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The causes of information risk

(C) The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 2-<#> Causes of Information Risk ?Biases and motives of the provider: ?If information is provided by someone whose goals are inconsistent with those of the decision maker, the information may be biased in favor of the provider.?Management asserts that the statements are fairly stated in accordance with applicable U.S. or international accounting standards.Loading...???????

The causes of information risk

© The McGraw-Hill Companies, Inc., 2008
McGraw-Hill/Irwin
2-‹#›
Causes of Information Risk

●Management asserts that the statements are fairly stated in accordance with applicable U.S. or international accounting standards. Legally, management is responsible for providing reliable information to users.
●As society becomes more complex, decision makers are more likely to receive unreliable information (information risk).
●There are several reasons for information risk:
A.Remoteness of information.
B.Biases and motives of the provider.
C.Voluminous data.
D.Complex exchange transactions.

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© The McGraw-Hill Companies, Inc., 2008
McGraw-Hill/Irwin
2-‹#›
Causes of Information Risk

●In a global economy, it is nearly impossible for a decision maker to have much firsthand (immediate) knowledge about the  organization with which they do business, and must rely on information provided by others. When information is obtained from others, the likelihood of it being intentionally or unintentionally misstated increases.

Remoteness of information :

Biases and motives of the provider:
●If information is provided by someone whose goals are inconsistent with those of the decision maker, the information may be biased in favor of the provider.
●For example, when a borrower provides financial statements to a lender, there is considerable likelihood that the borrower will bias the statements to increase the chance of obtaining a loan.

© The McGraw-Hill Companies, Inc., 2008
McGraw-Hill/Irwin
2-‹#›

Causes of Information Risk
●Higher volumes of transactions increase the likelihood of undetected errors.
●If many minor misstatements remain undiscovered, the combined total can be significant.
Voluminous data:

Complex exchange transactions:

●Transactions between organizations have become increasingly complex and therefore more difficult to record properly.
●Complex accounting standards are difficult to interpret and apply.
●For example, the correct accounting treatment of the acquisition of one entity by another poses relatively difficult accounting problems.


© The McGraw-Hill Companies, Inc., 2008
McGraw-Hill/Irwin
2-‹#›
Reducing Information Risk

●The most common way for users to obtain reliable information is to have an independent audit.

Audited Financial Statements



© The McGraw-Hill Companies, Inc., 2008
McGraw-Hill/Irwin
2-‹#›
Relationships Among Auditors, Client, and External Users

Auditor


Client