Companies go through a lot of trouble to make sure their financial statements are correct. Firms employ teams of accountants, who diligently keep records and make sure the reporting accurately reflects the company's financials. Beyond this, the company will engage the services of an outside auditor to double check the numbers and add their endorsement that everything looks right.
Even with all this, there's a chance - perhaps very small, but still - that the numbers are wrong in some substantial way. This lingering risk is known as the "audit risk." Basically, the term refers to the possibility that the company's auditor is wrong and at some point down the line, the firm will be forced to restate its financial statements to correct the error.
Audit risk comes in three main varieties: inherent risk, control risk and detection risk.
Inherent risk is basically the risks that arise from the type of business the company conducts. A complicated business or one involving a large number of cash transactions make it harder to track the finances accurately, raising the difficulty to audit the company effectively.
Control risk relates to the strength of the company's internal accounting structure. If it is weak, it makes it more likely that mistakes exist, which might not get caught by the auditor.
Detection risk relates to the auditor's procedures. If these are weak, the auditor might not be able to catch a mistake. (And that is bad.)
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Finance: What are a 10K and 10Q?57 Views
finance a la shmoop what are 10K and 10Q filings well as the pros say 10Q
very much yeah you know we had to go there sorry well they're just filings a [Girl filing her fingernails]
different kind of filings legal filings papers or data
well the 10K is the annual report and the 10Q is the quarterly report their
note the Q in there yeah very clever naming their people well we have no idea
why the K is there like shouldn't it have been a 10A fling equals annual
anyway the filings contain the key elements that report to shareholders the [Man giving presentation to shareholders]
progress or lack thereof that the company has made in the period it's
reporting and these apply to public companies people privates don't
necessarily file... well the K the Q have to contain an updated income statement [Income statement, balance sheet and cash flow statement appear]
balance sheet and cash flow statement along with tons of notes on whatever
business metrics the company regularly reports the number of people made sick
by the lemonade the number a coal miner Barbies sold the number of Disney cruise
passengers infected with Legionnaires disease and so on and if you're the CEO [Person puking off the edge of a cruise ship]
or CFO of the company and you don't get your filings in on time well you'll be
doing a different kind of filing so yeah 10K, 10Q they're really important
don't ignore them...
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