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Ethics and Professional Code of Conduct: Sunny Energy, Tisk & Field

Q7-16 (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.

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?

Q7-17 (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.

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.

Solution Preview

Sunny Energy:
a) What potential risk may be present in this engagement?

1. All work is performed by outsider contractors (so costs are vulnerable to others and access to vendors is critical to being able to generate sales
2. Contributions from owners is pending
3. Unrecovered development costs (largest asset) may be research and development costs that should not be capitalized
4. Basically, the entire balance sheet is potential asset and potential owners....extremely tentative and risky
5. Selling to the public so need an integrated audit (test controls and financial statements)
6. Officers are also owners (concentration of control and ability to override controls)
7. One officer/owner has prior integrity issues
8. Prior entity for both officers is under suspicion
9. Weak player in industry
10. Feasibility of product still not certain
11. No patents to protect design or give it a competitive advantage
12. New company so no track record

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

1. Accounting: capitalizing of assets legitimate?
2. Auditing: establishing the existence of owners
3. Auditing: ...

Solution Summary

Your tutorial is 607 words and includes 12 risks, 8 accounting and auditing issues, five inquiries of predecessor auditors and general content for the engagement letter. The discussion recommends the audit not be accepted and indicates why.