This case has two parts: Part I focuses on controls in the control environment and monitoring components Part II focuses on controls in the control activities of a sales process

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 ingredientseggs, dates, and nuts. In 2019, the company relocated to a 20 000-square-foot unit in Mississauga. At that time the bars were hand-made and extremely labour-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 loans principal value is con- verted to 10 common shares. As a result of the new financ- ing, the company was able to produce 1.5 million bars and employ 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 com- pany began to sell nationally at the major grocery store chains (Loblaws, Sobeys, etc.) and also 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 RxBars 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 excitedthe proposed sales price by Culwens is $600 million. The proposed price was based on RxBars revenue growth. Shelly Park, the audit senior, has completed some preliminary work regarding evaluation of internal control and you, an audit manager at Fox LLP, are reviewing her working papers. You begin with her documentation of the internal control environment and monitoring controls at the organization.

WP 301 Client: RxBar Ltd. Period End: September 31, 2021. Objective: To document the following components of internal control: Control Environment and Monitoring Control Environment Management is competent and committed to a good control environment. Peter and Ralph believe that everyone should have an opportunity to participate in the companys success, and all employees have an opportunity to receive a bonus for finding new customers. Because the bonus has been so popular, in 2017, Peter and Ralph announced that the bonus would be increased. In order to be adaptive to change, Peter and Ralph believe in having a flat organizational structure. This type of structure provides everyone with the ability to pitch in. For instance, in peak production times, the accounting people will help out in the warehouse and process shipping documents. Monitoring Financial Reporting One of the accounting clerks prepares monthly income and cash flow statements and budget to actual analysis for Peter and Ralphs review. Because Fox LLP posts many adjustments at each audit, Susan explains that Peter and Ralph do not use the income statements or the budget analysis to monitor operations and focus on cash flow. Conclusion: Because the annual financial statement audit serves as a compensating control, management has effective monitoring over financial reporting. 1. Identify the control weaknesses in RxBars components of control documented by Shelly and explain the impli- cation of the weakness for RxBar (what can go wrong), and provide a recommendation to address that control weakness. 2. Do you agree with Shellys conclusions that manage- ment monitoring over financial reporting is effective? Why or why not? 3. Based upon the information you have been provided, assess overall financial statement risk.