Instructions: As the auditor, you are assigned to test whether there are any overstatement or understatement errors in the payroll liability for the Roger Corporation. In order to complete this, you are given two data files: a payroll sub-ledger and an employee master file.
This is a variables sampling exercise – please ensure that you utilize the correct sampling unit, etc. as noted in Module G of the textbook.
Tasks:
Overstatement test: Select a sample of 20 payments from the payroll sub-ledger. Use a fixed interval sampling approach with a sampling interval of $5,000 using their gross pay. Use a random starting point to select this sample. For each of the 20 payments, verify whether the gross pay paid for the relevant employee matches the gross pay that they should receive in the employee master file by using their employee number to compare the two files.
Understatement test: Select a sample of 20 employees from the employee master file. Use an unrestricted random sampling approach using their gross pay in the employee master file. For each of the 20 employees, verify whether the gross pay that they should receive in the employee master file was actually paid to the employee.
If there are any misstatements in steps 1 and 2 larger than $1, these are audit differences. Determine the amount of any misstatements and extrapolate the error to the population as a whole. Take care to analyze positive and negative errors separately in your extrapolation.
Aggregate the total extrapolated errors from step 3 and determine whether they are greater than the tolerable misstatement = $5,000. Assume a 90% confidence level for this analysis.
Conclude whether the payroll amount is fairly presented by Roger Corporation in the financial statements compared to the tolerable misstatement of $5,000. Determine any necessary additional steps that you recommend based upon your conclusion.