Question

Sunny Engineering Application Company sells solar power 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 $78000 including $24000 of "stock subscriptions receivable". The largest asset is $42000 worth of "unrecovered development costs." The equity side of the balance sheet is made up of $78000 of "Common stock sub-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% of the then-issued and outstanding stock. There is two officer- employees of the company, Mike Whale and Willie Float, 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 Physics Inc. The Physics Inc. was controlled by Float and its predecessor for Sunny Energy Applications.

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

Required:

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?