Jamie Plane is testing the effectiveness of an important control for Blackheart Inc. Plane is placing a high level of reliance on this control and has assessed a relatively low risk of overreliance (5 percent) and tolerable rate of deviation (6 percent). Based on the acceptable risk of overreliance, expected population deviation rate, and tolerable rate of deviation, Plane determined a sample size of 60 items. The tests of controls revealed three deviations. Required Ignoring the effects on sample size, how would Plane’s decision to accept a higher risk of overreliance (10 percent) affect the conclusions made with respect to the operating effectiveness of the control?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Jamie Plane is testing the effectiveness of an important control
for Blackheart Inc. Plane is placing a high level of reliance on this control and has assessed
a relatively low risk of overreliance (5 percent) and tolerable rate of deviation (6 percent).
Based on the acceptable risk of overreliance, expected population deviation rate, and tolerable rate of deviation, Plane determined a
revealed three deviations.
Required
Ignoring the effects on sample size, how would Plane’s decision to accept a higher risk
of overreliance (10 percent) affect the conclusions made with respect to the operating
effectiveness of the control?
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