You are the audit senior for the financial statement audit of Dragon Skateboards for the year ended October 31, 2020. Dragon, a private company formed in 2011, manufactures and sells components and accessories for skateboards. Dragon provides components to a variety of big name manufacturers all around the world. It is now December 2020. The following are highlights from the audit team meeting for the Dragon engagement:

1. Dragon's main competition consists of foreign manufacturing and a very successful multinational conglomerate that has excellent customer recognition, including a distribution network.

2. ATL's net income has fallen in recent years because it lost several large sales contracts. Dragon is expecting that its new production methods and designs will lead to a recovery. However, to date, Dragon has not secured any new significant sales contracts. The following table outlines Dragon's revenues and profitability for the last five years:

Year	Revenues	Net Income (Loss) Before Income Taxes
2020 (unaudited)	$ 12,000,000	$200,000
2019	24,000,000	2,200,000
2018	56,000,000	4,900,000
2017	68,000,000	5,400,000
2016	52,000,000	(800,000)

3. During 2020, Sara Baggins, the President of Dragon, authorized a change in credit policies. Previously, customers were granted credit based upon the credit ratings developed by Dragon's Credit Manager, which took into account the outstanding balance of the customer's account and an analysis of its financial condition. Due to the recent financial difficulties in the technology sector, Baggins decided that Dragon must use a more lenient credit policy to keep sales flowing. Accordingly, as a cost cutting measure, the Credit Manager was laid off in December 2019, and Baggins now evaluates each customer contract or purchase order individually to determine whether credit should be granted. As a result of this new policy, no customer orders were declined for poor credit since December 2019.

4. The collection of accounts receivable has slowed considerably. The summary aging of accounts receivable from Dragon's 600 customers for the current and prior year is shown below:

Date	Total	Current <30 Days	31-60 Days	61-90 Days	>90 Days
Sept 30, 2020	$1,805,509	$722,009	$270,000	$255,000	$558,500
Sept 30, 2019	$2,099,080	1,045,080	210,500	222,000	621,500

5. Dragon has commenced a lawsuit against major competitor for patent infringement and industrial espionage. Management has evidence that it believes will result in successful action and wishes to record the estimated gain on settlement of $4 million. Although no court date has been set, legal correspondence shows that the competitor intends "to fight this action to highest court in the land.

6. Earlier this calendar year, Dragon negotiated a $3.5 million term bank loan, which is secured by the company's assets. The loan agreement requires Dragon to undergo an annual work safety assessment of its production facilities. To date, Dragon has not conducted an assessment. As of September 2020, assets (rounded to the nearest thousand) consisted of:

Current
Accounts Receivable	$1,806,000
Inventory	1,650,000
Prepaid Expenses	45,000
Total Current Assets	$3,501,000
Long Term
Capital Assets	$2,120,000
Patents	835,000
Total Assets	$6,456,000

7. Each year, senior management receives a bonus of 5% of their salary if the actual net income exceeds the budgeted net income by more than 10%. Senior management expects to receive their bonus since the current unaudited numbers exceed the budgeted net income by about 15%.

Required:

A) Assess audit risk for the Dragon engagement. (4 marks)

B) Determine materiality for planning purposes (planning materiality). Be sure to use both quantitative and qualitative analysis. (10 marks)

C) Assess inherent and control risks for sales/accounts receivable. To facilitate your assessment, do some basic analytical review calculations. (10 marks)

D) Provide a conclusion about audit strategy that you will use for the sales and accounts receivable cycle, and state why you will use the audit strategy. (2 marks)

E) State two audit assertions that are at risk of material misstatement for the sales/accounts receivable cycle and explain why. Provide audit procedures for those assertions. (4 marks)