PLEASE ! DON'T COPY from previous hand-writing solution. IT"S NOT CORRECT

The auditors of STA, Inc., a calendar-year corporation, obtained the selected information for years 1 and 2 located in the exhibit below.

Selected information		Year 2			Year 1
Gross revenue	$	63,000,000		$	60,000,000
Net income before taxes		11,650,000			11,000,000
Salary expense		12,500,000			8,000,000
Rent expense		1,920,000			1,200,000
Utilities expense		155,000			120,000
Depreciation expense		705,000			675,000
Repairs and maintenance		375,000			300,000
Interest expense		523,000			338,100
Miscellaneous		151,000			135,000
Tax expense		4,325,150			3,850,000

Additionally, the auditors noted the following information:

• STA rents space in an office building:
  • Space in Building 1: 25,000 sq. ft.
• On January 1, year 2, the company added a second space:
  • Space in Building 2: 11,000 sq. ft.
• The balance of interest-bearing debt outstanding:
  • January 1, year 2: $4,830,000
  • December 31, year 2: $10,262,000
  • The company issued additional debt on July 1, year 2

The auditors are performing analytical procedures relative to the expectations of expenses for year 2 and have established a materiality threshold of 5% of the auditor's expected year 2 amount. For each of the expenses in column A below, consider the additional notes in column B, and complete the following:

1. In "Auditor's expectation" column, enter the auditor's expectation of year 2 expense. (Round all amounts to the nearest dollar.)
2. In "Auditor's decision" column, select the auditor's decision as to whether further testing is needed. (Consider each account independently - an option may be used once, more than once, or not at all.)

Expense Auditor's expectation Auditor's decision Above acceptable amount. Further testing needed. Salary Rent Above acceptable amount. Further testing needed. Utilities Additional Notes Average salaries increased 2% effective January 1, year 2. Average headcount was 200 in year 1 and 300 in year 2 Building 1: On July 1, year 2, the company entered into a new lease agreement. Monthly rent expense was 5% higher than that of the prior lease. Building 2: The company began renting another facility on January 1, year 2, for $45,000 a month, on a month-to-month basis. The utilities expense is based on square footage of each facility; the rate did not change from year 1 to year 2. Calculation is based on 0.25% of gross revenue. Repairs and maintenance expense is based on the average gross value of assets at cost: January 1, year 1: $2,700,000 January 1, year 2: $3,300,000 January 1, year 3: $3,700,000 The average interest rate of STA's debt is 7% Below acceptable amount. Further testing needed. Within threshold. No further testing needed Miscellaneous Repairs and maintenance Within threshold. No further testing needed. Interest expense Within threshold. No further testing needed. Expense Additional Notes Auditor's expectation Auditor's decision Salary $ 10,200,000 Above acceptable amount Further testing needed. Rent 1,230,000 Above acceptable amount. Further testing needed. Utilities Average salaries increased 2% effective January 1, year 2. Average headcount was 200 in year 1 and 300 in year 2 Building 1: On July 1, year 2, the company entered into a new lease agreement. Monthly rent expense was 5% higher than that of the prior lease. Building 2: The company began renting another facility on January 1, year 2, for $45,000 a month, on a month-to-month basis. The utilities expense is based on square footage of each facility; the rate did not change from year 1 to year 2. Calculation is based on 0.25% of gross revenue. Repairs and maintenance expense is based on the average gross value of assets at cost: January 1, year 1: $2,700,000 January 1, year 2: $3,300,000 January 1, year 3: $3,700,000 Below acceptable amount. 8,640 x Further testing needed. Within threshold. No further 6,500 X testing needed. Miscellaneous Repairs and maintenance x Within threshold. No further testing needed Interest expense The average interest rate of STA's debt is 7% Within threshold. No further 5,220 > testing needed