Chapter 7, Problem 35DQP

You are auditing payroll for the Morehead Technologies company for the year ended October 31, 2016. Included next are amounts from the client’s trial balance, along with comparative audited information for the prior year.

You have obtained the following information to help you perform preliminary analytical procedures for the payroll account balances.

1. 1. There has been a significant increase in the demand for Morehead’s products. The increase in sales was due to both an increase in the average selling price of four percent and an increase in units sold that resulted from the increased demand and an increased marketing effort.
2. 2. Even though sales volume increased, there was no addition of executives, factory supervisors, or office personnel.
3. 3. All employees including executives, but excluding commission salespeople, received a three percent salary increase starting November 1, 2015. Commission salespeople receive their increased compensation through the increase in sales.
4. 4. The increased number of factory hourly employees was accomplished by recalling employees that had been laid off. They receive the same wage rate as existing employees. Morehead does not permit overtime.
5. 5. Commission salespeople receive a five percent commission on all sales on which a commission is given. Approximately 75 percent of sales earn sales commission. The other 25 percent are “call-ins,” for which no commission is given. Commissions are paid in the month following the month they are earned.

Required

1. a. Use the final balances for the prior year included above and the information in items 1 through 5 to develop an expected value for each account, except sales.
2. b. Calculate the difference between your expectation and the client’s recorded amount as a percentage using the formula (expected value – recorded amount)/expected value.