[TBone]

From Ninja MCQ:

The acceptable level of detection risk is inversely related to the:

A. assurance provided by substantive tests.

B. risk of misapplying auditing procedures.

C. preliminary judgment about materiality levels.

D. risk of failing to discover material misstatements.

I’m either misinterpreting the wording here or i’m just an idiot, but why is the answer A? The explanation doesn’t make sense:

“Detection risk is a function of the effectiveness of an auditing procedure and of its application by the auditor. Thus, the acceptable level of detection risk relates to the auditing procedures applied through substantive tests. As the assurance provided by substantive tests becomes or is expected to become higher, the acceptable level of detection risk decreases, or vice versa. Thus detection risk is inversely related to the assurance provided by substantive tests.”

FAR: 66, 75
AUD: 67, 69, 70, 74, 74
REG: 71, 79
BEC: 73

[Anonymous]

Detection Risk is “the risk that the auditor will not detect a misstatement that exists in an assertion that could be material, either individually or when aggregated with other misstatements.” So, if the assurance provided by substantive tests is higher, then the risk that the auditor will not detect a misstatement is lower…and, obviously, if the assurance provided by substantive tests is lower, then there's a higher risk that the auditor will not detect a misstatement due to the substantive tests not being as reliable. Hopefully that helps some.

[TBone]

I think its the term “acceptable level” that is throwing me off. I understand that with more assurance provided by substantive tests the auditor would have lower detection risk, but if there is more assurance would the auditor have a lower acceptable level of detection risk? It's like saying “We've been provided with more assurance, looks like we better not accept much detection risk anyway, even though assurance has increased.”

I may be rambling but the bottom line is there seems to be a big difference between actual level of detection risk and the auditor's acceptable level of detection risk which is what is throwing me off here. Do I have something mixed up?

FAR: 66, 75
AUD: 67, 69, 70, 74, 74
REG: 71, 79
BEC: 73

[Author]

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