Background You are the auditor of a United States client. You are entering the preliminary testing phase of the audit work program which instructs you to perform substantive analytical procedures in order to perform substantive test work over some previously identified low risk financial statement accounts. The internal controls testing surrounding these accounts have not uncovered any deficiencies that would preclude a lower control risk being included in the auditor's risk assessment for the accounts. The financial statement accounts for which you are going to perform substantive analytical procedures meet all of the following criteria: 1. The transactions within the account are routine and the results are reasonably predictable, 2. The transactions within the account do not involve complex accounting standards or complex judgments by management, and 3. There are relationships among data that exist and continue in the absence of known conditions to the contrary. a Given the low levels of risk of material misstatement surrounding these accounts, it has been indicated to you that performing a substantive analytical procedure over the accounts will provide sufficient appropriate audit evidence in order to conclude on the account balances and respective assertions. For the purposes of this exercise, it is assumed that the data you have received that will be used to form your expectations of the account has been separately subjected to sufficient appropriate audit procedures and is therefore reliable for use in the substantive analytical procedure to be performed. Following the determination of your expectation for the account balance, you are to compare any difference between what you calculate and the client-recorded account balance. It has been determined that the level of precision to be used in this comparison is 5% of the expected balance that you calculate. If any difference between the expected balance and the recorded balance is within the 5% precision, then no further investigation will be necessary. If the difference is greater than the 5% precision level, then additional investigation will be necessary for an audit team in practice. For this exercise, you should consider the types of additional testing, but you will not be asked to actually perform it as it is beyond the scope of this activity. You will need to determine how the expected balance was calculated, what might have led to the difference, and what (if any) additional substantive testing might be necessary. Instruction Use the information provided in the exercise scenarios for each of the accounts to determine an expectation for the current year balance for each of the following scenarios. Compare the expected balance you calculate to the client-recorded balance. Conclude on whether the difference is within the 5% level of precision and think about the implications of your findings for the audit. You should consider each scenario as independent of the other scenarios. ABC Restaurant Company owned 133 stores in 2019. Each store employs 32 hourly employees on average and each employee worked approximately 8 hours of overtime. In 2019 , we performed tests of details over hourly payroll expense. The procedures performed in 2019 included selecting a statistical sample of 134 employees. For each employee we recalculate 5 weekly paychecks. To accomplish this, we obtained 5 different weekly timecards for each employee, recalculated payroll expense for each employee, and vouched that amount to the weekly payroll summary report. Then, each weekly payroll report was vouched to the general ledger. In 2020,we would like to determine a more efficient method to test payroll expense for hourly employees. Below are a summary of facts that were obtained from the 2019 audit workpapers and 2020 facts obtained from inquiries of the corporate controller and the payroll manager: 2020 Facts: > Opened 43 new stores all on October 1 > Each store employs 32 hourly workers > Overtime pays time and a half > Implemented management strategy that reduces overtime by 50% per employee compared to 2019 . > No raises for hourly employees > Assume 40 regular hours per employee, per week > Assume 52 weeks per year >2020 actual payroll expense $161,253,989 Background You are the auditor of a United States client. You are entering the preliminary testing phase of the audit work program which instructs you to perform substantive analytical procedures in order to perform substantive test work over some previously identified low risk financial statement accounts. The internal controls testing surrounding these accounts have not uncovered any deficiencies that would preclude a lower control risk being included in the auditor's risk assessment for the accounts. The financial statement accounts for which you are going to perform substantive analytical procedures meet all of the following criteria: 1. The transactions within the account are routine and the results are reasonably predictable, 2. The transactions within the account do not involve complex accounting standards or complex judgments by management, and 3. There are relationships among data that exist and continue in the absence of known conditions to the contrary. a Given the low levels of risk of material misstatement surrounding these accounts, it has been indicated to you that performing a substantive analytical procedure over the accounts will provide sufficient appropriate audit evidence in order to conclude on the account balances and respective assertions. For the purposes of this exercise, it is assumed that the data you have received that will be used to form your expectations of the account has been separately subjected to sufficient appropriate audit procedures and is therefore reliable for use in the substantive analytical procedure to be performed. Following the determination of your expectation for the account balance, you are to compare any difference between what you calculate and the client-recorded account balance. It has been determined that the level of precision to be used in this comparison is 5% of the expected balance that you calculate. If any difference between the expected balance and the recorded balance is within the 5% precision, then no further investigation will be necessary. If the difference is greater than the 5% precision level, then additional investigation will be necessary for an audit team in practice. For this exercise, you should consider the types of additional testing, but you will not be asked to actually perform it as it is beyond the scope of this activity. You will need to determine how the expected balance was calculated, what might have led to the difference, and what (if any) additional substantive testing might be necessary. Instruction Use the information provided in the exercise scenarios for each of the accounts to determine an expectation for the current year balance for each of the following scenarios. Compare the expected balance you calculate to the client-recorded balance. Conclude on whether the difference is within the 5% level of precision and think about the implications of your findings for the audit. You should consider each scenario as independent of the other scenarios. ABC Restaurant Company owned 133 stores in 2019. Each store employs 32 hourly employees on average and each employee worked approximately 8 hours of overtime. In 2019 , we performed tests of details over hourly payroll expense. The procedures performed in 2019 included selecting a statistical sample of 134 employees. For each employee we recalculate 5 weekly paychecks. To accomplish this, we obtained 5 different weekly timecards for each employee, recalculated payroll expense for each employee, and vouched that amount to the weekly payroll summary report. Then, each weekly payroll report was vouched to the general ledger. In 2020,we would like to determine a more efficient method to test payroll expense for hourly employees. Below are a summary of facts that were obtained from the 2019 audit workpapers and 2020 facts obtained from inquiries of the corporate controller and the payroll manager: 2020 Facts: > Opened 43 new stores all on October 1 > Each store employs 32 hourly workers > Overtime pays time and a half > Implemented management strategy that reduces overtime by 50% per employee compared to 2019 . > No raises for hourly employees > Assume 40 regular hours per employee, per week > Assume 52 weeks per year >2020 actual payroll expense $161,253,989