As a Result of Tests of Controls, an Auditor Incorrectly

question 58

Multiple Choice

As a result of tests of controls, an auditor incorrectly assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was

• A) More than the risk of assessing control risk too low based on the auditor's sample.
• B) More than the deviation rate in the auditor's sample.
• C) Less than the risk of assessing control risk too low based on the auditor's sample.
• D) Less than the deviation rate in the auditor's sample.

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Definitions:

Decreasing Returns to Scale

A situation in which a proportional increase in all inputs leads to a less than proportional increase in output, indicating reduced efficiency as scale of production expands.

Long-Run Equilibrium

A state in which all factors of production and inputs can be adjusted by firms, leading to a situation where no firm has an incentive to change its output or production method.

LRAC Curve

Long-Run Average Cost Curve, a graphical representation showing the minimum cost at which any output level can be produced in the long run.

Exiting Firms

Businesses that are leaving a particular market due to various reasons such as unprofitability, strategic realignment, or market saturation.