An internal auditor is performing testing to gather evidence regarding an organization’s inventory account balance and is mindful of the possibility…

Question breakdown

Tests

Distinguish sampling risks in substantive testing

Difficulty

Easy

Key idea: Incorrect acceptance risk is the chance that a sample supports a conclusion that a balance is not materially misstated when it actually is.

How to reach the answer

1. Identify the type of test: substantive testing of an account balance (inventory).
2. Find the decisive clue: the sample says 'not materially misstated' when the balance actually is misstated.
3. Recall that the error of wrongly accepting a misstated balance is incorrect acceptance, a type II or beta risk.
4. Note that this risk bears on audit effectiveness, which is why the auditor is concerned about it.

Each option

• AIncorrect. Incorrect rejection is the opposite error: concluding a balance is misstated when it is fairly stated, which affects efficiency rather than effectiveness.
• BCorrect. It describes exactly the risk of accepting a recorded balance as fairly stated when it is materially misstated.
• CIncorrect. Tolerable misstatement is the maximum error the auditor will accept; it is a planning threshold, not a sampling risk.
• DIncorrect. Anticipated misstatement is the error the auditor expects to find and is used to size the sample; it is not a decision-error risk.

Common trap: Candidates often mix up acceptance and rejection, especially since the incorrect conclusion here is a 'not misstated' finding.

In practice: When auditors set sample sizes for balance testing, they choose a low acceptable risk of incorrect acceptance so a misstated balance is not missed.

Remember: Wrongly accepting a bad balance is incorrect acceptance, which hurts effectiveness; wrongly rejecting a good balance is incorrect rejection, which hurts efficiency.

Drafted with AI assistance and checked against the answer key.