Assess the role of risk and uncertainty in accounting measurements.
Reporting considerations when risk and uncertainty are involved require judgment by the auditors. Although the AICPA and other controlling units have attempted to quantity methodology to deal with risk and uncertainty, each situation is unique and the extent of disclosure must be considered.
Risk can be described in terms of probabilities. Risk concerns a lack of hard data which in turn leads to uncertainty. Uncertainty exists when information is deficient. SOP 94-6 attempted to further define how to deal with significant risks and uncertainties, including required disclosures in four different types of situations:
1. Nature of operations
2. Use of estimates
3. Certain significant estimates
4. Vulnerability due to certain ...
The 450 word solution qualifies the types of disclosure risks involved in financial reporting as defined in a SOP. For the two types of risks which are most controversial, further guidance is cited for better understanding.