Question

Should a financial analyst approach their work with a degree of skepticism, why or why not? What will be the main areas of skepticism as you review the SEC 10K report from southwest airlines?

Answer 1

Yes a financial analyst should approach their work with a degree of skepticism.Skepticism involves the validation of information through probing
questions, the critical assessment of evidence, and attention to inconsistencies. Skepticism
in not an end in itself and is not meant to encourage a hostile micromanagement; it is an
essential element of professional objectivity required of all participants in the financial
reporting supply chain. Audit inspectors throughout world have expressed concern about whether professional
skepticism is being applied properly in practice. There is currently a lack of practical
guidance around the appropriate application of professional skepticism in audit standards

Areas of skepticism in SEC 10k report are

Selected Financial data-we can begin to get a sense of factors such as revenue and earnings growth, figures such as gross and operating margin, the overall level of capital intensity, and the degree to which net income converts to free cash flow.

Management’s Discussion and Analysis (MD&A)-management explains the underlying economics of the business and the results of operations over the past three years

Financial Statements-review the notes on business segments more carefully at this stage if there are questions regarding the nature of the segment economics as they relate to the consolidated financial statements.