Companies go through a lot of trouble to make sure their financial statements are correct. Firms employ teams of accountants, who diligently keep records and make sure the reporting accurately reflects the company's financials. Beyond this, the company will engage the services of an outside auditor to double check the numbers and add their endorsement that everything looks right.
Even with all this, there's a chance - perhaps very small, but still - that the numbers are wrong in some substantial way. This lingering risk is known as the "audit risk." Basically, the term refers to the possibility that the company's auditor is wrong and at some point down the line, the firm will be forced to restate its financial statements to correct the error.
Audit risk comes in three main varieties: inherent risk, control risk and detection risk.
Inherent risk is basically the risks that arise from the type of business the company conducts. A complicated business or one involving a large number of cash transactions make it harder to track the finances accurately, raising the difficulty to audit the company effectively.
Control risk relates to the strength of the company's internal accounting structure. If it is weak, it makes it more likely that mistakes exist, which might not get caught by the auditor.
Detection risk relates to the auditor's procedures. If these are weak, the auditor might not be able to catch a mistake. (And that is bad.)
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Finance: What is a Commitment Letter?5 Views
Finance a la shmoop what is a commitment letter? dear Rebecca it's been fun and
all but asking me to move in with you was a real turnoff so uh have a nice [Rebecca reading letter]
life yeah that would be a fear of commitment letter I know that one well
well so what's a commitment letter then all right well you need dough but you
don't need it today you need it in six months when construction is finished on
your cabin by the lake at that point you'll convert your very expensive
building loan into a normal mortgage well you can go to the bank and for a [Man walks into bank]
small ish fee get a commitment letter from them which stipulates that assuming
nothing material changes between now and then you will in fact then get a loan
for one hundred fifty two thousand dollars at 5 percent fixed interest rate
for 30 years the bank is then committed to giving you that loan when you know [Contract stamped with committed]
eventually you need it that way you don't have to worry about your bank you
know breaking up with you which is nice because it's tough getting
the It's not you it's me speech from a guy in a bowtie [Man wearing bow tie talking to a man in the bank]
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