Joe Melton, CPA, has been contacted by the president of Mudalum Company (a company developing a process to turn mud into aluminum) and asked to perform the company's audit for the current year. During a meeting with the president, Joe learned that the Securities and Exchange Commission had a suit pending against the company, charging it with an illegal distribution of securities. The president explained that it was an honest mistake by Mudalum because neither its former attorneys nor its former auditors informed him of the SEC registration requirements. For this reason, the president decided to change auditors and has threatened the former auditors with a lawsuit. Because of the threatened litigation, the former auditors refuse to discuss their audit of Mudalum Company, with Joe.

If you were Joe, would you accept Mudalum Company as a client? Discuss your reasoning.

If you wished to make a further investigation of the situation, what would you investigate and what evidence would you gather?

May the former auditors properly refuse to discuss their audit of Mudalum Company with Joe?