What is the risk of incorrect acceptance?

Risk of incorrect acceptance = It's a risk that the sample supports the conclusion that the recorded account balance is not materially misstated, when in fact it really is. So the higher the risk you are willing to accept, lesser the sample you'll ned.

Am I making sense? I suck at explaining:(

October 27, 2011 at 5:45 am #668132 Reply

Inactive

Higher – Risk of incorrect acceptance (its means u can afford more incorrect) (its kinda like when u go to the casino you have money to lose)

Lower – Risk of incorrect acceptance

October 21, 2013 at 12:47 am #668133 Reply

Member

The trick here is the word “Specified”. You are expected to magically know that “Specified Risk” means the amount of risk the auditor is willing to accept. When dealing with the amount an auditor is willing to accept, then it has an inverse relationship to sample size.

If it simply said “Risk of Incorrect Acceptance”, then it would have a direct relationship to sample size.

October 21, 2013 at 1:20 am #668134 Reply

Member

Good explanation here.

https://www.another71.com/cpa-exam-forum/topic/risk-of-incorrect-acceptance-explanation-please

October 21, 2013 at 1:37 am #668135 Reply

Inactive

I think “corresponds” would be a better word than “leads to” in the question in the thread title. If you only sample 5 out of 1,000,000, there is a high risk that those 5 don't give a full picture of what's going on…and thus a high risk that if those 5 are good, you will incorrectly accept that the whole population is good. Does that make more sense? Whereas if you have a big sample size – you sample 75 of 100 – then if they're all good, the risk that you would incorrectly accept the whole population as being good isn't very great, since if 3/4 are good, probably all of them are good!

The “leads to” is because if you're OK with incorrectly accepting all of them, then you're not going to bother with sampling all of them. If the 1,000,000 listed in my first example is pennies that are sitting in one specific part of the US mint, then that's $10,000. If you're auditing whether or not the cash they say is there is really there, then inspecting lots of the pennies to ensure they are authentic US pennies is probably not worth the time, since the total cash on hand is probably something like 1,000,000,000, so the materiality of some fake or foreign pennies is not worth the time to check them – just grab a few to make sure they're not quarters and go on to the next thing! So, since you aren't worried about whether the $10k of pennies is exactly right or not, you accept a higher risk of incorrect acceptance, and that will lead to a smaller sample size.

…I didn't read the link Jennifer posted, so here's a second explanation in case it helps anyone. 🙂

October 21, 2013 at 2:16 am #668136 Reply

Participant

You're reading the cause-and-effect relationship backwards.

It is NOT “there is higher risk of incorrect acceptance, therefore I MUST take a smaller sample.”

It is “I can ACCEPT a higher risk of incorrect acceptance, therefore I CAN take a smaller sample.”

Risk of incorrect acceptance is a function of the sample size, not the other way around. Risk of incorrect acceptance is not some independent variable out of the auditor's control. That's inherent risk. The auditor uses the sample size to “create” the desired level of detection risk. If he wants a lower level of detection risk, he increases the sample size and vice versa.

June 1, 2015 at 1:08 pm #668137 Reply

Inactive

If detection risk decreases which means a larger sample, what does this do to the risk of incorrect acceptance? Does it decrease as well?

Risk of incorrect rejection is the risk that the sample allows for the auditor to conclude that the financial statements are materially misstated, when in fact they are not. This will affect the efficiency of audit procedures.

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