Basics of Incorrect Acceptance and Incorrect Rejection

In an audit, there are two key risks that auditors face when they conclude on sampling results. Incorrect acceptance is when the audit team concludes there is no material misstatement based on their sample testing, however, a material misstatement does actually exist in the population. Incorrect acceptance is a big risk for an audit team since they failed to properly detect a material misstatement and concluded that the financial statements were reasonably stated. Incorrect acceptance impacts the effectiveness of an audit.

Incorrect rejection is when the audit team concludes that a material misstatement does exist based on their sample testing, however, a material misstatement does not actually exist in the population. This results in the audit team performing additional testing when it is not necessary. Incorrect rejection impacts the efficiency of an audit.

To fully understand these topics, Universal CPA recommends that candidates develop their own analogy. Not only does thinking through these topics in your own words promote a deeper understanding, but it also helps with retention and recollection of information under pressure. A student of Universal CPA shared their analogy with the Universal CPA team and we received approval to share it with the rest of the CPA community!

Analogy for Incorrect Acceptance and Incorrect Rejection

Presumably you want to be married. In your search for your partner, you are probably going to go through multiple relationships. If it happens that you decide to propose your partner who later turns out to be a b*tch, you have incorrectly accepted a person. Now you have found yourself in an ineffective relationship…

On the contrary, if you said goodbye to a partner and later realize that they were actually the true love, although you have incorrectly rejected the partner the first time, you can still go back to the partner and try to make it work, given that you two are still not married. That’s an inefficient use of time and money but, hey, at least you didn’t commit to the wrong partner.