We know that the extent of substantive testing is determined by the risk of material misstatement. This relationship is illustrated by the audit formula: AR = IR x CR x DR

The auditors of Willington Electronics want to limit the risk of material misstatement in the valuation of inventories to 2%. They believe that there is a 50% risk that a material misstatement could have bypassed the client's internal controls and that the inherent risk of the account is 80%. They also believe that the substantive analytical procedures performed to test have a 40% risk of failing to detect a material misstatement.

a. Briefly discuss what is meant by audit risk, inherent risk, control risk, and that the risk that substantive analytical procedures might fail to detect a material misstatement.

b. Calculate the maximum allowable risk of incorrect acceptance by the substantive tests of the detail transactions.

c. What level of detection risk is implicit in this problem?