APM for the year ending September 30, 2010
Never been audited before – opening balances are not audited (not reliable) or not presented – scope limitation; more prone to f/s error.
Owner heavily rely on bookkeeper and the bookkeeper does not seem like he/she is competent due to the evidence of accounting issues we found later on plus he/she doesn't have accounting designation & not up to date to accounting principles - more prone to f/s error.
RMM (IR & CR) is high because…:
Incentives to shade better light on SFL’s performance to obtain the loan
Rely heavily on bookkeeper and he is not competent
Weak, not relying on them
100% substantive approach since we cannot rely on IC. High-risk areas are revenues overstated, expenses understated, and assets over. Maintain a higher level of professional skepticism.
Bank is the user and it will be interested in SFL’s solvency and profitability.
Ideally, we would use 5% of NIBIT, however, SFL has a high fixed costs therefore most clubs and operating at the BE level and some at loss. So using NIBIT might not be as representative as using revenue to represent operating income.
Therefore, we suggest using ½% of revenue to be the base.
We suggested the lower end on the percentage because of the high risks identified above.
Solvency Ratio: NI or after tax profit + Depreciation / ST< Liabilities
Will be adjusted upwards or downwards as we collect more information when we conduct the audits
Materiality will also need to be recalculated after a several adjustments being done on the f/s (Please refer to the PM issues section below for the adjustments).
Performance, Measurement, and Reporting Issues with Procedures:
Issue 1: Revenue for all memberships is recognized when received.
Alt 1: If performance is rendered, then this option is acceptable.
Alt 2: However, customers pay up front then receive the service throughout a specific time period. Therefore, what SFL doing now is wrong.
Should recognize $100 fee as deferred when a contract is signed. Then move the deferred to membership revenue as one month goes by.
Multiple deliverables - $1000 includes $100 fee per month x 12 months, one-time comprehensive assessment and one-time personalized workout and nutrition plan that worth $300. Therefore, $800 should be allocated to membership