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Statistically Incoherent Hypothesis Tests In Auditing, D. J. Johnstone
Statistically Incoherent Hypothesis Tests In Auditing, D. J. Johnstone
Faculty of Business - Accounting & Finance Working Papers
A classical, Neyman-Pearson hypothesis test results in a decision (choice of action) justified not by any assessment of sample evidence, but by the pre-specified frequencies with which that procedure generates errors of the two possible types. By applying such a test in auditing, the hypothesis tested is accepted or rejected without the auditor having to consider whether the data observed confirms (in any degree), or disconfirms, that hypothesis. In contrast with the classical framework, the Bayesian approach is to evaluate the probability of the hypothesis tested conditional on the data observed, and then to make a decision on the basis …
Audit Risk In Terms Of Probabilities: The Aup24 Model, D. J. Johnstone
Audit Risk In Terms Of Probabilities: The Aup24 Model, D. J. Johnstone
Faculty of Business - Accounting & Finance Working Papers
The AUP24 audit risk model defines audit risk implicitly as the joint probability of three independent events: (i) a material error occurring in an account balance, (ii) that error not being corrected by internal control procedures, and (iii) the uncorrected balance being accepted by the auditor. A more apposite risk measure, relating to these same possible events, is the conditional probability of a material-error given that the stated balance has been subject to internal control procedures and accepted by the auditor. The two risk measures so defined are related by the laws of probability, through Bayes' theorem specifically, but are …