Question 1 I 28 marks- 80 marks) Lux Fitness |nc.(LFl) 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 LFl's directors decided to pursue an initial public offering (IPO) on the Toronto Stock Exchange. LFI has been audited since its inception by a local firm, Small & Smaller LLP, operating out of an office in a Toronto suburb. LFI requires an audit in order to comply with bank imposed loan requirement for audited financial statements. The loan agreement also stipulates that LPI 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 Big4 LLP to take over the audit of LFI. You know Torn, before LFI he was an audit partner at your firm and he left the firm last year to join LFI. LFl'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 the Big4 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 a large international public accountancy firm like Big4 would add creditability to the financial statements for the upcoming IPO. Tom provided Susan with the six months ended December 3lst income statement and extracts of the December Slst balance sheet. Susan met with Tom at LFl's head office. She has sent you her notes from her meeting in Exhibit ll