Management of Consolidated Systems Company (CSC), a publicly held company, has asked three accounting firms, including yours, to bid on its annual audit. It has given permission to you and the predecessor firm, Andersen \& Price, to communicate. In your discussion with Randel Mudge, the partner with Andersen \& Price who supervised the CSC audit, you learn the following:

a. Mudge has no reason to question the integrity of the CSC management.

b. Mudge understands that the reason for the change in auditors was to obtain a lower audit fee. Andersen \& Price charged \(\$ 80,000\) for the prior-year audit, of which \(\$ 50,000\) has not yet been paid by CSC.

c. Mudge indicated that he had no disagreements with the management of CSC concerning accounting principles or auditing procedures. He did note that management had not informed the audit team of several canceled customer sales contracts for which revenue had been recorded. The auditors learned of the cancellations from their audit procedures, and management agreed to reduce revenue when questioned about the matter.

d. Mudge stated that the management was very conscious of a perceived need to increase earnings per share each year. To help accomplish this, they would record the very minimum required costs where subjective estimates were involved, such as the allowance for doubtful accounts and the allowance for warranty costs. Where alternative accounting principles existed, CSC always selected the principle that resulted in the highest current net income.

e. Mudge said that, because of significant losses in the last two years, he had seriously considered modifying the audit report last year to indicate substantial doubt as to CSC's ability to continue as a going concern. He discussed this matter with management, who were adamant that the company would continue as a going concern. Mudge agreed not to modify the report for last year, but he told management that a modified report might be necessary in the future.

Required:

a. Describe how each of the above items-

(a) through (e)-will affect your decision as to whether to accept CSC as an audit client.

b. Assuming that all other information that you obtain about CSC is satisfactory, explain why you will or will not accept CSC as an audit client.