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.

2. 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

3. 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