For each of the following independent situations, assume that any amounts would be material.

(I) Indicate the TYPE of appropriate audit report; A. unqualified,

B. qualified or adverse, C. qualified or disclaimer,

D. Disclaimer, E. Qualified only, or F. Other.

INDICATE the situation involved, i.e. Accounting situation,

and DISCUSS the situation.

(II) State whether an explanatory paragraph would be included, and

if so, what would be included in the explanatory paragraph.

1. Gelato Bros., Inc. leases its manufacturing facility from a

partnership controlled by the chief executive officer and major

shareholder of Gelato. Your review of the lease indicates that

the rental terms are in excess of similar buildings in the area.

The company refuses to disclose this related-party transaction

in the footnotes.

Type ____ Include Explanatory paragraph? _____

Discussion If Yes, Discuss YES or NO

2. The company uses lower of cost or market, rather than Historic

Cost to value inventory. It is felt this is more recent

information

Type ____ Include Explanatory paragraph? _____

Discussion If Yes, Discuss YES or NO

3. The company changes from Average Cost to First-in, first-out for

inventory valuation. The auditor agrees with the reason for the

change.

Type ____ Include Explanatory paragraph? _____

Discussion If Yes, Discuss YES or NO

4. The auditors were hired after year-end and were not able to

observe the taking of the companys physical inventory.

Inventory is based on a periodic inventory system; no detailed

perpetual inventory records are available.

Type ____ Include Explanatory paragraph? __

Discussion If Yes, Discuss YES or NO

5. One of the members of the audit team has a significant

financial interest in the company being audited.

Type ____ Include Explanatory paragraph? _____

Discussion If Yes, Discuss YES or NO