Set out where information about risk can be found
The idea
Risk information comes from several places. The financial statement notes cover financial instruments, fair value hierarchy, contingencies, commitments and pension assumptions. Management commentary discusses principal risks and uncertainties. The auditor's report states the opinion, flags material uncertainty about going concern and describes key audit matters under International Standards on Auditing (ISAs) or critical audit matters in the US, which are the matters of most significance in the audit, often the hardest judgements or the areas of higher assessed risk. Regulatory filings, proxy statements and the financial press add more, and market data such as credit default swap spreads and equity volatility reflect how investors price risk. The trap is relying only on the audit opinion; an unqualified opinion does not mean the company is low risk.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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- Show how a conceptual framework is used to judge how reliable and useful a company's financial reporting is
- Explain problems that can undermine the quality of financial reports
- Explain the process for judging how good a company's financial reports are
- Judge how good a company's financial reports are
- Explain the signs that indicate earnings quality
- Explain what is meant by sustainable (persistent) earnings
- Explain why earnings revert to the mean and how accruals change how quickly they do so
- Judge the quality of a company's earnings
- Judge the quality of a company's cash flows
- Explain the signs that indicate balance sheet quality
- Judge the quality of a company's balance sheet
- Explain the signs that indicate cash flow quality