Lux Fitness Inc.(LFI) operates 50 athletic resorts in major urban centers across the United States and Canada. Each LFI location offers a wide range of services including: fitness facilities, fitness classes, tennis, squash and swim programming. LFI also offers services such as personal training, weight loss programs and spa services. The company head office is based in Toronto and is owned by a group of private equity investors. The investors purchased the company 5 years ago with the intention of expanding the company and taking it public. LFI has experienced exceptional growth in the past 5 years - opening 5 new locations every year. After significant consultation with industry and legal experts, the LFI's directors decided to pursue an initial public offering (IPO) on the Toronto Stock Exchange.

In late 2017 LFI received a bank loan. The loan agreement stipulates that LPI must obtain an annual audit of their financial statements and must maintain a debt to equity ratio that does not exceed 50%. LFI has always prepared statements in compliance with IFRS and has a June 30th year-end.

It is now January 2018 and you are an audit manager at Big 4 LLP and you just left a meeting with Susan Liu an audit partner of your firm. Susan told you that Tom Lee the VP Finance from LFI recently contacted her about the opportunity for Big 4 LLP to undertake the audit of LFI. You know Tom, before LFI he was an audit partner at your firm and he left the firm last year to join LFI. LFI's offer was too good to pass up, Tom was offered a competitive salary and was offered a 5% equity stake in the business. As part of his employment contract he is also eligible for an additional 5% equity stake if LFI achieves certain sales and income targets within 1 year. While at Big 4 LLP Tom had a reputation to be a real go getter who always made his clients happy. He always found a way to justify client's accounting policies, no matter how aggressive they were.

Tom thinks an audit opinion from the public accounting firm of Big 4 LLP would add creditability to the financial statements for the upcoming IPO. Tom provided Susan with the six months ended December 31st income statement and extracts of the December 31st balance sheet See Exhibit I). Susan has met with Tom at LFI's head office. She has sent you her notes from her meeting in Exhibit II.

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