{"id":11039,"date":"2021-02-11T13:20:07","date_gmt":"2021-02-11T13:20:07","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=11039"},"modified":"2026-01-08T12:53:08","modified_gmt":"2026-01-08T12:53:08","slug":"sources-information-risk","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/","title":{"rendered":"Sources of Information about Risk"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Which of the following is least likely a source of information about risk?\",\r\n    \"text\": \"Which of the following is least likely a source of information about risk? A. Management commentary. B. Auditor's report. C. Letter from management.\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is C. Sources of information about the risk of a business include financial statements, the auditor's report, notes to financial statements, management commentary or MD&A, and the financial press. Most annual reports have a letter from management that summarizes the company's operations, but this letter is unlikely to provide detailed information about the company's risk in this context.\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/dVSE9osby10\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p><span style=\"font-weight: 400;\">Examining financial, operating, and other risks is an essential part of an analyst\u2019s job. Here, we discuss sources of information about risk.<\/span><\/p>\r\n<h3>Financial Statements<\/h3>\r\n<p>A company\u2019s financial statements provide useful indicators of financial, operating, or other risks. For example, leverage ratios obtained from a company\u2019s financial statement data can be used to determine potential financial risk. Additionally, financial statements contain information about the variability of cash flows and earnings over time. We also saw that quantitative models such as the Altman\u2019s Model usually rely on this accounting information.<\/p>\r\n<div style=\"margin: 0 0 20px 0;\">\r\n  <a\r\n    href=\"https:\/\/analystprep.com\/free-trial\/\"\r\n    style=\"\r\n      display: inline-block;\r\n      border: 2px solid #1e63ff;\r\n      color: #1e63ff;\r\n      background: #ffffff;\r\n      padding: 10px 14px;\r\n      border-radius: 10px;\r\n      font-weight: 500;\r\n      line-height: 1.35;\r\n      text-decoration: none;\r\n    \"\r\n    target=\"_blank\"\r\n    rel=\"noopener noreferrer\"\r\n  >\r\n    Want to practice information risk concepts with CFA\u00ae-style questions? Try AnalystPrep\u2019s free trial now.\r\n  <\/a>\r\n<\/div>\r\n\r\n<h3>Auditor\u2019s Opinion(s)<\/h3>\r\n<p>The content of an auditor\u2019s opinion is not a timely source of information about risk; therefore, its usefulness is limited. However, a discretionary change in auditor is a warning sign that an analyst should scrutinize.<\/p>\r\n<h3>Notes to Financial Statements<\/h3>\r\n<p>A company\u2019s notes usually contain vital information that can guide users of the financial statements in understanding a company\u2019s risk. Additionally, companies are required to make certain disclosures that can provide information about a company\u2019s financial, operating, reporting, or other risks. For example, the management commentary provides management\u2019s assessment of the critical risks faced by the company.<\/p>\r\n<p>Other disclosures may include capital raising, non-timely filing of financial reports, management changes, or mergers and acquisitions. Analysts should scrutinize these disclosures as they can provide crucial important information in assessing risk.<\/p>\r\n<h3>Management Discussion and Analysis, or MD&amp;A<\/h3>\r\n<p>Under IFRS, financial statements should have an MD&amp;A section. The commentary enables the users of the financial reports to understand the company\u2019s risk exposures, approach to managing risks, and effectiveness of risk management. The management commentary contains information about the nature of the business, objectives and strategies, resources, risks, and relationships, results and prospects, and performance measures and indicators.<\/p>\r\n<p>Theoretically, companies should include principal risks that are unique to the business as opposed to risks faced by most businesses in their management commentary. However, discussion of generic risks and \u201cboilerplate\u201d language usually makes this information of low usefulness.<\/p>\r\n<h3>SEC in a Form 8-K and NT<\/h3>\r\n<p>Disclosures on specific events such as capital raising, non-timely filing of financial reports, management changes, or mergers and acquisitions contain information relevant to risk assessment.<\/p>\r\n<p>The SEC form 8-K and \u2018NT\u2019 is filed when a firm in the United States is unable to file the required reports on time. These delays could be due to accounting difficulties arising from internal controls, the lack of adequate financial staff, or an accounting fraud that requires further examination. Therefore, such filings typically signal problems with the financial reporting quality.<\/p>\r\n<h3>Financial Press<\/h3>\r\n<p>The initial information about accounting irregularities may come from a news article. Analysts should further investigate this by using definitive sources such as regulatory filings to confirm any accounting and financial disclosures. Further, they should seek supporting information from other sources, where available. This ensures that the information revealed has merit and ascertains the extent and impact of the irregularity.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which of the following is <em>least likely<\/em> a source of information about risk?<\/p>\r\n<p>\u00a0 \u00a0 \u00a0 A. Management commentary.<\/p>\r\n<p>\u00a0 \u00a0 \u00a0 B. Auditor\u2019s report.<\/p>\r\n<p>\u00a0 \u00a0 \u00a0 C. Letter from management.<\/p>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is C.<\/strong><\/p>\r\n<p>Sources of information about the risk of business include financial statements, auditor\u2019s reports (auditor\u2019s opinion(s)), notes to financial statements, management commentary or MD&amp;A, and the financial press. Most annual reports have a letter from the management, which contains a summary of company operations. However, this letter is unlikely to provide information about a company\u2019s risk in this context.<\/p>\r\n<\/blockquote>\r\n<p>Reading 15: Evaluating Quality of Financial Reports\u00a0<\/p>\r\n<p><em>LOS 15 (m) Describe sources of information about risk.<\/em><\/p>\r\n<div style=\"text-align: center; margin: 32px 0;\">\r\n  <a\r\n    href=\"https:\/\/analystprep.com\/free-trial\/\"\r\n    style=\"\r\n      display: inline-block;\r\n      background-color: #1e63ff;\r\n      color: #ffffff;\r\n      padding: 12px 26px;\r\n      border-radius: 12px;\r\n      font-weight: 600;\r\n      font-size: 16px;\r\n      text-decoration: none;\r\n    \"\r\n    target=\"_blank\"\r\n    rel=\"noopener noreferrer\"\r\n  >\r\n    Start Free Trial \u2192\r\n  <\/a>\r\n\r\n  <div style=\"margin-top: 10px; font-size: 14px; color: #374151;\">\r\n    Practice sources of information risk and financial reporting quality questions with full solutions (CFA Level II).\r\n  <\/div>\r\n<\/div>\r\n","protected":false},"excerpt":{"rendered":"<p>Examining financial, operating, and other risks is an essential part of an analyst\u2019s job. Here, we discuss sources of information about risk. Financial Statements A company\u2019s financial statements provide useful indicators of financial, operating, or other risks. For example, leverage&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,312],"tags":[216,313,176],"class_list":["post-11039","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-financial-reporting-and-analysis-fra","tag-cfa-level-2","tag-financial-reporting-and-analysis-fra","tag-sources-of-information-about-risk","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Sources of Information About Risk | CFA Level II<\/title>\n<meta name=\"description\" content=\"Explains key sources of risk information, including financial statements, operating data, disclosures, and external reports used in analysis.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Sources of Information About Risk | CFA Level II\" \/>\n<meta property=\"og:description\" content=\"Explains key sources of risk information, including financial statements, operating data, disclosures, and external reports used in analysis.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/\" \/>\n<meta property=\"og:site_name\" content=\"CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2021-02-11T13:20:07+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-01-08T12:53:08+00:00\" \/>\n<meta name=\"author\" content=\"Irene R\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Irene R\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/sources-information-risk\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/sources-information-risk\\\/\"},\"author\":{\"name\":\"Irene R\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/7002f30d8f174958802c1c30b167eaf5\"},\"headline\":\"Sources of Information about Risk\",\"datePublished\":\"2021-02-11T13:20:07+00:00\",\"dateModified\":\"2026-01-08T12:53:08+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/sources-information-risk\\\/\"},\"wordCount\":642,\"keywords\":[\"CFA-level-2\",\"Financial Reporting and Analysis (FRA)\",\"Sources of Information about Risk\"],\"articleSection\":[\"CFA Level II Study Notes\",\"Financial Reporting and Analysis (FRA)\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/sources-information-risk\\\/\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/sources-information-risk\\\/\",\"name\":\"Sources of Information About Risk | CFA Level II\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\"},\"datePublished\":\"2021-02-11T13:20:07+00:00\",\"dateModified\":\"2026-01-08T12:53:08+00:00\",\"author\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/7002f30d8f174958802c1c30b167eaf5\"},\"description\":\"Explains key sources of risk information, including financial statements, operating data, disclosures, and external reports used in analysis.\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/sources-information-risk\\\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/sources-information-risk\\\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/sources-information-risk\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Sources of Information about Risk\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\",\"name\":\"CFA, FRM, and Actuarial Exams Study Notes\",\"description\":\"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/7002f30d8f174958802c1c30b167eaf5\",\"name\":\"Irene R\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g\",\"url\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g\",\"contentUrl\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g\",\"caption\":\"Irene R\"},\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/author\\\/irene\\\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/dVSE9osby10\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"3438\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2021-02-11T13:20:07+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Sources of Information About Risk | CFA Level II","description":"Explains key sources of risk information, including financial statements, operating data, disclosures, and external reports used in analysis.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/","og_locale":"en_US","og_type":"article","og_title":"Sources of Information About Risk | CFA Level II","og_description":"Explains key sources of risk information, including financial statements, operating data, disclosures, and external reports used in analysis.","og_url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/","og_site_name":"CFA, FRM, and Actuarial Exams Study Notes","article_published_time":"2021-02-11T13:20:07+00:00","article_modified_time":"2026-01-08T12:53:08+00:00","author":"Irene R","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Irene R","Est. reading time":"3 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/"},"author":{"name":"Irene R","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5"},"headline":"Sources of Information about Risk","datePublished":"2021-02-11T13:20:07+00:00","dateModified":"2026-01-08T12:53:08+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/"},"wordCount":642,"keywords":["CFA-level-2","Financial Reporting and Analysis (FRA)","Sources of Information about Risk"],"articleSection":["CFA Level II Study Notes","Financial Reporting and Analysis (FRA)"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/","url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/","name":"Sources of Information About Risk | CFA Level II","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/#website"},"datePublished":"2021-02-11T13:20:07+00:00","dateModified":"2026-01-08T12:53:08+00:00","author":{"@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5"},"description":"Explains key sources of risk information, including financial statements, operating data, disclosures, and external reports used in analysis.","breadcrumb":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sources-information-risk\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/study-notes\/"},{"@type":"ListItem","position":2,"name":"Sources of Information about Risk"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/study-notes\/#website","url":"https:\/\/analystprep.com\/study-notes\/","name":"CFA, FRM, and Actuarial Exams Study Notes","description":"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5","name":"Irene R","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g","caption":"Irene R"},"url":"https:\/\/analystprep.com\/study-notes\/author\/irene\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/dVSE9osby10","og_video_type":"text\/html","og_video_duration":"3438","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2021-02-11T13:20:07+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/11039","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/comments?post=11039"}],"version-history":[{"count":13,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/11039\/revisions"}],"predecessor-version":[{"id":41785,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/11039\/revisions\/41785"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/media?parent=11039"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/categories?post=11039"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/tags?post=11039"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}