Problem 1: (Accepting the engagement)
Sunny Energy applications Co. sells solar-powered swimming pool heaters. Sunny contracts 100 percent 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 "unrecovered development cost." 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% 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. Float is being sued by the SEC for missing funds raised by Canadian Brass in 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 reporting 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 financially stronger than Sunny Energy. The company has not been granted any patents that would serve to protect it from competitions.
REQUIRED
a) What potential risk 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?
Problem 2: (Communication with predecessor/engagement letter)
The audit committee of the board of director of Unicorn Corp. asked Tisk & Field, CPAs, to audit Unicorn's Financial statements for the year ended December 31, 20X3. Tisk & Field explained the need to make an inquiry of the predecessor auditor and requested permission to do so. Unicorn's management agreed an authorized the predecessor auditor to respond fully to Tisk & Field's inquiries.
After a satisfactory communication with the predecessor auditor, Tisk & Field drafted an engagement letter that was mailed to the audit committee of the board of directors of Unicorn Corp. The engagement letter clearly set forth arrangements concerning the involvement of the predecessor auditor and other matters.
REQUIRED
a) What information should Tisk & Field have obtained during their inquiry of the predecessor auditor prior to acceptance of the engagement?
b) Describe what other matters Tisk & Field would generally have included in the engagement letter.