Question

1-18 (Objectives 1-3, 1-4, 1-5) Consumers Union is a nonprofit organization that provides information and counsel on consumer goods and services. A major part of its function is the testing of different brands of consumer products that are purchased on the open market and then the reporting of the results of the tests in Consumer Reports, a monthly publication. Examples of the types of products it tests are middle-sized automobiles, residential dehumidifiers, flat-screen TVs, and boys' jeans. a. In what ways are the services provided by Consumers Union similar to assurance b. Compare the concept of information risk introduced in this chapter with the infor- c. Compare the four causes of information risk faced by users of financial statements as services provided by CPA firms? mation risk problem faced by a buyer of an automobile. discussed in this chapter with those faced by a buyer of an automobile. with those available to a buyer of an automobile. d. Compare the three ways users of financial statements can reduce information risk risk to a buyer of am

Answer 1

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Part - a)

The assurance services of a consumer union that provide quality assurance results for various consumer products is worth appreciating because it renders a good source of information to consumers and helps them to overcome the information risk of overcoming the wrong commodity.  

The services of a consumer union are similar to what a CPA professional provides to his or her clients. The following points show this similarity:

:::An independent evaluation of each commodity is conducted by the consumer union, similar to that of a CPA professional.

:::Like the CPA professionals, consumer union is also an independent body no way connected with any of the companies whose products are evaluated.

:::The consumer union can express an unbiased opinion for the benefit of the consumers, which is also the case with the CPA professionals who can express independent opinions on financial statements.

Part - b)

Information risk means risk that information might turn out to be inaccurate, as a result of which, the business decision based on said information would be incorrect or misleading.

Consumers of automobile products may face the information risk in the following areas:

:::The consumer may lack information from good vendors while buying the automobile.

:::The consumers are normally not aware of the after-sale services which vendors should provide.

:::The shoppers may also be cheated on costs or through supplying sub-standard merchandise.

::: The buyers may take a wrong decision on technical problems like engine capability or life or maintenance issues .

Part - c)

It is therefore very important for us to understand why this information risk arises and to identify the causes of information risk.

Voluminous business transactions of various natures and sizes are the leading reason that add to the difficulty and enhances the information risk.

The complexity of business transactions and also the inability to analyze them contribute to information risk.

The remoteness of information is a relevant factor due to the growth in size and scope of business because of globalization and diversification. Thus it is too difficult to obtain the first-hand sensitive information and information is made to travel through various channels of communication, which further disturbs the quality and reliability of information.

The bias of the information provider also affects the accuracy level of information, as it is quite certain that the provider will modify and present the information to suit his or her own selfish purpose. It is typically seen that the borrower of a loan, in order to ensure that the loan gets sanctioned in his or her favor, would intentionally try to falsify the financial statements by showing improved profitability and solvency position.

Cross-verification by the user of information is troublesome, as it may be uneconomical and time-consuming.

From the viewpoint of automobile buyer, all of the above discussed points would equally apply.

Part-d)

Information risk can be reduced though the following ways:

:::A regular audit of financial statements will go a long way in eliminating the information risk. The merit of this method is that independent expression of opinion by the auditor on the trueness and fairness of financial information provides a great level of comfort and certainty to the users of financial information. The disadvantage is that the audit may be a costly affair for small and medium organizations.

:::A regular audit may scale down the layers involved in the process of communication between the source of information and the ultimate user of information. The advantage is that it would prevent the distortion of information. The disadvantage of this method is that it might not be practical in modern times due to the growing dependence on individuals and machines, which enlarges the process of the flow of information.

:::The information risk can definitely come down by cross-verification by the users, as it will be advantageous enough to verify the quality of information being served to the user. The drawback of this is that the user might not have the requisite capability and resources at his or her disposal to cross-check the reliability of information.

The buyers of automobile should try to bear the above points in order to reduce the information risk.