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CMA Intermediate · Corporate Accounting and Auditing · Audit Sampling, Audit Techniques and Analytical Procedure

Sagar Textiles Ltd has 200 employees throughout the year at fixed monthly pay of ₹30,000 each, with no joiners or leavers. The auditor builds an expectation of total payroll cost for the year. What expectation results, and what does SA 520 say about such a model?

Expected payroll is 200 employees × ₹30,000 × 12 months, which equals ₹7.20 crore. SA 520 states that even an unsophisticated predictive model may be effective here, giving evidence on a significant item and reducing the need for tests of details on payroll.

  1. A₹7.20 crore; even an unsophisticated predictive model may be effective and may reduce the need for tests of details on payrollCorrect
  2. B₹6.00 crore; a predictive model can never reduce tests of details
  3. C₹7.20 crore; such a model is acceptable only for listed companies
  4. D₹0.60 crore; payroll must always be tested in full by tests of details

Explanation

Payroll = 200 × ₹30,000 × 12 = ₹72,00,000, which is ₹0.72 crore, not ₹7.20 crore. Rechecking: 200 × 30,000 = 60,00,000 per month; × 12 = ₹7,20,00,000 = ₹7.20 crore. SA 520 notes that with known employee numbers at fixed pay, an unsophisticated model may estimate payroll accurately and reduce the need for tests of details. ₹6.00 crore is only one month's figure multiplied wrongly by 10.

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