The auditors of STA, Inc., a calendar-year corporation, obtained the selected information for years 1 and 2 located in the exhibit below. Selected information Gross revenue Net income before taxes Salary expense Rent expense Utilities expense Depreciation expense Repairs and maintenance Interest expense Miscellaneous Tax expense Year 2 Year 1 $63,000,000 $60,000,000 11,650,000 11,000,000 12,500,000 8,000,000 1,920,000 1,200,000 155,000 705,000 675,000 375,000 300,000 523,000 338, 100 151,000 135,000 4,325, 150 3,850,000 120,000 Additionally, the auditors noted the following information: STA rents space in an office building: o Space in Building 1: 25,000 sq. ft. On January 1, year 2, the company added a second space: o Space in Building 2: 11,000 sq. ft. The balance of interest-bearing debt outstanding: o January 1, year 2: $4,830,000 o December 31, year 2: $10,262,000 The company issued additional debt on July 1, year 2 The auditors are performing analytical procedures relative to the expectations of expenses for year 2 and have established a materiality threshold of 5% of the auditor's expected year 2 amount. For each of the expenses in column A below, consider the additional notes in column B, and complete the following: 1. In "Auditor's expectation" column, enter the auditor's expectation of year 2 expense. (Round all amounts to the nearest dollar.) 2. In "Auditor's decision" column, select the auditor's decision as to whether further testing is needed. (Consider each account independently - an option may be used once, more than once, or not at all.) Expense Additional Notes Auditor's expectation Auditor's decision Salary Within threshold. No further testing needed Rent Average salaries increased 2% effective January 1, year 2. Average headcount was 200 in year 1 and 300 in year 2. Building 1: On July 1, year 2, the company entered into a new lease agreement. Monthly rent expense was 5% higher than that of the prior lease. Building 2: The company began renting another facility on January 1, year 2, for $45,000 a month, on a month-to-month basis. The utilities expense is based on square footage of each facility, the rate did not change from year 1 to year 2. Above acceptable amount Further testing needed. Utilities Below acceptable amount. Further testing needed. Within threshold. No further testing needed. Miscellaneous Calculation is based on 0.25% of gross revenue Repairs and maintenance Repairs and maintenance expense is based on the averag gross value of assets at cost: January 1, year 1: $2,700,000 January 1, year 2: $3,300,000 January 1, year 3: $3,700,000 Above acceptable amount. Further testing needed. Interest expense The average interest rate of STA's debt is 7% Within threshold. No further testing needed. The auditors of STA, Inc., a calendar-year corporation, obtained the selected information for years 1 and 2 located in the exhibit below. Selected information Gross revenue Net income before taxes Salary expense Rent expense Utilities expense Depreciation expense Repairs and maintenance Interest expense Miscellaneous Tax expense Year 2 Year 1 $63,000,000 $60,000,000 11,650,000 11,000,000 12,500,000 8,000,000 1,920,000 1,200,000 155,000 705,000 675,000 375,000 300,000 523,000 338, 100 151,000 135,000 4,325, 150 3,850,000 120,000 Additionally, the auditors noted the following information: STA rents space in an office building: o Space in Building 1: 25,000 sq. ft. On January 1, year 2, the company added a second space: o Space in Building 2: 11,000 sq. ft. The balance of interest-bearing debt outstanding: o January 1, year 2: $4,830,000 o December 31, year 2: $10,262,000 The company issued additional debt on July 1, year 2 The auditors are performing analytical procedures relative to the expectations of expenses for year 2 and have established a materiality threshold of 5% of the auditor's expected year 2 amount. For each of the expenses in column A below, consider the additional notes in column B, and complete the following: 1. In "Auditor's expectation" column, enter the auditor's expectation of year 2 expense. (Round all amounts to the nearest dollar.) 2. In "Auditor's decision" column, select the auditor's decision as to whether further testing is needed. (Consider each account independently - an option may be used once, more than once, or not at all.) Expense Additional Notes Auditor's expectation Auditor's decision Salary Within threshold. No further testing needed Rent Average salaries increased 2% effective January 1, year 2. Average headcount was 200 in year 1 and 300 in year 2. Building 1: On July 1, year 2, the company entered into a new lease agreement. Monthly rent expense was 5% higher than that of the prior lease. Building 2: The company began renting another facility on January 1, year 2, for $45,000 a month, on a month-to-month basis. The utilities expense is based on square footage of each facility, the rate did not change from year 1 to year 2. Above acceptable amount Further testing needed. Utilities Below acceptable amount. Further testing needed. Within threshold. No further testing needed. Miscellaneous Calculation is based on 0.25% of gross revenue Repairs and maintenance Repairs and maintenance expense is based on the averag gross value of assets at cost: January 1, year 1: $2,700,000 January 1, year 2: $3,300,000 January 1, year 3: $3,700,000 Above acceptable amount. Further testing needed. Interest expense The average interest rate of STA's debt is 7% Within threshold. No further testing needed