Question

Providence, CPA, is engaged in the December 31, Year 2, audit of Bedside Inc. Bedside Inc. is a nonissuer in the medical sales industry. The company was founded by Jude Dean, M.D., and is backed by a number of venture investors. Bedside is a new player in the medical sales industry and as of Year 2, Bedside sells the following: medical devices, surgical devices, and diagnostic imaging equipment.

As part of the payroll analytical procedures, the auditor needs to evaluate the significance of the differences between the recorded payroll amounts, as presented in the Selected Financial Information table below, and the expected values calculated by the auditor. The tolerable misstatement has been set at $10,000. The exhibits above include documents the auditor has gathered to aid in performing these analytical procedures, including the following:

• Wages and Salaries Year 1

• New Hire Report Year 2

• Year 2 Salaries and Wages Policy

• Year 2 Bonuses E-mail

• Health Insurance Premium E-mail

Use this information to complete the auditor's evaluation of the payroll expense accounts.

Selected Financial Information Salaries and wages expense Bonus expense Payroll tax expense Health insurance expense Year 2 $720,000 361,500 166,750 55,000 Year 1 $549,000 240,000 120,700 40,000 Significant Difference Between Actual and Expected? Auditor's Expectation Expense Account Salaries and wages expense 3 Bonus Bonus expense 4 Payroll tax expense 5 Health insurance expense

Answer 1

Significant Difference Between Actual and Expected? Expense Account Auditor's Expectation 2 Salaries and wages expense $685,483 Yes 3 Bonus expense $395,000 123 E 4 Payroll tax expense $165,470 123 Yes No No 5 Health insurance expense $53,429 128 e

Salary and wage expense: $685,483 | Yes

There are seven existing employees. Each employee's expected base salary for Year 2 is equal to their base salary for Year 1 times their base salary increase, based on their performance rating for Year 1 (See exhibits "Wages and Salaries Year 1" and "Year 2 Salaries and Wages Policy"). As an example, Dan D's expected base salary for Year 2 is equal to $88,810 ($83,000 base salary Year 1 * 1.07% salary increase). The sum of all seven employees' expected Year 2 base salary is equal to $568,180.

Year 2 base salary for existing employees is effective as of 3/1/Year 2. For 10 months out of 12 months, existing employees will receive the previously calculated expected Year 2 base salary, or $473,483 ($568,180 total Year 2 base salary * 10/12 months). For 2 months out of 12 months, these employees will receive their Year 1 base salary, or $91,500 ($549,000 total year 1 base salary* 2/12 months). Total expected salary for existing employees is equal to $564,983.  

There are three new employees with an effective hire date of 7/1/Year 2 (See exhibit "New Hire Report Year 2"). For 6 months out of 12 months, employees will receive their year 2 base salary, or $120,500 ($241,000 Year 2 base salary * 6/12 months). Total expected salary and wage expense is equal to $685,483 ($564,983 expected salary for existing employees + $120,500 expected salary for new employees).

The difference between the Year 2 actual and the auditor's expectation for salary and wage expense is equal to $34,517 ($720,000 Year 2 actual - $685,483 auditor's expectation). This difference exceeds tolerable misstatement of $10,000; therefore, the difference is significant.

Employee Name	Base Salary / Wage Year 1	Performance Rating Year 1	Base Salary Increase	Calculate Base Salary / Wage Year 2
D. Dan	$83,000	1	7%	$88,810
T. Jack	$79,000	3	3%	$81,370
G. Gabriella	$83,000	3	3%	$85,490
R. Ted	$73,000	4	0%	$73,000
P. Kate	$79,000	2	5%	$82,950
C. Meng	$73,000	3	3%	$75,190
I. Jose	$79,000	3	3%	$81,370
	$549,000			$568,180

Bonus expense: $395,000 | Yes

Total company bonus is equal to $395,000 ($7,900,000 Q1–Q3 total sales × 5% bonus percentage). Total sales and bonus percentage are shown in the exhibit "Year 2 Bonuses E-mail".

The difference between the Year 2 actual and the auditor's expectation for bonus expense is equal to $33,500 ($361,500 Year 2 actual - $395,000 auditor's expectation). This difference exceeds tolerable misstatement of $10,000; therefore, the difference is significant.


Payroll tax expense: $165,470 | No

Total Year 1 salaries and wage expense and bonus expense is equal to $789,000 ($549,000 salaries and wages + $240,000 bonus expense). Payroll tax as a percentage of total Year 1 compensation is equal to 15.3% ($120,700 Year 1 payroll taxes / $789,000 total Year 1 compensation).

Total Year 2 salaries and wage expense and bonus expense is equal to $1,081,500 ($720,000 salaries and wages + $361,500 bonus expense). Expected payroll tax expense is equal to $165,470 ($1,081,500 total Year 2 wages × 15.3% previously calculated payroll tax percentage).

The difference between the Year 2 actual and the auditor's expectation for payroll tax expense is equal to $1,281 ($166,750 Year 2 actual - $165,470 auditor's expectation). This difference does not exceed tolerable misstatement of $10,000; therefore, the difference is not significant.


Health insurance expense: $53,429 | No

The average health insurance expense per employee for Year 1 is equal to $5,714 ($40,000 total health insurance expense / 7 Year 1 head count). There was a 10% increase in health insurance premium for Year 2 (see exhibit "Health Insurance Premium E-mail"). Average health insurance per employee for Year 1 factoring in the 10% increase in premiums is equal to $6,286 ($5,714 average health insurance expense per employee for Year 1 × 1.10 10% premium increase).

There are seven existing employees who worked 12 months in Year 2 and three newly hired employees who worked six months in Year 2 (see exhibits "Wages and Salaries Year 1" and "New Hire Report Year 2"). Total expected health insurance for Year 2 is equal to $53,429 [($6,286 average health insurance expense per employee × 7 existing employee head count x 12/12 months) + ($6,286 average health insurance expense per employee × 3 newly hired employees x 6/12 months)].

The difference between the Year 2 actual and the auditor's expectation for health insurance expense is equal to $1,571 ($55,000 Year 2 actual - $53,429 auditor's expectation). This difference does not exceed tolerable misstatement of $10,000; therefore, the difference is not significant.