CFA Learning - Notebook, 19.2 Footnote, Audit and Analysis

Financial statement notes include a more detailed description of the disclosure of the financial statements. Footnotes can help users to improve their ability to judge the amounts, timing and uncertainties involved in the financial statements. Footnotes include:

Describes the basis for the content of the report, such as the inclusion of accounting periods and associated entities.

Provide information such as accounting methods, accounting assumptions, and valuations used by managers

There is also additional information such as corporate mergers or liquidations, legal proceedings, employee benefit plans, significant events and warranty matters, significant customers, sales related parties, organizational structure

Management's commentary [or management's discussion and analysis( MD&A)] is one of the most useful pieces of information in an annual report. In this section, management explains various issues. The International Financial Reporting Standards (IFRS) guidance recommends focusing on the content of management comments, including the nature of the business, management objectives, the past benefits of the business, the benefit assessment methods used, the important relationship partners of the enterprise, resources and risks. Analysts should be aware that some of the comments of managers may not have been audited.

For U.S. public companies, the U.S. Securities and Exchange Commission (SEC) requires management comments to address corporate trends, key events, and uncertainties affecting corporate liquidity, funding sources, and results of operations. MD&A must provide the following instructions:

Major events affecting inflation and price changes

Off-balance sheet financed debt and contractual debt, like a purchase agreement

Management is required to make effective judgments on the use of the accounting system

Forward-looking approach to spending and divestitures

An audit is an independent review of a company's financial reports. The accountant conducts an audit and checks the financial report to provide a description of the relevant records. The purpose of an audit is for auditors to be able to provide a fair and reliable account of the financial statements.

The Board of Directors employs an independent registered accounting firm to review the financial statements and meet the requirements of accounting standards. Auditors examine the company's accounts and internal regulatory systems, corporate assets and liabilities. It is usually the best possible to confirm that the financial statements of the enterprise are free of material errors. Audit reports are an important source of information.

The standard audit opinion consists of three parts:

Although the financial statements are made and accountable by management, auditors are independently audited.

Reasonable assurance that the financial statements are free of material errors is usually provided on the basis of acceptable auditing standards.

The statements meet the requirements of acceptable accounting standards, and the selection and evaluation of accounting standards is also reasonable, and such statements are approved by the auditor. The auditor's report must also contain additional clarification of inconsistencies in accounting methods between the two periods.

An unqualified opinion indicates that the auditor believes that the statement is free of material omissions and errors. If there are any irregularities in the report that do not comply with accounting standards, the auditor will indicate a qualified opinion and explain these anomalies in the audit report. If the content of the statement is not well expressed, or there is a clear discrepancy with the accounting standards, a negative opinion will be provided. If the auditor is unable to express an opinion (if the scope of the audit is limited), a rejection opinion is provided. Any opinion that is not unqualified is sometimes called a non-standard unqualified opinion.

When significant losses may occur but the extent is not reasonably predictable, the auditor's opinion will contain an explanatory paragraph. This uncertainty may be related to the assumption of continuing business, the valuation and realization of asset value, or litigation. This type of disclosure can be a signal of serious problems that will draw closer attention from analysts.

Internal regulation is the process by which a business ensures that accurate financial statements are provided. This is the responsibility of management. For U.S. public companies, auditors must express an opinion on the internal regulation of the company. The auditor may provide these observations individually or as part iv of the standard opinion.

The audit report also includes key audit matters (Critical Audit Matters), which contain highlights accounting choices. This is important for users of financial statements. These matters have accounting choices that have been judged and evaluated by management, indicate how significant transactions occurred during the accounting period, or the selection of auditors is particularly challenging and subjective, and therefore the likelihood of false positives is also high.

In addition to the financial annual report, analysts should also review the quarterly and semi-annual reports. These transition reports usually update the main financial statements and footnotes, but there is no need for an audit.

Securities and Exchange Commission (SEC) documents are available from EDGAR (Electronic Data Gathering, Analysis, and Retrieval System). The Form 8-K requires companies to submit reports on major events such as acquisitions and liquidations of significant assets and changes in management or organizational structure. Corporate financial annual and quarterly reports are also submitted to the SEC.

Proxy statements refer to explaining to shareholders when there are matters that require shareholders to vote. These notes are also a good source of information to reflect the election of board members, compensation, management eligibility and issuance of stock options.

Company reports and press releases are written by management and are often seen as a public relations or marketing event. Not all significant events are independently reviewed by external auditors. Events like these can be seen on the company's website. Before the earnings report is published, companies often provide some performance guidance. Once a performance statement is issued, a conference call is usually held where business executives answer questions.

Analysts should also pay attention to information about the economic environment, information about the industry in which the company is located, and information about comparing competitors. Some of the necessary information can also be obtained from trade journals, statistical reporting services and government agencies.

Includes 6 steps:

Step 1: State the goal and context. Determine the questions the analyst needs to answer, the form of information it represents, what sources of information are useful for the analysis, and how long it will take.

step 2: Collect data. Obtain corporate financial statements and other relevant data on the industry and economic environment in which you operate. Consult with corporate management, suppliers and consumers, browse corporate websites.

step 3: Process the data. The financial statements are treated appropriately and the relevant ratios are calculated. Prepare evidence, like images and uniform metric balance sheets

Step 4: Analyze and interpret the data. Use data to answer the questions posed in step one. Decide what conclusions or recommendations to draw from the information.

Step 5: Report conclusions or recommendations. Prepare reports and communicate with your target audience. Confirm that reporting and publication comply with relevant specifications and standards recommended for investment analysis.

Step 6: Update the analysis results. Repeat the above steps periodically when necessary to update conclusions or recommendations.