Question

You are auditing payroll for the

Cast IronCast Iron

Technologies company for the year ended October​ 31,

20162016.

Included next are amounts from the​client's trial​ balance, along with comparative audited information for the prior year.

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​(Click the icon to view the amounts from the trial​ balance.)                        

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​(Click the icon to view the additional​ information.)

Requirements

a.	Use the final balances for the prior year and the information in items 1 through 5 to develop an expected value for each​ account, except sales.​ (Round to the nearest whole​ dollar.)
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. ​(Round to the nearest hundredth​ percent, X.XX%.)

​(Note 1: When computing the expected value of factory hourly​ payroll, you must take into consideration both the

44​%

wage increase and the

66​%

increase in the number of units produced and sold. Note​ 2: Use the increase in the

​10/31/20162016

preliminary sales balance over the

​10/31/20152015

audited sales balance to determine the expected value for sales commissions on

​10/31/20162016​.)

		Requirement a.
	(A)	(B)
	Preliminary Balance	Expected Value
	10/31/2016	10/31/2016
Executive salaries	649,215
Factory hourly payroll (see Note 1)	11,597,899
Factory supervisors' salaries	797,096
Office salaries	2,694,881
Sales commissions (see Note 2)	2,395,881

	Audited Balance	Preliminary Balance
	10/31/15	10/31/16
Sales*	$55,934,900	$60,969,041
Executive salaries	544,881	649,215
Factory hourly payroll	9,284,511	11,597,899
Factory supervisors' salaries	729,582	797,096
Office salaries	2,239,582	2,694,881
Sales commissions	2,798,321	2,395,881
*Sales have increased 9% over prior year. 3% percent of that is due to an increase in the average selling price. The remaining 6% is attributed to an increase in the number of units sold.

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

1.	There has been a significant increase in the demand for Cast IronCast Iron​'s products. The increase in sales was due to both an increase in the average selling price of threethree percent and an increase in units sold that resulted from the increased demand and an increased marketing effort.
2.	Even though sales volume increased there was no addition of​ executives, factory​ supervisors, or office personnel.
3.	All employees including​ executives, but excluding commission​ salespeople, received a fourfour percent salary increase starting November​ 1, 20152015. Commission salespeople receive their increased compensation through the increase in sales.
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. Cast IronCast Iron does not permit overtime.
5.	Commission salespeople receive a sevenseven percent commission on all sales on which a commission is given. Approximately 6060 percent of sales earn sales commission. The other 4040 percent are​ "call-ins," for which no commission is given. Commissions are paid in the month following the month they are earned.

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Answer 1

	Workings-Note
1	Calculation of Executive salaries
	Balance as on 10/31/2015	544,881.00	A
	Increase	4%	B
	Increase amount	21,795.24	C=A*B
	Expected as on 10/31/2016	566,676.24	D=A+C
2	Calculation of Factory supervisors' salaries
	Balance as on 10/31/2015	729,582.00	E
	Increase	4%	F
	Increase amount	29,183.28	G=E*F
	Expected as on 10/31/2016	758,765.28	H=G+E
3	Calculation of Office salaries
	Balance as on 10/31/2015	2,239,582.00	I
	Increase	4%	J
	Increase amount	89,583.28	K=I*J
	Expected as on 10/31/2016	2,329,165.28	L=K+I
4	Calculation of Factory hourly payroll
	Balance as on 10/31/2015	9,284,511.00	M	We are assuming that factory hourly payroll is ditecly proportional to sales units. So any increase in sales will increase the payroll by same %.
	Increase in sales due to quantity	6%	N
	Increase amount	557,070.66	O=M*N
	Factory hourly payroll at old rates	9,841,581.66	P=M+O
	Increase in payroll rates	4%	Q
	Increase amount	393,663.27	R=P*Q
	Expected as on 10/31/2016	10,235,244.93	S=P+R
5	Calculation of Sales commissions
	Sales as on 10/31/2016	60,969,041.00	T	This figure is given in the question.
	Sales value on which commission is paid	36,581,424.60	U= T*60%
	Commission %	7%	V
	Expected as on 10/31/2016	2,560,699.72	W=U*V

Calculation of expected balance:

Particulars	Audited Balance	Expected Balance		Preliminary Balance
	10/31/2015	10/31/2016		10/31/2016
Sales*	55,934,900.00	Not required		60,969,041.00
Executive salaries	544,881.00	566,676	See Note 1	649,215.00
Factory hourly payroll	9,284,511.00	10,235,245	See Note 4	11,597,899.00
Factory supervisors' salaries	729,582.00	758,765	See Note 2	797,096.00
Office salaries	2,239,582.00	2,329,165	See Note 3	2,694,881.00
Sales commissions	2,798,321.00	2,560,700	See Note 5	2,395,881.00