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…