Background and audit information
You are the audit manager at Kagiso Incorporated (Kagiso), a firm of registered auditors with offices in all the major cities in South Africa. Kagiso has experienced exponential growth as
a result of the partners being much more involved in marketing their services to various listed companies.
You are currently engaged in the audit of Gym World Ltd (Gym World). Mandy Isaac,
CA(SA) and RA, has been the audit partner of Gym World for the past 6 years. Kagiso has a good working relationship with Gym World and their directors which resulted in Kagiso being reappointed year after year. Mandy Isaac and Thandi Makhaya, Gym World’s Chief Executive Officer (CEO), have been close friends for the past 10 years as they studied together at university. This friendship further resulted in the audit being awarded every time to Kagiso by Thandi Makhaya. Mandy Isaac has been able to keep the relationship professional by only agreeing to meet during business hours.
Gym World Ltd (Gym World) is a South African fitness franchisor and operator with its head office based in Sandton, Johannesburg. Gym World has over 500 gyms in South Africa. Some of the locations include Centurion, Cape Town, Durban, Kimberly and Braamfontein. Gym World is the fastest growing gym franchisor in South Africa and they are looking for more growth opportunities.
In 1995, Gym World founders, Musa and Stephanie Sithole, started a gym in Centurion, Pretoria. Gym World experienced some challenges as their membership fees were too high and they were struggling to get enough members to break-even. Musa and Stephanie Sithole then decided to create a non-intimidating, low-cost model which resulted in lower
membership fees and higher volume of memberships. This low-cost business model focused on the first-time health club members, rather than more experienced trainers.
Gym World has three (3) main memberships: basic membership for R199 per month, regular membership for R499 per month and extreme memberships for R799 per month.
Gym World has approached Mandy Isaac requesting Kagiso to distribute and market Gym World’s gym memberships to Kagiso’s employees and clients. Kagiso will be given a commission for every member that joins through Kagiso’s marketing campaign.
Governance structure
The following are the board members of Gym World:
No. Name Position Committee
1 Thandi Makhaya Chief Executive Officer (CEO), Chairperson of the board
2 Norma Stander Chief Operating Officer
(COO)
N/A
N/A
3 Istiaaq House Chief Data Officer (CDO) N/A
4 Naledi Grootboom Non-executive Audit Committee, Remuneration Committee
5 Harry Patson Non-executive Audit Committee
6 Thabo Goodman Non-executive N/A
7 Qamilla Hoblos Non-executive Audit Committee, Remuneration Committee
Thandi Makhaya has been the chairperson of the board for the last 8 years. She also owns
15% of the Gym World’s shares. To ensure compliance with King IV, Gym World decided to appoint Harry Patson as the Lead Independent Director (LID).
Harry Patson and Naledi Grootboom joined the board of directors in the current year after retiring from being part of the executive management of the directors, namely COO and CDO.
Gym World is looking to appoint the following five (5) new directors to Gym World’s board of directors:
No. Name Position
1 Stephen Blackburn Marketing Director (MD)
2 Clay Thompson Chief Information Officer (CIO)
3 Raymond Grey Non-executive
4 Gary Ponston Non-executive
5 Andrew Wingman Non-executive
Stephen Blackburn and Clay Thommyson sent a request to Thandi Makhaya to be appointed to the board of directors as they would like to be part of the decision makers and the additional remuneration will assist them to meet their expensive lifestyles. Thandi Makhaya, as the chairperson of the board, approved their appointments.
Other information
Norma Stander attended a fraud seminar recently and was a bit confused about what Gym World can do to combat fraud within the entity and whether the responsibility of detecting fraud lies with management or the auditors? Based on the confusion Gym World’s management requested you to prepare an email to clarify these two issues for them.
| REQUIRED | Marks | |
| 1 | With reference to the background and audit information:
Discuss your concerns in terms of the Companies Act 71 of 2008 and SAICA Code of Professional Conduct. |
15 |
| 2 | With reference to the governance structure:
Identify and discuss any corporate governance concerns in terms of the King IV Code on Corporate Governance. |
15 |
| 3 | With reference to the concerns raised by Norma Stander:
(i) Discuss management’s and auditor’s responsibilities for the prevention and detection of fraud.
(ii) List the internal controls Gym World can implement to prevent and detect fraud. |
3
7 |
| Communication skills: logical argument Neatness & Presentation | 5
5 |
|
| Total | 50 |
Answers to Above Questions on Auditing
Answer 1: On the basis of analysis of information about Kagiso incorporated audit engagement with gym world Limited, it is evaluated that there are several issues identified in respect to compliance with the Companies Act 71 of 2008 and the SAICA code of professional conduct. The major concerns are identified in relation to independence and objectivity, governance structure, appointment of new directors, fraud detection responsibility and ethical consideration.
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