Sunny Energy Applications Co. Risk for audit engagement?
What are your thoughts on the following case?
Sunny Energy Applications Co. sells solar-powered swimming pool heaters. Sunny contracts 100 % of the work to other companies. As Sunny is a new company, its balance sheet has total assets of $78,000 including $24,000 of “stock subscriptions receivable.” The largest asset is $42,000 worth of “un-recovered development costs.” The equity side of the balance sheet is made up of $79,000 of “Common Stock Subscribed.”
The company is contemplating a public offering to raise $1 million. The shares to be sold to the public for $1 million will represent 40 percent of the then issued and outstanding stock. There are two officer-employees of the company, Mike Whale and Willie Float former officers of Canadian Brass Co. Flat is being sued by the SEC for misusing funds raised by Canadian Brass I a public offering. The funds were used as compensatory balances for loans to a Physics Inc. was controlled by Float and is the predecessor for Sunny Energy Applications.
Canadian Brass is being sued by the SEC for improper (exaggerated) income. Float was chief executive at the time. Many organizations are engaged in researching the feasibility of using solar energy. Most of the organizations are considerably larger and finance stronger than Sunny Energy. The company has not been granted and patents that would serve to protect it from competitors.
1) What potential risks may be present in this engagement?
2) What specific auditing and accounting problems appear to exist?
3) What additional information do you feel you need to know about the company?
4) Do you believe the engagement should be accepted or rejected? Why?