The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent.They believe that inherent risk is 100%,there is a 40 percent risk that material misstatement could have bypassed the client's system of internal control,and a 50 percent risk that any existing material misstatement would not have been brought to light by the auditors' analytical procedures.What is the maximum risk of incorrect acceptance the auditors should specify in their substantive tests of details of accounts receivable?
A)5 percent.
B)10 percent.
C)20 percent.
D)25 percent.

Question

Quizplus · Accepted Answer

The maximum risk of incorrect acceptance that the auditors should specify in their substantive tests of details of accounts receivable can be calculated as follows:
Maximum Risk of Incorrect Acceptance = Planned Detection Risk / (Inherent Risk x Control Risk x Analytical Procedures Risk)
Here, Planned Detection Risk is given as 5%.
Inherent Risk = 100%
Control Risk = 40%
Analytical Procedures Risk = 50%
Substituting the values, we get:
Maximum Risk of Incorrect Acceptance = 0.05 / (1 x 0.4 x 0.5) = 0.25 or 25%
Therefore, the correct choice is D. The maximum risk of incorrect acceptance the auditors should specify in their substantive tests of details of accounts receivable is 25 percent.

The Auditors of Smith Electronics Wish to Limit the Audit