Abstract
Highlights that the multiplicative risk model which forms the basis of auditing standards in both the USA and the UK only considers the risk of incorrect acceptance of an account balance. Points out, however, that when planning audit tests, the auditor also faces a risk of incorrect rejection of the sample under consideration if an unrepresentative sample is obtained. Incorporates the risk of incorrect rejection of the account balance into a theoretical risk model and investigates the relationship between the risks of incorrect acceptance and incorrect rejection using the power function of the test. Concludes that, first, the ability of an audit test to identify the magnitude of the error in the population, and especially its ability to identify material error reliably, is very important and, second, planning of effective audit testing should be undertaken, rather than relying on the extension of testing when results fail to meet expectations.
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