- CFA Exams
- 2025 Level I
- Topic 4. Financial Statement Analysis
- Learning Module 1. Introduction to Financial Statement Analysis
- Subject 3. Regulated Sources of Information
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Subject 3. Regulated Sources of Information PDF Download
Regulatory authorities require publicly traded companies to prepare financial reports in accordance with specified accounting standards and other securities laws and regulations. An example of such a regulatory authority is the SEC in the U.S.
Other organizations exist without explicit regulatory authority and develop reporting standards, facilitate cooperation, and advise governments. Examples include the International Organization of Securities Commissions, the European Securities Committee, and the European Securities and Market Authority.
International Organization of Securities Commissions (IOSCO)
This is essentially the international equivalent of the U.S. Securities and Exchange Commission (SEC).
- It works to achieve improved market regulation internationally.
- It works to facilitate cross-border listings.
- It advocates for the development and adoption of a single set of high-quality accounting standards.
U.S. Securities and Exchange Commission (SEC)
In the U.S., the form and content of the financial statements of companies whose securities are publicly traded are governed by the SEC through its regulation S-X. Although the SEC has delegated much of this responsibility to the FASB, it frequently adds its own requirements. The SEC functions as a highly effective enforcement mechanism for standards promulgated in the private sector.
Financial Notes and Supplementary Schedules
Financial footnotes are an integral part of financial statements. They provide information about the accounting methods, assumptions and estimates used by management to develop the data reported in the financial statements. They provide additional disclosure in such areas as fixed assets, inventory methods, income taxes, pensions, debt, contingencies such as lawsuits, sales to related parties, etc. They are designed to allow users to improve assessments of the amounts, timing, and uncertainty of the estimates reported in the financial statements.
Supplementary Schedules: In some cases additional information about the assets and liabilities of a company is provided as supplementary data outside the financial statements. Examples include oil and gas reserves reported by oil and gas companies, the impact of changing prices, sales revenue, operating income, and other information for major business segments. Some of the supplementary data is unaudited.
Management Discussion and Analysis (MD&A)
This requires management to discuss specific issues on the financial statements, and to assess the company's current financial condition, liquidity, and its planned capital expenditure for the next year. An analyst should look for specific concise disclosure as well as consistency with footnote disclosure.
Note that the MD&A section is not audited and is for public companies only.
Auditor's Reports
The auditor (an independent certified public accountant) is responsible for seeing that the financial statements issued comply with generally accepted accounting principles. In contrast, the company's management is responsible for the preparation of the financial statements. The auditor must agree that management's choice of accounting principles is appropriate and that any estimates are reasonable. The auditor also examines the company's accounting and internal control systems, confirms assets and liabilities, and generally tries to be sure that there are no material errors in the financial statements.
Though hired by the management, the auditor is supposed to be independent and to serve the stockholders and the other users of the financial statements.
An auditor's report (also called the auditor's opinion) is issued as part of a company's audited financial report. It tells the end-user the following:
- Whether the financial statements are presented in accordance with generally accepted accounting principles.
- It identifies those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.
- Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.
An auditor's report is considered an essential tool when reporting financial information to end-users, particularly in business. Since many third-party users prefer or even require financial information to be certified by an independent external auditor, many auditees rely on auditor reports to certify their information in order to attract investors, obtain loans, and improve public appearance. Some have even stated that financial information without an auditor's report is "essentially worthless" for investing purposes.
There are four common types of auditor's reports, each one representing a different situation encountered during the auditor's work. The four reports are as follows:
Other Sources of Information
User Contributed Comments 21
User | Comment |
---|---|
roydain | Are Financial notes audited? Are Proxy Statements audited? |
quean2008 | 1. Interim report is in condense form, not subject to full audit and less date than anaual report 2. Accounting method and assumption can be found on footnote while others in MD&A or supplementary schedule |
quean2008 | IASC --> IASB = FASB (U.S) IOSC = SEC (U.S) |
rethan | Is this statement correct? "10-Q (interim report) on a quarterly basis. It is far less detailed than annual financial statements, as it contains unaudited basic financial statements" I thought 10-Qs had to be audited as they are filed with the SEC |
JoshL1 | No, 10-Q's are not audited. They are "reviewed" by the auditors, which is nowhere near as robust as the audit of the 10-K (the annual year-end financial statements). |
MRSLETS | What is 10-Q and 10-K? |
reganbaha | 10-Q (interim report) 10-K (the annual year-end financial statements). |
EMerkert | SEC is a joke, just a bunch of lawyers who have basic knowledge of financial matters. U.S. would be better off without it. |
cleopatraliao | unqualified>qualified>adverse>disclaimer :D |
kahh | Who knows more on this COSO opinion? |
Saxonomy | Sounds like you or a friend has been sanctioned. |
zsbaksa | IAS standards were published between 1973-2001 IFRS standards from 2001-. IAS by IASC, IFRS by IASB IFRS takes precedence over IAS if there are contradictions and IAS is dropped. |
thekobe | mrslets, take a brief look at the edgar online website so you can take a look to a 10q and a 10k, so you can realize the differences |
vatsal92 | Unqualified -> Clean report Qualified -> Exceptions to Accounting principles Adverse -> Not fair presentation Disclaimer -> Unable to express an opinion. |
leon121 | You got that right EMerkert. Another excuse to expand the government's role in our lives... |
LogicMan | what is "COSO"? |
irapp92 | COSO stands for the Comittee of Sponsoring Organizations of the treadway commission. They established a new system of internal control strategies for companies, thus planting the seed for new broadly accepted standards of internal reporting and control within public companies. A quick Google gives you all the info if you're interested |
akhlo | Technically the auditors are hired by the board of directors, not management but whatever. |
UcheSam | This phrase “Though hired by the managemen....” is not correct. In context, External Auditor is being spoken about here. External auditors are appointed and engaged by the shareholders mostly through audit committee. |
zealtina | Proxy Statements are concerned with shareholders right? |
D3Er | Why it is called 'UNQUALIFIED opinion report' when all it means is a "clean bill of health'? |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
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