The auditors of Dunbar Electronics want to limit the risk of material misstatement in the valuation of inventories to 2 percent. They believe that there exists a 50 percent risk that a material misstatement could have bypassed the client’s internal control and that the inherent risk of the account is 80 percent. They also believe that the analytical procedures performed to test the assertion have a 40 percent risk of failing to detect a material misstatement.
a. Briefly discuss what is meant by audit risk, inherent risk, control risk, and the risk that analytical procedures might fail to detect a material misstatement.
b. Calculate the maximum allowable risk of incorrect acceptance for the substantive test of details.
c. What level of detection risk is implicit in this problem?