Distinguish between Type I and Type II errors. What terms are used to describe these errors when the auditor is conducting tests of controls and substantive tests? What costs are potentially incurred by auditors when such decision errors occur?
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Accounting
- Risk of incorrect rejection (type 1) In testing internal control, this is the risk that the sample supports a conclusion that the control is not operating effectively, when in truth, the control is operating effectively
- Risk of incorrect acceptance (Type 2) in testing a control, this is the risk that the sample supports a concussion that the control is operating effectively when in truth it is not operating effectively.
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