Explain how the increased use of fair value accounting might increase information risk.

A.

Information risk is the risk that managers will make poor decisions based on industry conditions. Fair value accounting is based on materiality levels during an audit. The materiality levels will usually be based off of industry conditions of similar businesses. Since mangers usually base materiality on industry conditions using faulty information, information risk will increase.

B.

Information risk is a risk where auditors obtain faulty information on a complex transaction a company performs. Fair value accounting is based on similar industry standards. Industries often have the same types of transactions performed during the year due to the similar business natures. Fair value accounting differs depending upon the industry, and the type of transaction; however, it can be subjective which industry standards to follow if the company is in multiple industries. All of these factors increase information risk.

C.

Information risk is the risk that information upon which a business decision is made is inaccurate. Fair value accounting is often based on estimates and requires judgment. Fair value can be estimated using multiple methods with some estimates being more subjective than others. Fair value estimates are made at a point in time, but can also change rapidly, depending on market conditions. All of these factors increase information risk.

D.

Information risk is the risk where invoices under 10% of sales are not audited. Fair value accounting is often based on performing similar tasks together. This means that not all entries are immediately input into accounting systems, and are sometimes held until the dollar amounts are substantial enough to book. This can cause a lot of smaller balances equal the 10% required limit. All of these factors increase information risk.