RIM Audit Planning Memo

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RIM

Audit Planning Memo


Cheuk Hei Cheng

20242415

Irvin
Hann Pinn
Choo

20243322

Kieng Iv 20233702

Sylvia Luong

20225279

Tara Mathanda
20224148

Sherina Hsuan Yang

20247975

Monday, July 1
1
th
, 2011

Page |
1



To: RIM Engagement Partner

From: CA

Re:

RIM
Audit Pl
anning Memo

Brief Overview of RIM

History and
Key
Information

Research in Motion (RIM) was founded in 1984 in Waterloo, Ontario.
1

Its founders were
then
university students Mike Lazaridis (current President and Co
-
CEO) and Douglas Fregin.
2

Since its incep
tion in 1984, the company’s
product
offerings have
expanded f
rom
the
designing,
manufacturing and marketing of wireless communication devices to
the provision of
e
-
mail,
phone, short message service, internet and
intra
-
net application solutions.
3

Please re
fer to
Appendix I for a brief
timeline of

RIM’s history.
The company’s headquarter
s

remains based in
Waterloo
; however, the company has
since expanded to operate in
Asia
, Europe, and other parts
of North America. Currently, RIM’s products are directed at b
oth businesses and consumers.

RIM has a
n extensive
managemen
t and corporate governance team (
See Appendix
I
I for
list of officer
s), l
ed by the two co
-
CEOs, Jim Balsillie and Mike Lazaridis. Jim Balsillie, a
graduate from Harvard’s School of Business

and a
Chartered Accountant
, is in charge of driving
corporate strategy, business development, marketing, sales and finance
.
4
,
5

Mike Lazaridis resides
over

product strategy, research and development, and manufacturing.
6

Brian Bidulka, a CA
formerly of Ernst & You
ng LLP, is the current CFO
in charge of overseeing financial repo
rting
and compliance activities
.
7

All of the executives are well qualified
in their respective fields.

T
he shareholders of RIM are represented by

nine

additional independent
directors

who
ar
e responsible for oversight and governance
.
8

In addition, RIM has an audit and risk
management committee that provides assistance to the board of directors with regards to legal
Page |
2



and fiduciary obligation in areas such as accounting auditing, financial repor
t
ing
, and internal
control
s
.
9

As well, a compensation, nomination and governance committee provides assistance to
the board of directors in areas such as compensation of senio
r management

and the
selection and
appointment of
new
directors
.
10

Recent
Operatio
ns


In the past year, RIM has continued in its efforts to stay ahead of the market with the
release of the newly designed Blackberry Torch and Blackberry Style, as well
as the new

Blackberry

OS 6.0. The company also released updates of existing but popular

Blackberry
phones.
11

RIM’s BlackBerry App World also underwent changes with the unveiling of a 2.0
version in June 2010
.
12

These product innovations appear to be in direct response to some of
their recently publicized shortcomings. Critics have stated that
competitors
,

such as Google’s
Android and Apple’s iPhone
,

“have gigabytes more memory, faster processors, slicker software
and better browsers.”
13

RIM’s App World has also been previously criticized for not being at par
with Apple’s App Store in terms of se
lection, pricing, and payment options.
14

These criticisms
may suggest that RIM is lagging in the marketplace. On the other hand,
The
Nielson

Company
, a
reputable research firm,

shows that just
fewer than

80% of American wireless subscribers have
yet to upgr
ade to a smart
phone in May 2010,
15

leaving much of the market untapped.

As well,
t
he NPD research group highlighted a major strength for Blackberry, stating that “e
-
mail is what
often drives people to adopt a data plan.”
16

RIM’s Blackberry continued to be th
e number
one

selling smartphone in Canada, United States, Latin America, and the United Kingdom as of the
most recent fiscal year end.
17

However, at the end of March 2011, RIM had a market share of
27.1% among U.S subscribers, down from the 42.1% just a yea
r before in February 2010.
18


One of the
most anticipated of RIM’s product introductions would be the Blackberry
Page |
3



Playbook tablet. The release of the tablet is extremely time sensitive, given the fact that Apple
has already launched its own tablet
, the iPad,

in January

2010 and has had it available for sale
worldwide since May 2010.
19

In fact, there have been rumours circulating that the iPad 2 will be
released sometime in March 2011.
20

Although RIM, released information on the Playbook in
September 2010, it is

not scheduled for sale until April 2011
.
21

Yet
,
Apple has taken the first to
market advantage in the tablet market, which puts RIM at a disadvantage. Some analysts have
argued
that
this
will

potentially impair RIM’s ability to capture a large share of this

market.
22

RIM has significantly expanded its foreign operations in the past year, and “international
markets accounted for approximately 54% of revenue in fiscal 2011 versus 37% a year ago.”
23

RIM attributes this adoption in foreign markets to their BlackBe
rry Messenger service
and

prepaid BlackBerry service plans.
24

Foreign markets could prove to be very lucrative for RIM, as
they tend not to offer subsidies on cell phones. As such, lower priced Blackberry

phones

might
be a more appealing option to consumers

than higher price smartphones such as Apple’s
iPhone.
25

One threat to foreign operations
has

been the government bans in India and the UAE
due to RIM’s refusal to relax its SMS security programming.
26

Although, RIM views these
obstacles as something that hi
ghlights one of their

security value propositions, they definitely
have

impeded its ability to serve these markets.
As well, despite
expansion, RIM appears to be
losing global market share, as it decreased to 16.1% for the calendar year 2010 from 19.9% in
the prior year. In fact, Apple actually surpassed RIM in this measure in Q4 2010.
27


Recent operations also included the acquisition of several companies including “QNX
Systems, The Astonishing Tribe, Viigo and Cellmania.”
28

Recent Financial
Performance

The
draft financials of RIM for the fiscal year 2011 provided by management, show
ed

an
Page |
4



overall growth in revenue of 33.13% from $14,953 million in fiscal 2010 to $19,907 million in
fiscal 2011. This figure is in line with analyst forecasts, which had estimates

as high as $20.2
billion and as low as $18.8 billion
.
29

Comparatively, 3 and 5 year sales growth percentage of
49.07% a
nd 57.32%, respectively, signal

that RIM’s trend of hyper growth is starting to slow.
However, RIM is still outperforming the
industry sa
les growt
h rate of 9.26
%
.
30

Despite
marginally slowing

sales figures
, RIM’s gross margin of 44.33% for fiscal 2011 has remained
constant when compared to the prior year gross margin of 44.03% and
the
5 year average of
44.95%.
31

Earnings per share

also grew 4
6.21% from $4.35 basic in fiscal in 2010 to $6.36 basic

in fiscal 2011. This figure also corresponds with analysts’ forecasts, who had estimated them to
be
as high as $7.03

and as low as $6.10.
32

In general, over the four quarters in fiscal 2011, RIM
has us
ually

met or slightly exceeded

analyst estimates. (See Appendix
III)


In terms of stock performance, although RIM started the year strong at $73.47,

it was
subject to a low of $45.69 on September 10, 2010.
However,
after issuing guidance above
analyst expe
ctations and releasing details of the Playbook,
RIM
closed the year at $61.64. (See
Appendix
IV
)

33
,
34
,
35
,
36

Strategic Objectives

RIM’s strategic objectives centre on its goal to maintain and grow market share in
existing geographic markets, while expanding i
n new foreign markets.
37

This
hinges on its ability
to be first to market and maintain the product leadership and innovation that it has become
known for through the BlackBerry wireless solution. As such, its primary objective is to
continually
improve
the
BlackBerry
line of products
,
and also look to
develop
alternative
wireless technologies.
38

To achieve this
, RIM invests heavily in its personnel and actively
pursues investments in companies with promising technologies, in order to attain the level of
Page |
5



intel
lectual
innovation
needed to compete in the marketplace.
39

This strategic objective of
technology development and
continuous
enhancement is geared t
oward both the global
enterprise and consumer markets
.
40

Critical Success Factors

Critical success factors giv
e a company competitive advantage over its competitors and
help differentiate its products or services.
One

important success factor is that RIM develops
products that meet consumers’ demands for specific features
,

while also ensuring

that
its
network’s

se
curity meets the
requirements
of
business users
.
Other factors include
marketability
of the BlackBerry brand,
support for multiple carriers,
strong
intellectual property rights,
a

flexible
network
architecture, support of a vibrant developer community,
and

manageability
.
41


Key Business Processes

A key business process of RIM would be its research and development. Research and
development is a crucial
part of RIM’s success, since its strategy of continuous innovation is
dependent on its ability to develop
be
tter products to compete with its competitors.


User Analysis

Shareholders and Analysts

As per a company publication on March 31, 2011, the shareholdings of RIM are widely
dispersed. The number of shares currently held by insiders of the company comprises

only 11%
of total shareholdings.
42

In contrast, institutional investors and mutual fund owners hold a total of
66% of all shares, and 73% of the company’s public float. To get a sense of exactly how
dispersed RIM’s shareholdings are, consider that the top
two institutional shareholders (FMR
LLC


16,528,418 shares and the Royal Bank of Canada


14,418,470) only hold 3.15% and
2.75% of all outstanding stock respectively. RIM’s perceived status as a growth company would
imply that they do not rely on dividend
s to attract shareholders. Accordingly, the Annual
Page |
6



Information Form for the year ended February 26, 2011 states that the company has only paid
dividends once since its inception in 1984.
43

Considering majority ownership is a highly unlikely
proposition for
each and every shareholder, the only remaining incentive for them to hold
company stock is to sell them sometime in the future at the highest possible value. Following
this, the shareholder’s interests in the financial statement
s

should be limited to measu
ring the
company’s ability to earn income off existing assets and reinvest
ing

them strategically in hopes
that the intrinsic value of the stock will increase. Therefore, shareholders and analysts would
want to focus on net income, which will eventually flo
w
to the retained earnings

of the company

and result in an

increase the overall share price
.

Competitors


RIM is the
s
ubject of intense scrutiny not only by shareholders, but
also
by competitors
who
monitor its practises to protect their own interests. T
his is merely a function of a high level
of competition in the technology industry, and according to the company, is in the normal course
of business.
44

The Annual Information Form notes dozens of companies who have ongoing legal
proceedings with RIM as at
the report date of March 29, 2011. Occasionally, RIM loses lawsuits
or chooses to settle with some of these competitors. For example, it has been reported that Kodak
has been favoured in a recent court judgement over a billion dollar patent infringement la
wsuit.
45

Another lawsuit with Motorola was settled within the 2011 fiscal year end, resulting in ongoing
royalty payments by RIM.
46

Competitors would most certainly focus on the company’s revenues
and retained earnings balances, which represent income unlawf
ully earned historically through
the use of patented technology.

Former owners of new subsidiaries


Part of RIM’s strategy involves the acquisition of smaller companies in order to take
advantage of new and innovative technology. The majority of these acq
uisitions are financed
Page |
7



entirely through the extensive internal cash reserves, but sometimes payment can be contingent
on future performance within the company. Currently, the company has approximately $5
million in payments which are “contingent on the ach
ievement of certain agreed upon
technology and working capital milestones and earnings targets.”
47

As expected, the
beneficiaries of these payments focus primarily on RIM’s earnings and working capital balances.
However, judging by the frequency of these ev
ents and the relatively small value of contingent
outflows, these users
form

a relatively small
number
in total
. Thus, they will not be weighed as
heavily in the judgment of materiality.

Government Organizations

Government

organizations are another main
user of RIM’s financial statements.
Currently, RIM has entered two project development agreements with Technology Partnership
Canada (TPC), who provide
s

funding and financial assistance to support RIM’s research
activities. The company has already fulfille
d its obligations with TPC
-
1; however, the second
agreement has not been paid back in full as of fiscal 2011. In order for RIM to receive the
$
23.3
million in funding

implicit in the agreement
, they
have
to fulfill prerequisite conditions
. These
include
ma
intain
ing

a minimum number of
Canadian employees and to
limit undisclosed
expenditures
through fiscal 2015.
They will
repay TPC in the form of royalties totalling 2.2% of
gross revenues. As of fiscal 2011; they have recorded $4.9 million in royalty repayme
nts.
Hence,
some of the financial items that TPC will be most concerned
with
relate to the sales and revenue
accounts. TPC relies on RIM’s gross product revenues for repayment and are able to charge
interest if the repayments are not made on time.
48


Board
of D
irectors

The board o
f directors (BoD) meet twice every fiscal quarter with RIM management and
the independent accounting firm (Ernst & Young) to discuss the financial statements and any
Page |
8



significant reporting and accounting issues.
49

T
ogether

they hold
less than 10% of the issued
common shares. The BoD is concerned about every aspect of the financial statements, but must
pay special attention to the company’s earnings and strategic direction. The
BoD

will assess the
company’s ability to generate income f
rom existing assets and management’s ability to
effectively carry out its
strategy
. In doing so, they will focus primarily on revenues, expenses and
ultimately net income.

Audit Committee

The Audit and Risk Management Committee’s main purpose is to suppor
t and
communicate with the Board of Directors matters regarding the “
accounting, auditing, financial
reporting, internal control, and legal compliance and risk management functions of the
Company

50
. Hence, they are concerned with all aspects of the financi
al statements as the audit
committee has a great responsibility in determining how well the company is complying with
regulatory standards. There will be no specific account
-
level focus for the audit committee, as
they are primarily concerned about the fin
ancial information being fairly stated and in
accordance with pre
-
determined accounting policies.

Management

The management at RIM are especially concerned about the earnings of the financial
statements as most of them participate in the stock
-
option comp
ensation plan.
For example, both
Jim Ballsillie and Mike Lazardis draw over 50% of their total earnings from compensation
plans.
51
,
52

As the value of their compensation increases relative to the share price, this puts the
main focus on net income, one of the

main drivers of stock price.


Conflict analysis


Overall, the objectives of each of the users of

RIM’s financial statements mostly
aligned
with one another. For example, the Board of Directors, management, shareholders and analysts,
Page |
9



would all favour incom
e increasing accounting policies as a natural function of their implicit
goal of maximizing shareholder benefit.


However, some level of conflict does exist between some of the groups of users of the
financial statements. Whereas the government organizatio
ns, competitors and former owners of
new subsidiaries would all prefer income increase policies to in turn maximize their return from
the company (primarily through various contingencies and royalties linked to revenues, net
income and retained earnings),
RIM’s management would likely prefer the opposite to occur in
order to minimize the amount of these payments. Yet, this conflict is mitigated al
most entirely by
the
overriding objective to management to

realize

gr
owth in their own stock options. Though it
would indeed benefit the organization to minimize payments out on account of these
contingencies, the act of choosing to minimize revenues and income would inherently damage
the reputation and future prospects of the company. RIM is continuously assessed o
n its ability to
meet analyst forecasts, and failure to do so will mean direct penalties to management in the form
of lower compensation as stock prices decrease.

Materiality

When assessing materiality, it is important to understand “
t
he nature of the ent
ity, where
the entity is in its life cycle and the industry and economic environment in which the entity
operates
.

53

In addition, materiality m
ust take into consideration “t
he entity's ownership structure
and the way it is financed” and “
t
he relative volat
ility of the ben
chmark”
.
54

As RIM is
a heavily
profit
-
oriented
technology
company,
this
will impact
the decision of
what forms the base of
materiality. In a profit
-
oriented company, materiality is usually based on
an income st
atement or balance sheet figure
s, subject to the current
life cycle of the company and
the needs of the users.

Page |
10



Although the earlier discussion on RIM’s financial growth shows it is slightly slowing
down, it appears the company is still in the growth stage as the grow
th figures are still

relatively
high when compared to the industry
.

The industry that RIM operates in is dominated by three major
companies
:

RIM,
Google
,
and Apple
. “The competitive environment for the wireless data communications industry is
rapidly evolving and, to data, no

technology has been exclusively or commercially adopted as the
industry standard for wirel
ess data communication.”
55

The intense competition between each of
the parties means that net income will inherently be a volatile figure as new products emerge in
th
e marketplace, detracting from its usefulness as a basis for materiality.

Additionally, t
he ownership structure is widely dispers
ed with the top shareholder
holding only 3.15%. Approximately ⅔ of the total shares are held either by mutual fund
managers or institutional
investors
. The company is financed purely by equity and also has
no
long term debt
.
56

RIM’s

lack of leverage indicat
e
s

that a net asset (equity) or earnings base
will
be

appropriate. R
ather than reclaiming their initial investment and fixed amount of investment
income such as debt holders, equity holders are more interested in maximizing their investment,
hence, earning
s is of major concern
.

Given the above analysis that RIM is in the growth stage, a profit
-
oriented organization,
in a rapidly changing industry and its current capital structure is purely equity, it is recommended
that an income statement base be used for
calculating materiality.

After assessing the needs of the users, it appears most are affected by changes in earnings
as
opposed to changes in revenue. The only specific user who cares about revenue

as

opposed to
earning
s

is the government whose royalties
are based on gross product revenue. Given the users’
focus on earnings and the sensitivity towards earnings,
operating income
shall be used as the
Page |
11



base of calculating m
ateriality.

As there do

not appear to be any significant changes in the user
base
, mate
riality should continue to be set
at 10% of income from operations, or approximately
$464 million
.
The
lack of
any
significant

changes in the user base
justifies the decision to keep
materiality consistent with the prior year.

Risk Assessment

Financial St
atement Level Risk

There are several financial statement level risks that have a pervasive impact on
several
accounts on the
financial statements.

Heavy Competition



RIM has experienced heavy

competition

from its
leading
competitors,
Apple and Google. Th
is
competiti
ve

pressure

result
s

in
a marginal increase in business risk
as
compared to the

previous year. As previously mentioned,
RIM is quickly losing market share
despite its
strong
revenue
growth.
This is reinforced by the fact that
Apple

recently surp
assed
RIM in terms of global market share for smart phones.

57


As a result,
management
may want
to
overstate its revenue and
understate expenses

in order to signal to
investors that it is still
a strong
competitor in a hotly
contested market.

Technology In
dustry



RIM competes in the technology industry which has inherently difficult
accounting implications.
58

For example, revenue recognition is difficult
to determine
because
RIM enters into long
-
term agreem
ents with multiple components (B
lackberry support s
ervice
and physical hardware) with many service providers globally. This imp
acts the occurrence and
cut
-
off of revenues

as it is difficult to determine when they should recognize its revenue
. As
well, the existence and valuation of intangibles is inherentl
y
hard
to measure as the technology
industry is always
evolving;
success in the market place is

never guaranteed. These impact

the
value of the current patents and other intangible and the future economic benefit of intangibles
recognized in the current ye
ar.

Page |
12



Management Stock Options and Analyst Expectations



As many of
RIM
’s

employees are
compensated through stock
options
;

their potential compensation depends on a higher stock
price.

RIM’s stock price is
also
highly sensitive
to
analyst expectations
, as t
hey are one of the
most well

covered stocks in the world
.
This provides management with the incentive to meet
analyst expectations and a potential bias to overstate revenue and understate expenses, as most of
expectations are around earning targets.

Furthe
rmore,
i
n 2009, RIM had to restate its 2004
-
2006
financial statements
due to a
n

options

backdating fraud perpetrated by management
.
59

This lack
of integrity from management may have
a
pervasive impact on the presentation of the financial
statements as manag
ement may

be

bias
ed

in how the

statements

are presented

in order to obtain
personal gains.

These factors increase the control risk
in

many of the accounts on the financial
s.

International Expansion



Over the years
,

the international market has
been a targ
et of
increasing focus for RIM.
International markets are inherently more unpredictable than
the North
American
markets that RIM

is accustomed to dealing with
. This uncertainty in
terms of
accounting implications may result in errors or inaccuracy

of accou
nts receivable valuation
s
,
litigation from foreign governments, and revenue recognition as there would be less established
controls in place to ensure the accuracy and occurrence of transactions.

Thus, RIM’s expanded
foreign operations increase the inheren
t and control risk of the above accounts.

Assertion Level Risks

Investments

and Goodwill



It may be difficult to determine the valuation of RIM’s
investments as they do acquire several start
-
ups in the course of their business. The amount of
goodwill that

results
from

the acquisition method of accounting is generated based on a fair
market value assessment of the assets of the acquired company. There may not be a large enough
market to assign a proper value to how much the business is worth especially as t
he company’s
Page |
13



feasibility may not yet be determined. Thus, this increases the inherent risk of the valuation of
assertion for goodwill
.


Internally Developed Intangible Assets



As indicated in

the

analysis of financial statement
level risks, intangible ass
ets are inherently difficult to account for in the rapidly developing
technology industry. Approximately $1 billion of new intangibles were either acquired or
developed

in 2011
. The inherent risk over the valuation for intangibles has increased over the
pr
ior year; especially as RIM’s explosive growth has slowed down

as this would make the future
economic

benefit lower than under the expectation of continued explosive growth
. As well,
intangibles recognized in the current period

need to be tested for existe
nce as the rapid pace of
the technology industry will make products and patents

obsolete quickly.

Revenue



Due to the inherent complexity of revenue contracts in this industry, occurrence and
accuracy need to be tested as it may be difficult to determine
the point and time when revenue
will meet all the revenue criteria. The high inherent risks for these assertions are compounded by
the higher distribution of revenues in foreign countries and the noted management integrity and
control issues noted in the d
iscussion of financial statement level risks.

Provision for Litigation



The technology industry is plagued with lawsuits over patent
infringements and RIM has faced lawsuits with many companies over the years
,

such as Kodak
and Motorola.
The high possibi
lity of litigation suits results in a high inherent risk for the
completeness of contingencies and related liabilities. Likewise, there lies a high inherent risk
related to the presentation of less probable or measurable contingencies or lawsuits.


Account
s Receivable/Allowance for Doubtful Accounts



RIM’s management has booked a
provision for doubtful accounts of $2 million for
2011
and this same amount
remained

the same
from

the

prior year; however, revenue and accounts receivable balance have increased
by 50%
Page |
14



and 30%, respectfully, over the prior year. As well, RIM’s revenues are more heavily based on
international markets, where credit issues may be more prevalent, leading to uncertainty over the
collectability of the accounts. When analyzing the accoun
ts receivable turnover ratio (201
1



6.08 and 20
10



6.35) and days sales outstanding (60 days and 57 days), it appears that the
receivable
s were of lesser quality in 2011 than in 2010
. This analysis is inconsistent with the
constant allowance for doubtful

accounts value,
and results in

a high inherent risk over the
completeness of this provision.

Inventory



As the industry advances rapidly, inventory obsolescence and valuation lead to high
inherent risk over the valuation of inventory. However, when anal
yzing the inventory turnover
(2011


17.9 and 2010
-

12), it indicates that liquidity and mobility of inventory has improved.
The margin percentage across both hardware and service lines of revenue remain unchanged
from the previous year.
The introduction
of the OS 6 software may be grounds for impairment of
units that feature an older operating system. Yet, t
he relative strength of the inventory ratios give
a measure of assurance that suggest that inventory is a
n

inherently low risk account
at the
assertio
n level
compared to the prior year.

General Risk Mitigating Factors

Internal Audit Function



RIM has an internal audit function which increases the quality of the
financial reporting function.
“A chief audit executive was hired in January 2008 to develop
the
Company’s internal audit function. Internal Audit continues to develop and refine its
methodology, approach, and practices, and, in June 2009, the chief audit executive reported to
the audit committee on the conduct of four initial internal audit revie
ws.”
60

Unqualified Audit Opinions



RIM has received unqualified audit opinions since it has gone
public; however, it did have to restate its 2004
-
2006 statements because of the backdating of the
Page |
15



stock options.

Risk of Material Misstatement

The declining
growth prospects
of RIM
, combined with evidence of mounting
competitive pressures have led to the increased inherent and control risks for many of the above
accounts. Of particular
significance
,
is the fact that the allowance for doubtful accounts remains
constant despite the presence of these risks

a
nd

large increase in accounts receivable
for

the
current year. Though the risk of material misstatement is lowered slightly by
a higher materiality
level

for the year
, this

increase in materiality will be
likew
ise
offset
by a larger
relative
asset base
resulting from

rapid development and acquisition

activities during the year
. Therefore, the
overall risk of material misstatement is high relative to the prior year.

Audit Procedures

The following discussion on
procedures aims to address the relevant, high
assertion/account level risks discussed within the risk assessment. Proper planning with regards
to staffing and timing should be performed in order to ensure that the following procedures can
be carried out, a
s they specifically work to lower the detection risk and overall audit risk of the
file.

T
hese procedures are not an exhaustive list of
those
to be
performed
during the audit
.


Revenue

Occurrence



Develop an expectation on RIM’s total revenue by obtaining R
IM’s monthly sales by product
line and location. Compare the analysis with prior years and seek explanation through
enq
uiry of management

to determine any significant variances. This will help explain the
large fluctuation in revenues.



Select a sample of s
ales recorded on the general ledger and vouch the sales invoices to the
underlying shipping documents to ensure the occurrence of the sales.

In addition, review
sales document to ensure products
where the risk and reward has not been transferred (i.e.
Page |
16



prod
ucts could be returnable if not sold) will not be recognized into revenue
.



“Revenue from software maintenance, unspecified upgrades and technical support contracts
is recognized over the period that such items are delivered or those services are provided.”
61

Vouch a

sample of
revenue postings on the general ledger to the original support contracts to
ensure that their terms
have been
occurred in

the period
.

Cutoff



Inspect the sales invoices near the year end and after year end to determine if the underlying
shipping documents provide evidence that the revenues are properly cutoff and not
overstated.

Accounts receivable

Existence



Issue positive confirmations to all accounts over materiality threshold and to a random
sample of the remaining accounts to ensure
the accounts receivable exist.



Vouch cash receipts after year end to determine whether payments subsequent to year end
have not been applied to the account receivable balance.

Ownership



Obtain management representation and review minutes and other loan ag
reements to
determine if any of the A/R was pledged

or factored
.

Valuation



Evaluate the adequacy of the allowance for doubtful account by comparing the current year
write off to the prior year write off to determine if the write offs are adequate.



Recalcu
late the allowance based on prior experience, industry data and economic conditions
to determine the reasonability of the allowance.



Examine the aged accounts receivable listing and compare to industry averages and historical
data to determine if the allow
ance is a reasonable.

Page |
17



Inventory

Existence



Conduct an inventory count

at year end at
a random
sample of warehouses not disclosed to
the client beforehand to ensure existence.



Issue confirmations or inspect inventories from public warehouses (other location

where the
product is still considered being owned by RIM) to determine the existence of the RIM
products.

Valuation



While observing inventory count, specifically look for damaged or scrapped inventory which
may be evidence of impairment/obsolescence.



Enqu
ire with management and technology experts on the potential obsolescence of inventory
older phone models in order to ensure that there are adequate write
-
downs.



Obtain a schedule of

inventory by age
. Consider a write
-
down of inventory kept in storage in
ex
cess of time indicated by historical trends.

Acquisitions and Goodwill

Valuation



Review the purchase and sale agreement for all of the acquisitions undertaken during the year
including those of The Astonishing Tribe, QNX Software Systems, Torch Mobile Inc
.,
Certicom Corp.
62
, in order to verify the purchase price, type of consideration, and terms of
the acquisition.

This will determine the valuation and existence of goodwill, as the
consideration paid for the acquisitions is used to determine the amount of g
oodwill.



Obtain independent appraisals of the assets purchased through acquisitions and compare
them to the appraisals obtained by management. This will ensure that the fair market value of
the assets determined by company as part of the acquisition method

used for the business
combinations is accurate.

This will also ensuring the correct allocation of the purchase price
Page |
18



values to individual assets acquired.



Review
management’s

process for evaluating whether previously recorded goodwill has
become impaired
and determine whether it is in line with accounting standards.

Internally developed intangible assets

Existence



Review the agreements for the new licenses relating to the 3G and 4G technologies, the
patent assignment and transfer agreement entered into w
ith Motorola, and other third party
agreements for the licensing of technology in order to ensure that these are expenses meet the
definition of an intangible asset and were rightly capitalized.

These two agreements are the
majority of the total additions
to the intangibles account during the year.

63



Enquire with management on the legal status of any patents, copyrights, and other acquired
technology from acquisitions in order to ensure the determination of “existence” of these
intangibles takes into consid
eration this fact as part of the “control” and “future economic
benefit” tests of an intangible asset.



Vouch a sample of legal costs capitalized to the intangibles account, as part of the defense of
those patents, in order to ensure the description on the

invoice relates to the patent lawsuit
and was correctly capitalized.

Valuation



Enquire with management on the usability of any technology acquired, licensed or internally
developed for the Blackberry 6 operating system, in order to determine whether carry
ing
value that was previously capitalized has fallen below the recoverable value, as the software
will not be used in any other Blackberry smart phones.
64

Lawsuits

Completeness



Obtain a positive confirmation from RIM’s outside legal counsel, as to the likel
ihood of all
Page |
19



lawsuits filed against the company being lost, and lawyers best estimate of the monetary loss
expected to ensure that all contingent liabilities are being either disclosed or recorded.




Review settlement agreement entered into between RIM and
Motorola, in order to ensure that
any liabilities for future cross licensing payments, as well as damages, have been accrued.
65


Existence



Obtain a positive confirmation from RIM’s outside legal counsel, as to the likelihood of all
lawsuits filed by the co
mpany being won, and lawyers best estimate of the monetary gain
expected to ensure that all contingent assets are being either disclosed or recorded.


Presentation



While reviewing the settlement agreement, determine the timing of the cash outflows to
ensur
e they have been classified, in terms of current and long term appropriately.

As well,
ensure the disclosure in the notes to the financials is appropriate in terms of its representation
the conditions of the settlement, as well as in terms of what is requi
red by the US GAAP.

Accrual for product warranties

Completeness



Determine the basis for management’s estimate of

warranty costs, and
review if assumptions
and inputs used are reasonable by comparing against historical trends and industry data.
Recalculate

t
he

warranty costs
to determine if the amount recorded is

reasonable.



Compare
of the actual warranty expense
s subsequent to year end
to
accrued amounts to
determine if the amount is reasonable.

Other liabilities

Completeness



Take a sample of suppliers’ in
voices and trace it to the general ledger.

Investments

Valuation



For the money market and other debt securities, verify the value of the investments through
bank statements for the investment account.

Page |
20





Identify the investments that have decreased in value

and follow RIM’s policy to determine if
a permanent write
-
down is required and have been recorded. In addition, determine whether
RIM’s policy is in accordance with US GAAP.



RIM depends on independent third party valuators to determine the fair value of
securities.
66

Examine the fair valuation of securities conducted by the independent third party valuators.
Determine if the valuators work can be relied on for the audit. RIM uses two primary vendors
so the valuators may not be fully independent. If it is d
etermined that the work does not
provide enough assurance for the audit then independent valuators should be hired
.

Overall Conclusion

A
stable user base justifies
the maintenance of a materiality base that
is derived as 10% of
net income from operations.
RIM, while still a profoundly successful company, has sta
rted to
exhibit signs of decreasing

growth over the
past fiscal year.
The mounting pressure for
management to increase earnings
and meet analyst expectations

has
increase
d the
inherent and
control ri
sks for
many
accounts at the assertion level.
Overall, the risk of material misstatement
has increased at RIM for fiscal year 2011. In order to keep audit risk at acceptable levels,
extensive procedures should be performed as
to

reduce the amount of detect
ion risk present in
the 2011 audit

of RIM’s financial statements.





Page |
21



Appendix
I


History (1984


present)
67
,
68

1984


Founded by university students Mike Lazaridis (current President and Co
-
CEO) and
Douglas Fregin (Current Vice President, Operations)

198
5 to 1996


Development of wireless technologies and introduction of readers, point
-
of
-
sale
terminal, wireless modems and two
-
way messaging pagers

1997


RIM becomes publicly trade on the Toronto Stock Exchange

1998


Introduction of Wireless handheld and
synchronization platform

1999


RIM becomes listed on the NASDAQ. The
introduction to the
current Blackberry
wireless email solution,
and Enterprise Server Software wa
s introduced.


2000 to 2010


Continue development of products, launch of different serie
s of Blackberry
handhelds and beginning to form partnership and alliance with other tech companies such as
Nortel, Qualcomm, and Open Text.

2011


Entered the tablet market by launching of Blackberry Playbook


* For a full comprehensive list of the histor
y, please visit the two sources provided

Appendix I
I



List of Officers in the Executive Team
69

Co
-
Chief Executive Officer

President and Co
-
Chief Executive Officer

Chief Operating Officer

Chief Information Officer

Chief Financial Officer

Chief Technology Of
ficer, Software

Chief Operating Officer, Global Manufacturing & Supply Chain

Chief Operating Officer, Product Engineering

Appendix III: Comparison of Analyst Estimates
v
s. Actual RIM
Performance
70




Estimate

Actual

Difference

Surprise %

Sales (in millio
ns)





Quarter Ending Feb
-
11

5,645.85

5,556.00

89.85

(1.59)%

Quarter Ending Nov
-
10

5,379.54

5,494.50

114.96

2.14%

Quarter Ending Aug
-
10

4,481.29

4,621.33

140.04

3.13%

Quarter Ending May
-
10

4,352.25

4,235.39

116.86

(2.68)%

Earnings Per Share





Quar
ter Ending Feb
-
11

1.76

1.78

0.02

1.38%

Quarter Ending Nov
-
10

1.65

1.74

0.09

5.58%

Quarter Ending Aug
-
10

1.36

1.46

0.10

7.72%

Quarter Ending May
-
10

1.34

1.38

0.04

2.81%


Page |
22



Appendix IV
: RIM(TSX) Stock Price Over Fiscal Year 2011
71






1

"Fast Facts." Research in Motion. Web. 11 July 2011. <
http://www.rim.com/company/index.shtml
>.

2

"RIM's History."
Blackberry.com
. Research in Motion. Web. 11 July 2011.
<
http://www.blackberry.com/select/get_the_facts/pdfs/
rim/rim_history.pdf
>.

3

"Profile: Research in Motion Ltd." Reuters. Web. 11 July 2011.
<
http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=RIMM.O
>.

4

RIM's Executive Team." Research in Motion. Web. 11 July 2011.
<
http://www.rim.com/newsroom
/mediaexecutive/
>.

5

Ibid

6

Ibid

7

Ibid

8

"RIM's Board of Directors." Research in Motion. Web. 11 July 2011.
<
http://www.rim.com/investors/pdf/Board_of_Directors_Bios_05
-
2010.pdf
>.

9

"Charter of the Audit and Risk Management Committee of the Board of Direc
tors of Research in Motion Limited."
Research in Motion. Web. 11 July 2011.
<
http://www.rim.com/investors/pdf/Audit_Risk_Management_Committee_Charter_2011.pdf
>.

10

"Charter of the Compensation, Nomination and Governance Committee of the Board of Directors o
f Research in
Motion Limited." Research in Motion. Web. 11 July 2011.
<
http://www.rim.com/investors/pdf/Nomination_Governance_Committee_Charter.pdf
>.

11

"2011 RIM Annual Report." Research in Motion. Web. 8 July 2011.
<http://www.rim.com/investors/documents/
pdf/annual/2010rim_ar.pdf>. Page
2
.

12
Sacco, Al. "BlackBerry App World 2.0 Unveiled: Images, Details."

CIO.com
. 16 June 2010. Web. 01 July 2011.
<http://www.cio.com/article/596994/BlackBerry_App_World_2.0_Unveiled_Images_Details?page=2>.

13

"RIM's Strategy t
o Stay on Top in Smartphones | Signal Strength
-

CNET News."
Technology News
-

CNET News
.
12 May 2010. Web. 08 July 2011. <http://news.cnet.com/8301
-
30686_3
-
20004753
-
266.html>.

14
Sacco, Al. "BlackBerry App World: Nine Must
-
Do Fixes for RIM's App Store."

CIO.
com
. 01 July 2009. Web. 08
July 2011.
<http://www.cio.com/article/496434/BlackBerry_App_World_Nine_Must_Do_Fixes_for_RIM_s_App_Store?page
=3>.

15

"RIM's Strategy to Stay on Top in Smartphones | Signal Strength
-

CNET News."
Technology News
-

CNET News
.
12 May

2010. Web. 08 July 2011. <http://news.cnet.com/8301
-
30686_3
-
20004753
-
266.html>.

16

Ibid

Page |
23








17

Ibid

18

"RIM’s Market Share Plummets as Users Opt for Android over BlackBerry."

Financial Post
. 6 May 2011. Web.
08 July 2011. <http://business.financialpost.com/2011/
05/06/rims
-
share
-
plummets
-
as
-
users
-
opt
-
for
-
android
-
over
-
blackberry/>.

19

"Apple Launches IPad."

Apple
. 27 Jan. 2010. Web. 08 July 2011.
<http://www.apple.com/pr/library/2010/01/27ipad.html>.

20

Yin, Sara. "Top 10 Rumors About IPad 2."

PC Magazine
. 29 Dec. 20
10. Web. 08 July 2011.
<http://www.pcmag.com/article2/0,2817,2374846,00.asp>.

21

"2011 RIM Annual Report." Research in Motion. Web. 8 July 2011.
<http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf>.

Page 9.

22

Miller, Hugo. "RIM Tablet Expectat
ions May Be Too Optimistic, Analyst Says."
Businessweek
. 30 Nov. 2010.
Web. 08 July 2011. <http://www.businessweek.com/news/2010
-
11
-
30/rim
-
tablet
-
expectations
-
may
-
be
-
too
-
optimistic
-
analyst
-
says.html>.

23

"2011 RIM Annual Report." Research in Motion. Web. 8 J
uly 2011.
<http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf>. Page
2.

24

Ibid

25

"Can International Markets Compensate for RIM's North American Market Share Losses?"
NASDAQ Community
Home
. 12 Jan. 2011. Web. 08 July 2011. <http://community.nas
daq.com/News/2011
-
01/can
-
international
-
markets
-
compensate
-
for
-
rims
-
north
-
american
-
market
-
share
-
losses.aspx?storyid=52879>.

26

Gokhale, Ketaki, and Santosh Kumar. "RIM Averts BlackBerry Ban in India With 60
-
Day Security
Test."

Bloomberg
-

Business & Financia
l News, Breaking News Headlines
. 30 Aug. 2010. Web. 08 July 2011.
<http://www.bloomberg.com/news/2010
-
08
-
30/rim
-
averts
-
india
-
blackberry
-
ban
-
as
-
government
-
tests
-
security
-
modification.html>.

27

Whitney, Lance. "Apple, Android Surge in 2010; Nokia, RIM Slip |
Apple."

CNET News
. 7 Feb. 2011. Web. 08
July 2011. <http://news.cnet.com/8301
-
13579_3
-
20030831
-
37.html>.

28

"2011 RIM Annual Report." Research in Motion. Web. 8 July 2011.
<http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf>. Page
2.

29

"Resear
ch In Motion Ltd (RIM.TO) Analysts."

Reuters.com
. Web. 08 July 2011.
<http://www.reuters.com/finance/stocks/analyst?symbol=RIM.TO>.

30

“Research In Motion Ltd (RIM.TO) Financials.” Reuter.com. Web. 08 July 2011.

<
http://www.reuters.com/finance/stocks/financ
ialHighlights?symbol=RIM.TO>


31

"Research In Motion Ltd (RIM.TO) Analysts."

Reuters.com
. Web. 08 July 2011.
<http://www.reuters.com/finance/stocks/analyst?symbol=RIM.TO>.

32

Ibid

33

"Research In Motion Limited (USA): NASDAQ:RIMM Quotes & News
-

Google Financ
e."
Google
. Web. 08 July
2011. <http://www.google.ca/finance?q=rimm>.

34

Miller, Hugo. "RIM Gains After Sales Forecast Tops Analyst Estimates."

Businessweek
-

Business News, Stock
Market & Financial Advice
. 17 Sept. 2010. Web. 08 July 2011. <http://www.busin
essweek.com/news/2010
-
09
-
17/rim
-
gains
-
after
-
sales
-
forecast
-
tops
-
analyst
-
estimates.html>.

35

Miller, Hugo. "RIM Climbs as Analysts Forecast Growing Demand for PlayBook."
Bloomberg
-

Business &
Financial News, Breaking News Headlines
. 30 Nov. 2010. Web. 08 Jul
y 2011.
<http://www.bloomberg.com/news/2010
-
11
-
30/rim
-
climbs
-
as
-
analysts
-
forecast
-
growing
-
demand
-
for
-
playbook.html>.

36

"Research In Motion Limited (USA): NASDAQ:RIMM Quotes & News
-

Google Finance."
Google
. Web. 08 July
2011. <http://www.google.ca/finance?q
=rimm>.

37

"Annual Information Form."

Research In Motion Limited
. 26 Feb. 2011. Web. 9 July 2011.
<http://www.rim.com/investors/documents/pdf/AIF/AIF_Fiscal_2011.pdf>. Page
15
.

38

Ibid

39

"Annual Information Form."

Research In Motion Limited
. 26 Feb. 2011. We
b. 9 July 2011.
<http://www.rim.com/investors/documents/pdf/AIF/AIF_Fiscal_2011.pdf>. Page
16.

40

"Annual Information Form."

Research In Motion Limited
. 26 Feb. 2011. Web. 9 July 2011.
<http://www.rim.com/investors/documents/pdf/AIF/AIF_Fiscal_2011.pdf>. Pa
ge
15.

Page |
24








41

"Annual Information Form."

Research In Motion Limited
. 26 Feb. 2011. Web. 9 July 2011.
<http://www.rim.com/investors/documents/pdf/AIF/AIF_Fiscal_2011.pdf>.

42

"RI
M Major Holders | Research In Motion Limited Stock."

Yahoo! Finance
. Web. 08 July 20
11.
<http://finance.yahoo.com/q/mh?s=RIMM>.

43

"Annual Information Form."

Research In Motion Limited
. 26 Feb. 2011. Web. 9 July 2011.

44

Ibid

45

Stothard,

Michael
.

Kodak

shares
jump

after positive development
in

patent dispu
te


Financial Times
. London
(UK):
Mar 29, 2011
. pg. 24

46

"2011 RIM Annual Report." Research in Motion. Web. 8 July 2011.
<http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf>.

47

Ibid

48

"TECHNOLOGY PARTNERSHIPS CANADA."

Industrial Technologies Office
. 1 Ap
r. 2001. Web. 8 July 2011.
<http://ito.ic.gc.ca/eic/site/ito
-
oti.nsf/eng/h_00186.html>.

49

"2011 RIM Annual Report." Resear
ch in Motion. Web. 8 July 2011.

<
http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf
>
. P
age 59

50

"Annual Information Form
."

Research In Motion Limited
. 26 Feb. 2011. Web. 9 July 2011.
<http://www.rim.com/investors/documents/pdf/AIF/AIF_Fiscal_2011.pdf>.
P
age 70

51

"James Balsillie Profile."

Corporate Executives & Directors Search Directory
. Web. 08 July 2011.
<http://people.f
orbes.com/profile/james
-
balsillie/26031>.

52

"Michael Lazaridis Profile."

Corporate Executives & Directors Search Directory
. Web. 08 July 2011.
<http://people.forbes.com/profile/michael
-
lazaridis/68045>

53

CAS 320, CICA Handbook

54

Ibid

55

"Annual Information
Form."

Research In Motion Limited
. 26 Feb. 2011. Web. 9 July 2011.
<http://www.rim.com/investors/documents/pdf/AIF/AIF_Fiscal_2011.pdf>. Page

24
.

56

"2011 RIM Annual Report." Research in Motion. Web. 8 July 2011.
<http://www.rim.com/investors/documents/pdf/
annual/2010rim_ar.pdf>. Page
57.

57

Whitney, Lance. "Apple, Android Surge in 2010; Nokia, RIM Slip | Apple."

CNET News
. 7 Feb. 2011. Web. 08
July 2011. <http://news.cnet.com/8301
-
13579_3
-
20030831
-
37.html>.

58

"Accounting in the Technology Industry." Deloitte
, 24 Jan. 2010. Web. 8 July 2011.
<http://www.iasplus.com/uk/1010uktechindustry.pdf>.

59

Rooney, Ben. "RIM Settles Option Backdating Case."

CNNMoney
. 17 Feb. 2009. Web. 08 July 2011.
<http://money.cnn.com/2009/02/17/technology/RIM_backdating/index.htm>.

60

"
Governance Review of Research In Motion Limited." Protiviti, 30 June 2009. Web. 8 July 2011.
<http://www.osc.gov.on.ca/documents/en/Proceedings
-
OTH/gov_rev_20090630_rim.pdf>.

61

"2011 RIM Annual Report." Research in Motion. Web. 8 July 2011.
<http://www.rim
.com/investors/documents/pdf/annual/2010rim_ar.pdf>. Page
24.

62

"2011 RIM Annual Report." Research in Motion. Web. 8 July 2011.
<http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf>. Page
6
4
. N
ote 7
.

63

"2011 RIM Annual Report." Research in Mot
ion. Web. 8 July 2011.
<http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf>. Page
64. Note 6.

64

Savov, Vlad. "RIM Announces BlackBerry 7 OS with Better Browser and BlackBerry Balance, but No Legacy
Support."

Engadget
. 2 May 2011. Web. 08 July

2011. <http://www.engadget.com/2011/05/02/rim
-
announces
-
blackberry
-
os
-
7/>.

65

Akkad, Omar El. "RIM, Motorola Resolve Patent Case."

The Globe and Mail
. 11 June 2010. Web. 08 July 2011.
<http://www.theglobeandmail.com/report
-
on
-
business/rim
-
motorola
-
resolve
-
patent
-
case/article1600440/>.

66

"2011 RIM Annual Report." Research in Motion. Web. 8 July 2011.
<http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf>. Page
28.

67

"RIM's History."
Blackberry.com
. Research in Motion. Web. 11 July 2011.
<
http://w
ww.blackberry.com/select/get_the_facts/pdfs/rim/rim_history.pdf
>.

68

"Blackberry Playbook Launch."
BlackBerry
-

Press Releases
. Research in Motion. Web. 11 July 2011.
<
http://press.rim.com/
>.

Page |
25








69

"RIM's Executive Team." Research in Motion. Web. 11 July 2011.
<
http://www.rim.com/newsroom/mediaexecutive/
>.

70

"Research In Motion Ltd (RIM.TO) Analysts."

Reuters.com
. Web. 08 July 2011.
<http://www.reuters.com/finance/stocks/analyst?symbol=RIM.TO>.

71

"Research In Motion Limited (USA): NASDAQ:RIMM Quotes & News
-

Goo
gle Finance."
Google
. Web. 08 July
2011. <http://www.google.ca/finance?q=rimm>.




Works Cited

"2011 RIM Annual Report." Research in Motion. Web. 8 July 2011.
<http://www.rim.com/investors/documents/pdf/annual/2010rim_ar.pdf>.

"Accounting in the Technolog
y Industry." Deloitte, 24 Jan. 2010. Web. 8 July 2011.
<http://www.iasplus.com/uk/1010uktechindustry.pdf>.

Akkad, Omar El. "RIM, Motorola Resolve Patent Case."
The Globe and Mail
. 11 June 2010.
Web. 08 July 2011. <http://www.theglobeandmail.com/report
-
on
-
business/rim
-
motorola
-
resolve
-
patent
-
case/article1600440/>.

"Annual Information Form."
Research In Motion Limited
. 26 Feb. 2011. Web. 9 July 2011.
<http://www.rim.com/investors/documents/pdf/AIF/AIF_Fiscal_2011.pdf>.

"Apple Launches IPad."
Apple
. 27 Jan.

2010. Web. 08 July 2011.
<http://www.apple.com/pr/library/2010/01/27ipad.html>.

Blackberry Playbook Launch."
BlackBerry
-

Press Releases
. Research in Motion. Web. 11 July
2011. <
http://press.rim.com/
>.

"Can International Markets Compensate for RIM's Nort
h American Market Share Losses?"
NASDAQ Community Home
. 12 Jan. 2011. Web. 08 July 2011.
<http://community.nasdaq.com/News/2011
-
01/can
-
international
-
markets
-
compensate
-
for
-
rims
-
north
-
american
-
market
-
share
-
losses.aspx?storyid=52879>.

Page |
26








CAS 320, CICA Handbook

"Fast Facts." Research in Motion. Web. 11 July 2011.
<
http://www.rim.com/company/index.shtml
>.

Gokhale, Ketaki, and Santosh Kumar. "RIM Averts BlackBerry Ban in India With 60
-
Day
Security Test."
Bloomberg
-

Business & Financial News, Breaking News Headlin
es
. 30
Aug. 2010. Web. 08 July 2011. <http://www.bloomberg.com/news/2010
-
08
-
30/rim
-
averts
-
india
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