Reference no: EM133015156

Question - Keepfit, a limited liability company, operates twelve fitness centres around the country. The facilities at each centre are of a standard design and each centre contains a heated twenty-five metre swimming pool, a sauna, a gymnasium and a fitness lounge. Each centre also provides supervised childcare facilities. The day-today operations of each centre are the responsibility of a centre manager, who is required however to manage the centre in accordance with strict company policies. The centre manager is also responsible for preparing and submitting monthly accounting returns to head office. By law, each centre must have a licence to operate from the local government authority. Licences are granted for periods four years and are renewable at the end of each four-year period subject to satisfactory inspection reports from local authority inspectors. The average annual cost of a licence is Rs 39,500.

All customers of the centres are enrolled as 'members'. Members pay a Rs 1500 joining fee, plus 4,000 per month for 'peak' membership or Rs 2,000 per month for 'off-peak'membership. Fees are payable annually in advance. All fees are stated to be nonrefundable.

One of the fitness centres was closed between May and August in the financial year just ended, after a serious accident in the sauna involving chemicals. The centre was re-opened at the end of August, but head office management issued an instruction to all the fitness centre managers that the sauna facilities should be shut down until further notice.

Head office also issued the fitness centre managers with revised guidelines for the minimum levels of supervision for child care. This followed complaints from some dissatisfied members to the local government authority. Centre managers have been finding it difficult to provide the additional supervision specified in the revised guidelines and some of them have recommended strongly that the childcare facilities should be withdrawn.

Each centre operates early morning fitness sessions for members that run from 07.00 to 08.00 on four days each week. Every centre has had problems with late arrivals by staff, and many members have complained strongly that they have turned up for sessions that were shortened in length or did not run at all.

Training staff is costly and time-consuming but staff retention rates in the fitness centres are poor. In addition, staff turnover rates among the centre managers are also high. Most leavers complain of excessive directions imposed on them by head office and by company policy.

Three of the fitness centres are expected to have run at a loss for the year to 31 December (just ended) due to falling membership. Keepfit has invested heavily in building a hydrotherapy pool at one of these centres, with the aim of attracting members who are past retirement age. Completion of construction is behind schedule and costs to date are far in excess of the original budget. The pool is now expected to open within the next two months.

The company has experienced cash flow difficulties in the current year. As a consequence, head office management have decided to defer by at least one year the replacement of gym equipment in most of its centres.

Required -

(a) Identify and explain the business risks that should be assessed by the management of Keepfit in details.

(b) Identify how each of the business risks identified in (a) may be linked to a financial statement risk in details.