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Type I and Type II errors are the two types of decision errors an
auditor can make when deciding that sample evidence supports or does
not support a test of controls or a substantive test based on a sampling
application.
In reference to a test of controls, Type I and Type II errors are:
• Risk of incorrect rejection (Type I): the risk that the assessed level of
control risk based on the sample is greater than the true operating
effectiveness of the control. Also commonly referred to as the risk of
assessing control risk too high or the risk of under reliance.
• Risk of incorrect acceptance (Type II): the risk that the assessed level
of control risk based on the sample is less than the true operating
effectiveness of the control. Also commonly referred as the risk of
assessing control risk too low or the risk of overreliance.
In reference to substantive tests, Type I and Type II
errors as follows:
• Risk of incorrect rejection (Type I): the risk that the
sample supports the conclusion that the recorded
account balance is materially misstated when it is not
materially misstated.
• Risk of incorrect acceptance (Type II): the risk that
the sample supports the conclusion that the recorded
account balance is not materially misstated when it is
materially misstated.
The risk of incorrect rejection relates to the
efficiency of the audit because such errors can result in
the auditor’s conducting more audit work than
necessary in order to reach the correct conclusion. The
risk of incorrect acceptance relates to the effectiveness
of the audit because such errors can result in the
auditor failing to detect a material misstatement in the
financial statements. This can lead to litigation against
the auditor by the parties who relied on the financial
statements.
Exercise 8-3
List the four factors that enter into the sample size
decision. What is the relationship between sample
size and each of these factors?
The four factors that enter into the sample size
decision and their relationship with sample size are:
Factor Relationship to Sample Size
The risk of incorrect rejection Inverse
The tolerable deviation rate Inverse
The expected population Direct
deviation rate
The population size Decreases sample size only when
population size is small (<500 items)
Exercise 8-8
€4.750.000
Sample size = x 1,2 = 57
€155.000− €55.000
Answer: