The auditors of TQ Inc obtained the following selected accou

The auditors of TQ, Inc. obtained the following selected account information. Selected Information Sales revenue Hourly wage expense Office salary expense Bonus expense Payroll tax expense - hourly Payroll tax expense - office 401 (k) match expense Health insurance expense Short-term disability expense Year 2 Year 1 $63,000,000 $12,340,000 $5,092,500 $1,315,000 $1,114,200 $458,000 $410,000 $377,500 $340,000 $60,000,000 $12,000,000 $4,850,000 $1,250,000 $1,080,000 $436,500 $407,000 $265,000 $350,000 Additionally, the auditors noted the following information: . Year 1 unit sales of Product Alpha: 25,000 . Year 1 unit sales of Product Beta: 45,000 Unit sales increased in year 2 by 10% and 6% for Product Alpha and Product Beta, respectively.

Solution

1. Bonus Expense :

Year 1 total sales were 70,000 units

For year 2 it would be 75200

Increase in Overall sales 5200/70000*100 = 7.42%

So it is more than 5%, So bonus should be 1179500, but it is 1315000, which is excess by 135500 i.e. by 135500/1179500*100 = 11.48% , auditor should obtain sufficient information on excess amount as it increase by materiality level of 5%

2. Short term disability expenses :

2% of prior year salary & wages = 337000,

Where actual amount is 340000, so it is excess by 0.89%, which is under materiality level of 5%.

So it is acceptable

3. Office salary expense :

In year 1 headcount was 40, so per head salary was = 4850000/40 = 121250

Now 4% increase will be 126100 per head

So Jan To June = 6 months = 40*121250*6/12 = 2425000

    July To Dec = 6 months = 48*126100*6/12 = 3026400

So total office salary expense would be = 5451400 which is less than actual by 6.58%. which is more than 5% i.e. materiality level. Auditor should obtain evidence that why it is less than expected as there may be possibilities that some employees were laid off in year 2.

re actual is less than it. Auditor should obtain evidence that why it is less than expected as there may be possibilities that some employees were laid off in year 2.

4. 401(K) PLAN :

Amount would be = +(12,340,000+5092500+1315000)*80%*50%*6% = 449940, which is less than actual by 8.87%. which is more than 5% i.e. materiality level. Auditor should obtain evidence that why it is less than expected as there may be possibilities that some employees were laid off in year 2.

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5. Hourly payroll tax expense :

Payroll tax is 10% so 12,000,000 * 10% = 1,200,000

Unemployment tax = Jan to Sept = 12,000,000*1%*9/12 = 90,000

                                   Oct to Dec = 12,000,000*2%*3/12 = 60,000

So total = 1,350,000 , which is less than actual by 17.46%. which is more than 5% i.e. materiality level. Auditor should obtain evidence that why it is less than expected as there may be possibilities that some employees were laid off in year 2.

6. Health insurance expense :

Total headcount was 200 in year 1 , so expense per head = 265,000/200 = 1325

So for year 2 = 260*1325*1.12 = 385840, which is less than actual by 2.16% , which is under materiality level , so no action required.