Risks and Uncertainties

Question 1

Sources of risk and uncertainty can be:

Answer 1

• Nature of the entity’s operations
• General use of estimates in the financial statements
• Certain estimates that are significant, such as a loss contingency
• Vulnerability due to significant concentrations of operations
• Entity’s ability to continue as a going-concern

Question 2

What would be included in the risk from an entity’s operations?

Answer 2

Products and services- Negative side effects
Geographical areas- Concentrations
Principal Markets

Question 3

Why are estimates a risk?

Answer 3

Most items require that require that estimates (i.e. allowance for uncollectible accounts)

Estimates are approximates

Significant estimates- these are distinguished because a slight change could have a material impact on the financial statements- They have to disclosure the nature of the uncertainty and effect of the change in estimate. Examples: Litigation obligations, environmental remediation costs.

Question 4

What is a significant concentration and why are they risky? What are the the required disclosures for concentrations?

Answer 4

Significant concentration make the entity vulnerable to conditions or events capable of material impact on the financial statements in the near term (one year)

Heavy concentration in just a few customers, products, or sales in a geographical area.

Required Disclosure: Volume of business with a particular customer, supplier, lender.

Revenue from a specific product, service

Market or geographical areas of operations

Question 5

How do you know if it is a concentration? (what are the requirements)

Answer 5

1) The concentration exists at the balance sheet date
2) The entity is vulnerable, because the concentration, to the risk of “severe impact” (material impact)
3) Reasonably possible could occur in the near term (reasonably possible- 40-50%)

Question 6

What do company’s need to disclosure about going-concern?

Answer 6

If there is substantial doubt about the entity’s ability to continue as a going concern. Based on facts that are known or reasonably knowable. The “look-forward” period is one year.

Question 7

If there is going-concern uncertainties, management has to disclosure:

Answer 7

1) conditions causing the uncertainty
2) managements evaluation of quantitative and qualitative factors
3) the plan to alleviate the substantial doubt

Question 8

How often does management need to evaluate going-concern?

Answer 8

For interim financial statements and annual financial statements