The risks of incorrect rejection and incorrect acceptance are related but involve two entirely different outcomes: Incorrect rejection means the risk of concluding that recorded book value is materially misstated when material monetary error does not exist, and incorrect acceptance means the risk of concluding that recorded book value is not materially misstated when in fact material monetary error does exist. Importantly, all three classical variables sampling plans—ratio estimation, difference estimation, and mean-per-unit estimation—require estimates of the risks of incorrect rejection and incorrect acceptance, and probability-proportional-to-size sampling requires an estimate of the risk of incorrect acceptance.

Required:

1. Explain why the risks of incorrect rejection and incorrect acceptance are competing risks. Why, for example, does increasing the risk of incorrect acceptance necessarily decrease the risk of incorrect rejection?

2. How can an auditor systematically reduce both the risk of incorrect rejection and the risk of incorrect acceptance simultaneously?