Risk of incorrect acceptance definition
/What is the Risk of Incorrect Acceptance?
The risk of incorrect acceptance is a situation in which the results of an audit sample support a conclusion that an account balance is correct, when this is not really the case. Instead, the account balance is materially incorrect. The outcome could be that the auditor conducting the test issues an incorrect opinion regarding a client's financial statements. The risk of incorrect acceptance can be reduced by increasing the size of the samples used in various audit tests, though doing so increases the cost of the audit. Thus, the auditor needs to balance a potential reduction in the risk of incorrect acceptance against spending too much to conduct an audit.
The lower the risk of material misstatement or the greater the reliance on other tests, the greater the allowable risk of incorrect acceptance, which therefore results in a smaller required sample size. The reverse situation calls for a larger required sample size. The auditor may accept a somewhat higher risk of incorrect acceptance when the client’s controls have proven to be effective.
Related AccountingTools Courses
When is the Risk of Incorrect Acceptance More Likely?
The risk of incorrect acceptance is more likely when internal controls are weak, the audit evidence is based on estimates or judgments, or the sample size is too small to be representative of the population. It also increases in complex or high-volume transactions where misstatements may be subtle or dispersed. Additionally, this risk is more prevalent when the auditor applies inappropriate sampling methods or misinterprets the results due to confirmation bias or inadequate professional skepticism. Industries with rapidly changing conditions or volatile financial data may also heighten this risk, as underlying assumptions may quickly become outdated.