Chapter 7, Problem 37DQP

a.

To determine

Determine the expected value from the given information.

Explanation of Solution

Audit Evidence: The piece of evidence provided by the audit team to prove their opinion with respect to the audit is known as audit evidence. It includes accounting information related to the evidence and their source.

Determine the expected value.

Account	Expected value
Executive salaries	$\begin{array}{l}=\left(\begin{array}{l}\text{Sales of adjusted balance}\\ \times \text{103\%}\end{array}\right)\\ =\$546,940\times 103\%\\ =\$563,348\end{array}$
Factory hourly payroll	Increase due to 3% pay rate increase: $\begin{array}{l}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Factory hourly payroll in }\\ \text{audit balance}\end{array}\right)\\ \times \text{Increase in pay rate }\end{array}\right)\\ =\left(\$10,038,877\times 3\%\right)\\ =\$301,166\end{array}$ Increase due to 8% increased production: $\begin{array}{l}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Factory hourly payroll in }\\ \text{audit balance}\end{array}\right)\\ +\text{Increase due to pay rate }\end{array}\right)\times 108\%\\ =\left(\$10,038,877+\$301,166\right)\times 108\%\\ =\$10,340,043\times 1085\\ =\$11,167,246\end{array}$
Factory supervisors’ salaries	$\begin{array}{l}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Factory supervisors' salaries}\\ \text{in audited balance}\end{array}\right)\\ \times \text{103\%}\end{array}\right)\\ =\$785,825\times 103\%\\ =\$809,400\end{array}$
Office salaries	$\begin{array}{l}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Office salaries}\\ \text{in audited balance}\end{array}\right)\\ \times \text{103\%}\end{array}\right)\\ =\$1,990,296\times 103\%\\ =\$2,050,005\end{array}$
Sales commissions	Increase in commissions due to increased sales: $\begin{array}{l}=\left(\begin{array}{l}\text{Sales commission }\\ \times \text{Sales earned}\end{array}\right)\\ =\left(3\%\times \text{\$4,618,461}\right)\\ =\$230,923\end{array}$ $\begin{array}{l}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Sales commission }\\ \text{in audited balance}\end{array}\right)\\ +\text{Increase in commission}\end{array}\right)\\ =\$2,018,149+\text{\$230,923}\\ \text{=\$2,249,072}\end{array}$

Table (1)

b.

To determine

Compute the difference between the own expectation and client’s recorded amounts as percentage.

Explanation of Solution

Compute the difference between the expectation and client’s recorded amounts as percentage.

Account	DIFFERENCEIN EXPECTEDAND RECORDED
Executive salaries	$\begin{array}{l}=\frac{\left(\begin{array}{l}\left(\begin{array}{l}\text{Expected value of }\\ \text{executive salaries}\end{array}\right)\\ -\text{Executive salaries}\\ \text{in preliminary balance}\end{array}\right)}{\left(\begin{array}{l}\text{Expected value of }\\ \text{executive salaries}\end{array}\right)}\\ =\frac{\left(\$563,348-\$615,970\right)}{\$563,348}\\ =-9.34\%\end{array}$
Factory hourly payroll	$\begin{array}{l}=\frac{\left(\begin{array}{l}\left(\begin{array}{l}\text{Expected value of }\\ \text{factory hourly payroll}\end{array}\right)\\ -\text{Factory hourly payroll}\\ \text{in preliminary balance}\end{array}\right)}{\left(\begin{array}{l}\text{Expected value of }\\ \text{factory hourly payroll}\end{array}\right)}\\ =\frac{\left(\$11,167,246-\$11,476,319\right)}{\$11,167,246}\\ =-2.77\%\end{array}$
Factory supervisors’ salaries	$\begin{array}{l}=\frac{\left(\begin{array}{l}\left(\begin{array}{l}\text{Expected value of }\\ \text{factory supervisors'}\\ \text{salaries}\end{array}\right)\\ -\text{Factory supervisors'}\\ \text{salaries in preliminary }\\ \text{balance}\end{array}\right)}{\left(\begin{array}{l}\text{Expected value of }\\ \text{factory supervisors'}\\ \text{salaries}\end{array}\right)}\\ =\frac{\left(\$809,400-\$810,588\right)}{\$809,400}\\ =-0.15\%\end{array}$
Office salaries	$\begin{array}{l}=\frac{\left(\begin{array}{l}\left(\begin{array}{l}\text{Expected value of }\\ \text{office salaries}\end{array}\right)\\ -\text{Office salaries }\\ \text{in preliminary balance}\end{array}\right)}{\left(\begin{array}{l}\text{Expected value of }\\ \text{office salaries}\end{array}\right)}\\ =\frac{\left(\$2,050,005-\$2,055,302\right)}{\$2,050,005}\\ =-0.26\%\end{array}$
Sales commissions	$\begin{array}{l}=\frac{\left(\begin{array}{l}\left(\begin{array}{l}\text{Expected value of }\\ \text{Sales commission}\end{array}\right)\\ -\text{Sales commission }\\ \text{in preliminary balance}\end{array}\right)}{\left(\begin{array}{l}\text{Expected value of }\\ \text{Sales commission}\end{array}\right)}\\ =\frac{\left(\$2,249,072-\$2,367,962\right)}{\$2,249,072}\\ =-5.3\%\end{array}$

Table (2)