2. For each of the following independent situations, indicate the reason for and the type of audit report that you would issue. Assume that each item is significant.

a. Barfield Corporation, a wholly owned subsidiary of Sandy, Inc., is audited by another CPA firm. As the auditor of Sandy, Inc., you have assured yourself of the other CPA firm’s independence and professional reputation. However, you are unwilling to take complete responsibility for their audit work.

b. The management of Gough Corporation has decided to exclude the statement of cash flows from their financial statements because they believe that their bankers do not find the statement to be very useful.

c. You are auditing Diverse Carbon, a manufacturer of nerve gas for the military, for the year ended September 30, 2003. On September 1, 2003, one of their manufacturing plants caught fire, releasing nerve gas into the surrounding area. Two thousand people were killed and numerous others paralyzed. The company’s legal counsel indicates that the company is liable, but the company does not want to disclose this information in the financial statements.

d. During your audit of Cuccia Coal Company, the controller, Tracy Tricks, refuses to allow you to confirm accounts receivable because she is concerned about complaints from her customers. You are unable to satisfy yourself about accounts receivable by other audit procedures.

e. On January 31, 2004, Takeda Toy Manufacturing hired your firm to audit the company’s financial statements for the year 2003. You were unable to observe the client’s inventory on December 31, 2003. However, you were able to satisfy yourself about the inventory balance using other auditing procedures.

f. 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 rental terms for similar buildings in the area. The company refuses to disclose this relationship in the footnotes.

g. Mitchell Manufacturing Company has used the double-declining balance method to depreciate its machinery. During the current year, management switched to the straight-line method because they felt that it better represented the utilization of the assets. You concur with their decision. All information is adequately disclosed in the financial statements.