Final answer:
The risk of incorrect rejection and the risk of under-reliance are auditing terms that refer to Type I and Type II errors respectively, which are concerned with incorrect conclusions about material misstatements in financial audits.
Step-by-step explanation:
The risk of incorrect rejection and the risk of under-reliance are concepts related to auditing processes. In the context of audits, these risks refer to two types of errors that can occur when auditors are testing financial statements. The risk of incorrect rejection, also known as Type I error, occurs when an auditor incorrectly concludes that a material misstatement exists in a financial statement when it does not. On the other side, the risk of under-reliance, or Type II error, happens when the auditor fails to detect a material misstatement that actually exists.
Similar problems with imperfect information arise in labor and financial capital markets, where mechanisms are used to reduce risks so buyers and sellers can proceed with transactions. For instance, when hiring, employers cannot be certain about a candidate's performance and have to rely on strategies like educational background and work history, which serve as imperfect proxies for the employee's potential.