Sunny Energy Applications Co. sells solar-powered swimming pool heaters. Sunny contracts 100 percent of the work to other companies. As a new company. Sunny's balance sheet has total assets of \(\$ 78,000\), including \(\$ 24,000\) of "stock subscriptions receivable." The largest asset is \(\$ 42,000\) worth of "unrecovered development costs." The equity side of the balance sheet is made up of \(\$ 78,000\) of "Common Stock Subscribed."

The company is contemplating a public offering to raise \(\$ 1\) million. The shares to be sold to the public for the \(\$ 1\) million will represent 40 percent of the then issued and outstanding stock. There are two officers-employees of the company, Mike Whale and Willie Float. Whale and Float are former officers of Canadian Brass Co. Float is being sued by the SEC for misusing funds raised by Canadian Brass in a public offering. The funds were used as compensatory balances for loans to a Physics Inc. Physics Inc. was controlled by Float and is the predecessor of Sunny Energy Applications.

Canadian Brass is being sued by the SEC for reporting improper (exaggerated) income. Float was chief executive at the time. There are many organizations engaged in researching the feasibility of using solar energy. Most of the organizations are considerably larger and financially stronger than Sunny Energy. The company has not been granted any patents which would serve to protect it from competitors.

Required:

a. What potential risks may be present in this engagement?

b. What specific auditing and accounting problems appear to exist?

c. What additional information do you feel you need to know about the company?

d. Do you believe the engagement should be accepted or rejected? Why?