Sunny energy application company Limited sells solar-powered swimming poll 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 “shares subscription 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 shares 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 percent of the then issued and outstanding shares. There are two officers-employees of the company Mike Whale and Willie Float. Whale and Float are former officers of Canadian Brass Company Limited. Float is being sued by the Ontario Security Commission (O.S.C.) for misusing fund raised by Canadian Brass in a public offering. The funds were used as compensatory balances for loan to physics Inc. Physics Inc was controlled by Float and is the predecessor of Sunny Energy Application.
Canadian Brass is being sued by the O.S.C. for reporting improper (exaggerated) income. Float was chief executive at the time. There were many organizations 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 granted any patents that would serve to protect it from competitors.
Sunny was engaged with a bank to open up a line of credit for $2 million. The bank requested sunny to have audited financial statements for last three years. The company was not audited before. Mr. Mike approached your audit firm to provide the service in order to satisfy the bank’s requirement.
You have created this audit firm last year with Ms. Susan Mike. You and Susan worked together for last three years for a medium sized audit firm. Susan and you were well experienced in real...