The audit firm you work for is auditing the 2025 financial statements for a national clothing retailer. As part of the audit, ADA is being used to assess risk associated with accrued wages. Regression-based ADA was developed, and the first four steps of the five-step ADA process have already been completed. The regression was developed using monthly data from 2022, 2023, and 2024. The regression model was validated from a statistics and a business logic point of view. 

The results from the regression analysis are summarized in the following visualization, where the blue dots outside the confidence interval represent November and December 2025. The independent variable is monthly number of employees. The dependent variable is payroll payable at the end of the month.

Required

a. Evaluate the results of the ADA. In your answer, be sure to state what assertions might be misstated. 

b. What tests would you perform next to determine whether any notable items identified have a valid business reason supporting them?

Transcribed Image Text:

$45,000 Monthly Payroll Payable ($000) 35,000 25,000 15,000 4,500 Monthly Payroll versus Number of Employees 5,000 5,500 6,000 6,500 Monthly Number of Employees ● Historical 7,000 Linear regression line ● Current year 95% prediction interval