M8-34 (LOs 3, 4, 8) RxBar Ltd.-Understanding Controls and Identifying RMM - Part I INTRODUCTION This case has two parts: Part I focuses on controls in the control environment and monitoring components (Chapter 8) Part II focuses on controls in the control activities of a sales process (Chapter 9) BACKGROUND RxBar Ltd. is a niche protein bar maker. The company was founded in 2017 in a basement by two childhood friends, Peter Ever and Ralph Franklin, who had an idea to create protein bars that were made of simple ingredients without sugar or additives. Their protein bars were unique in that they only contained three different ingredients - eggs, dates, and nuts. In 2019, the company relocated to a 20000 -square-foot unit in Mississauga. At that time, the bars were hand-made and extremely labor-intensive. The company secured funding from investors to finance the automation of the manufacturing process and to hire employees. The loan had a conversion feature that could be triggered by the investors if the current ratio fell below 1.2 . If the conversion feature is triggered, every $100 of the loan's principal value is converted to 10 common shares. Due to the new financing, the company produced 1.5 million bars and employed 40 people in 2019. A turning point came in early 2020 , when the company redesigned its labels. The new labels focused on the short, real food ingredient list and as the two owners put it had a "no B.S." mantra. The redesign of the label really changed the business, and for the year ended September 30,2021 , the company sold 12 million bars, creating $100 million in revenue. RxBar initially sold the bars to exercise gyms in the Greater Toronto Area, and it also established an online presence where customers could purchase bars online with Canada Post delivery. In 2019, the company began to sell nationally at the major grocery store chains (Loblaws, Sobeys, etc.) and penetrated the U.S. market with sales to major grocery retailers (Whole Foods and Target). Peter and Ralph were recently approached by the multinational cereal company Culwens, who expressed interest in purchasing RxBar. The most striking element for Culwens was RxBar's outstanding revenue growth. Culwens has asked for audited financial statements to be provided to them by October 31 to assist them in the valuation of RxBar. Peter and Ralph see this opportunity to cash in on a major windfall, they are very excited - the proposed sales price by Culwens is $600 million. The proposed price was based on RxBar's revenue growth. Shelly Park, the audit senior, has completed some preliminary work regarding evaluation of