Information Risk Definition

Information risk refers to the probability that the information provided by a company is false or misleading. This risk arises due to a conflict of interest between information providers (e.g., management) and users (e.g., investors and creditors). Management may present an overly optimistic or inaccurate picture of the company's financial health to secure funding or investments.

The Role of Financial Statement Auditing

Auditing addresses information risk by providing independent assurance that financial statements are free from material misstatements and fairly presented in accordance with Generally Accepted Accounting Principles (GAAP). This assurance reduces skepticism among users and enhances the credibility of the financial statements.

Impact on the Cost of Capital

Audited financial statements improve investor and creditor confidence, which lowers the perceived risk of investment or lending. Consequently, companies benefit from a reduced cost of capital, as lenders and investors require less compensation for perceived risk.

The auditing process involves examining evidence, evaluating management’s assertions, and issuing an audit opinion. This systematic and independent verification ensures reliable financial reporting, fostering trust in capital markets.

Auditing Insight: Audit Quality (Auditing and Assurance Services (9E))