Red Monkey Cycles (RMC) is a classic story of manufacturing in North America. Begun in Akron, Ohio, at the turn of the twentieth century, they were a major bicycle manufacturer. Their bicycles were extremely robust for travel on the poor rods that then existed. They were so robust that one of the first attempts at motorizing a vehicle was to attach a gasoline engine to a red Monkey’s sturdy frame.

Motor vehicles turned out to be RMC’s downfall. Automobiles spurred the growth of better roads while urbanization concentrated buyers in big cities. Sturdy meant heavy, and RMC’s bikes fell out of favour in the nineteen-seventies as lightweight racer style bikes took over. The last RMC plant shut its doors in 1978, but the trademarks and name were still held by the descendants of RMC’s founder, Neville Jones.

In 2003, two engineering students who were roommates in Hamilton, Ontario watched an old movie together. They were fascinated by the Red Monkey bicycles shown in the movie. The bikes appeared to be very similar to modern mountain bikes, and as avid mountain-bikers themselves, the engineers spotted an opportunity. Further research led them to Flora Saunders, granddaughter of Neville Jones, who was happy to sell naming and brand rights to the students for $6,400,000. In 2005, Red Monkey bicycles were back on the road.

It is January, 2019, and you have been assigned as the senior audit manager for RMC (2004) Limited, now a public company and a long-time client. You are reviewing the following notes from the files created by the junior manager, Cassandra Hall, for the 2018 audit.
• The year-end date is December 31. The Board of Directors on January 15 and it is now Friday, January 11, the last day of the field work.
• RMC-2004 amortizes $200,000 per year from the trademarks acquired account.
• Sales have begun to plateau as growth in the mountain bike sector has slowed. RMC-2004 began sales to Asian clients in 2016 but found that their designs were reverse engineered and copied without permission. They have recently licensed a manufacturing subsidiary of Tata to produce and market RMC branded bicycles in Asia and Africa.
• A lawsuit was launched in 2016 against the Chinese factory that had copied RMC’s design. A preliminary ruling at the end of 2016 had blocked the Chinese factory from selling RMC-copies but so far these counterfeit bikes were still being sold in Asia.
• Inventory consists of raw materials and finished goods. RMC does a final run around December 20 each year and then closes until after Christmas. Production starts up again in January. Raw materials include aluminum, titanium and steel, as well as components such as tires and chains purchased as finished parts from other suppliers.
• Payroll is allocated to production based using process costing methods. Workers use their access card to record their hours and what station they are working at since pay rates vary by work station duties. In addition, RMC-2004 pays workers generous annual bonuses based on meeting production goals. These bonuses are recorded directly to administration expenses.
• There is a new payroll supervisor this year. She is busy working on the T-4 summary, so it was not available for the audit. Cassandra is concerned that this may lead to a scope limitation and is wondering how she may confirm the total payroll for audit purposes.
• While she waits for you to finish reviewing her work, Cassandra asks about what also needs to be finished before finalizing the field work. She also asks what to do about a customer who declared bankruptcy just this week on January 88h. Receivables of $4,853,000 are currently shown net of an allowance for doubtful accounts of 3%, which reflects historical experience. This customer was a major department store and owes RMC-2004 $402,136.

Required
a) Calculate materiality and justify your choice of calculation.
b) List four areas of above average inherent risk for this audit. Be specific as to the possible effects on the financial statements of the identified risk.
c) Make your notes for areas of continued concern or issues to be addressed with Cassandral.
d) Cassandra has initially recommended a clean opinion be issued. At this point are you comfortable with that recommendation?