Edgar question Edgar Aerospace (EAI), a privately-owned manufacturer of aircraft components, has expanded rapidly over the last five years. Its wholly-owned subsidiary, PL Components Inc. (PL), has just received a government contract to manufacture certain electrical components. PL has experienced significant growth over the last two years and accounts for approximately 45% of EAI's consolidated inventories and sales. PL is located in Mexico, where labour is considerably cheaper than in Canada. To encourage capital investment in Mexico, the Mexican government has provided material forgivable grants to finance operations. A condition of the grant is that a minimum of 200 Mexican residents must be employed throughout the year. If this condition is not met, then the grants become due and payable on demand. While EAI has had a history of steady profits, its preliminary financial statements for the current year show a loss of $200,000. The loss is attributable to a material amount of research and development costs incurred by EAI in the current year. Your review of the statements also indicates that the company has changed its accounting policy for recognizing revenue from the completed contract basis to the percentage-of-completion basis. Your discussions with the controller indicate that, in addition to the controller, there is one full-time clerk in the accounting department. Given the growth of the company, the controller confides to you that the accounting for payables and receivables is backlogged but that EAI intends to hire temporary staff in the upcoming month to help in processing the outstanding invoices. EAI has been audited by a sole practitioner over the past ten years. Due to the large growth experienced by EAI, the President of EAI is considering switching to Check and Balances, professional accountants for the upcoming year. You are an auditing student