to the finance director, this
could lead to deficiencies in controls and have negative impact on
management’s ability to monitor the company’s performance.
The strategy of expanding the company would improve profits and exchange
more feasible, but this need to have company be more realistic. As potential
target companies will be identified in the next 12 to 18 months, and seeking a
flotation of the company within five years needs to see the results of the
acquisition. As the leisure centres has to comply with health and safety
regulations, and facilities are inspected regularly, these all increase the expense
for operating licence every year. There is a risk of going concern with expanding
too quickly, as the industry is competitive.
Expansion plans
In order to make the expansion and flotation be successful, management
could be pressured to make unwise decisions and increase spending, which
will impact significantly on the company’s cash flow.
The industry is competitive, and the company’s strategy is to encourage

customers to renew their membership and attract new members by offering
new activities. These strategies will contain loss if loss members for unexpected
reasons, and do not have substitute plans, this will bring more challenges for
the company in the future.
竞争激烈  广告费用，现金流压力，从财报中找数据。员工成本上升。
T和i
Competition and marketing expenses
The industry is competitive, which cause high pressure on the company to
maintain its market share and customer base, so the company has 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.
High investment in gym equipment
The company’s success relies on gyms being equipped with modern
equipment, this requires a high annual expenditure, for example, this year 12
milion was invested in gym equipment, and maintenance and repairs for
facilities is 5.5 million, this will give a big pressure on cash flow.
Health and safety regulations

The company operates in a highly regulated industry, and the risk of non-
compliance with various laws and regulations is high, and if the company is
found break relevant regulations, its operating license could be revoked, this
would lose reputation, and could decrease revenue and even impact
company’s going concern status.
Government initiative
The government initiative to unemployed people may give bad influence to
existing customers as the initiative will put pressure on the capacity of the
gyms and could lead to the facilities becoming crowded, especially at peak
time. This could lead to memberships not being renewed and pay as you go
customers moving to other providers, which may decrease revenue and affect
cash inflow.
Liquidity and overtrading

The company’s cash position is projected to deteriorate significantly, with the
level of cash falling from 5.6 million to 1.4 million in the year, which decreased
by 75%, as the industry is competitive, the expenditure is extremely high to
gain market share, for example, the investment is 12 million ,the market
expense is 85 million, what’s more, the company is planning to expand, this all
gives big pressure to cash position.
B. Risks of Material misstatement
Materiality
Benchmark
Use the profit before tax as a benchmark for the audit planning, as the
range will from 0.345(5%*6.9) to 0.69. As this is client is in a competitive
industry with market expanding, chose 0.345 million as the threshold.
The benchmark is only for the comparation, more professional judgement
should be made during the audit planning process. Existing client, some
significant still set at the lower endo the range at 0.345 million.
Revenue increased 18%, with expanding and want to be listed in 5 years,

management has pressures in finance performance and will create
management bias. 会员人数或者利润上升
Revenue 可以有 2 个计算
Revenue recognition
Membership usually subscribed annual and not members can pay to access
a centre for a day, these different methods of revenue should be recognised
separately. Pay as you go which the performance obligation can be satisfied
on the day, whilst the annual membership needs 12 months to recognise
the revenue, these should be separated. 85% of the revenue should be
recognised as deferred income, there is a risk that overstated the revenue
and understate the deferred income.
The forecast of revenue needs to consider more, as the success of the

campaign ‘healthy kids’ linked with parents’ membership, these are
annually membership, have to be recognised when the performance
obligation is satisfied, these increased new members cannot be recognised
as revenue immediately, it is overstated revenue and understate deferred
income.
Government grant
The grant received of 2 millions is a government grant, need to fulfil
government requirements and the recognise as grant. The government
intends to run for three years, and promote long-term participants, these
grants cannot be fully recognised in 20X9, as this is not reach three years’
period.
In the coming two years, if the company failed to provide enough free hours
to unemployed people, these grants will be taken back from government
and should be recognised as provision. There is a risk overstate government
grant and understate provision.
Some as deferred income, income would overstated and understate
liability.
If the required free hour for unemployment is not met, some grant may
require repayment, then it would mean that a provision should be
recognised or contingent liability should be disclosed, otherwise, liability
will be understated.
Operating expenses
Operating margin increased 5%, this may because operating income more
than before. The maintenance and repairs of facilities need to identify
separately, as whether can have future economic benefit income and
measured reliably. The company opened new sport centre and most of the
facilities are inspected regularly to ensure that all regulations are being
followed, so that the company to retain its operating licence. These all
including maintenance and repairs, but should be illustrated separately by
nature. There is a risk of overstating expenses and understate assets.
Loan
The loan does not bear interest and is repayable at par value of 34 million,
the difference between ten year loan 30 million is 4 million which contains a
deep interest during the ten year period, and need to use amortise method.
The amortised amount is 0.4 and the loan should be recognised as 30.4 in
20X9.
A loan of 1 million was to the company from managing director, Bob, this is
related party transaction, they term of this loan should be checked of the
intention, there is a risk of intention of RPT and this transaction may not
real.
Disclose
Bank loan
The company took out a significant loan of 30 million, this is material based
on the threshold of 0.345 million calculated above.
Under the standard, the finance cost associated with a deep discount
should be amortised over the term of the loan. In this case, redback Co
should amortised the 4 million, which is difference between the amount
received and the amount repayable on maturity of the debt, if the company
ignore the 4 million, there is an audit risk that non-current liability and
finance costs would be understated.
Total assets
The number of sport and leisure centres increased 2, which are the new
sport and leisure centres opened this year, and a new coastal centre should
be recognised as it was opened in the capital city, this understate the
number of centers and understate the assets, overstate the liabilities.
Internal control risk

Expanding strategy and acquiring facilities, with small internal audit
department and does not have audit committee contains internal control
risk.
Poor internal control
The company lacks an audit committee, and the internal audit department
is report to finance director, which causes strong risk of not being
independent. The poor control environment will increase the risk of
control and probability of manipulation of financial statements.
Fee paid to celebrity athlete

The 1 million paid to the celebrity athlete, this is material based on the
threshold of 0.345 million calculated above.
Given that the athlete is providing a service to the company for two years,
the payment should be recognised as prepayment and expensed over that
two-year period. If all of the expense has been recognised this year, profit
is understated, and assets are understated.
In conclusion, the audit risk have been ordered with regard to the estimated
significant of any misstatements and the likelihood of the misstatement
occurring.
For example, the company is aiming to achieve a stock market listing within
five years, so there is significant management bias to manipulate revenue,
so it should be considered first.

2018-dec-q1

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1.

To: Audit Engagement partner

A. Business risks 写小标题

The industry is competitive, and the company’s strategy is to encourage

Health and safety regulations

Liquidity and overtrading

Revenue increased 18%, with expanding and want to be listed in 5 years,

Revenue 可以有 2 个计算

The forecast of revenue needs to consider more, as the success of the

Internal control risk

Fee paid to celebrity athlete

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