What is the Risk of Incorrect Rejection?

The risk of incorrect rejection arises when a sample indicates that there is a risk of material misstatement when this is not actually the case. This occurs when the items selected in a sample are not truly representative of the population being tested. It comes from the possibility that a sample selection might contain proportionately more or less of a misstatement or deviation than exists in the population as a whole.

An auditor encountering this issue will expand the sample size or engage in other testing, though doing so reduces the efficiency of the audit work. This risk is a particular concern when the cost or difficulty of obtaining additional audit evidence is high.

When is the Risk of Incorrect Rejection More Likely?

The risk of incorrect rejection tends to increase when the sample size is small, variability in the population is high, or the auditor sets a low tolerable deviation or misstatement rate. It may also arise when the audit environment is highly regulated or when the auditor is especially cautious due to prior audit issues or industry-specific risks.