ExpertHard1 markMultiple Choice
CPA · Question 44 · Area III: Procedures
An auditor is performing substantive analytical procedures on payroll expense. The auditor develops an expectation of payroll expense by multiplying the number of employees by the average wage rate. Which of the following factors would MOST likely reduce the precision of this expectation?
An auditor is performing substantive analytical procedures on payroll expense. The auditor develops an expectation of payroll expense by multiplying the number of employees by the average wage rate. Which of the following factors would MOST likely reduce the precision of this expectation?
Answer options:
A.
A stable workforce with fixed salary contracts.
B.
Use of a payroll service provider.
C.
Significant turnover in employees with varying pay rates throughout the year.
D.
Inflation adjustments applied uniformly to all employees.
How to approach this question
Precision of analytics depends on the predictability of the data. Volatility/Turnover reduces predictability.
Full Answer
C.Significant turnover in employees with varying pay rates throughout the year.✓ Correct
Analytical procedures rely on plausible and predictable relationships. Significant turnover, especially with varying pay rates, disrupts the relationship between 'number of employees' and 'total expense', making the expectation less precise and the test less effective.
Common mistakes
Thinking external providers affect the precision of the auditor's *expectation* (they affect the data reliability, but turnover affects the logic of the model itself).
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