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As the new auditor, you are to develop a comprehensive audit plan. The auditing standards describe the components of what is to be included in
As the new auditor, you are to develop a comprehensive audit plan. The auditing standards describe the components of what is to be included in an audit plan. You are to describe accounting and auditing issues in the audit you will face as the new auditor. You are to identify the company's risks, how these risks will affect the audit, and how you will mitigate the risks. For example, if you select a company with overseas manufacturing plants that produce inventory, what approach will you take to observe the inventory in the U.S. and overseas? What will you include in your audit plan? The purpose of the report is to write an audit plan. Note that this report is to be written from an auditor's perspective and not from an analyst's perspective performing an analysis of a company's financial statements. The perspectives are quite different. Use below data for NVIDIA corporation and create audit planSupply, Product Transitions, and New Products: NVIDIA faces challenges related to supply chain conditions, product transitions, and new product introductions. These factors can result in revenue reductions or volatility, particularly when there are misalignments between inventory or supply commitments and product demand. NVIDIA AI Cloud Service Offerings: NVIDIA plans to offer AI cloud services directly and through partners. However, the success of these offerings requires significant time, resources, and investment. These services may not be successful, leading to costs without significant revenue generation. COVID-19: The ongoing COVID-19 pandemic and associated restrictions can disrupt NVIDIA's operations, supply chain, logistics, and demand estimation. Lockdowns and macroeconomic conditions in China have negatively impacted end-customer sales, and similar challenges could arise globally. Russia: NVIDIA ceased direct sales and closed business operations in Russia, which may negatively affect revenue to partners selling into Russia due to the war in Ukraine. 2. Divisions and Product Lines may be discussed in the MD&A section. What audit and internal control issues may arise in these areas as you consider our chapters for the week? The Compute & Networking division focuses on accelerated computing platforms and networking solutions for data centers, including GPUs and AI computing platforms. The Graphics division deals with graphics processing technologies used in gaming, professional visualization, and automotive applications. There are several audit and internal control issues that can be identified. Revenue Recognition: Given the complexity of NVIDIA's product lines and the potential for product transitions, auditors and internal controls should ensure proper revenue recognition practices.. Inventory Management Given the growth in supply, product complexity, and recent reductions in demand, effective inventory management is crucial. Risk Assessment and Mitigation: With the expansion into new use cases, applications, and cloud service offerings, auditors and internal controls should evaluate the adequacy of risk assessment processes. Compliance with Regulations: The mention of new license requirements impacting exports to China and Russia suggests the need for strict compliance with relevant regulations Financial Reporting and Disclosures: Given the termination of the Arm Share Purchase Agreement and the associated acquisition termination cost, auditors and internal controls should carefully review the financial reporting and disclosures related to this event. By considering these areas in the MD&A section and examining the associated audit and internal control issues, auditors can provide assurance on the accuracy and reliability of financial reporting and help mitigate risks for the company. 3. Management often explains higher or lower than expected in their comments. Discuss the profitability and other comments in the MD&A section as they relate to our chapters, thus on audit strategy, risk, internal control, materiality, and management. The MD&A section provides insights into audit risks, internal control considerations, materiality thresholds, and the role of management in financial reporting. Auditors should carefully evaluate these insights, conduct relevant audit procedures, and communicate significant findings or concerns to stakeholders. Profitability: The decline in gross margin due to inventory charges suggests potential risks in inventory management and forecasting accuracy. Auditors should assess inventory valuation and provisioning adequacy and review the reasonableness of management's demand expectations. Operating expenses increase: The significant rise in operating expenses requires auditors to evaluate the reasonableness and appropriateness of these expenses. This involves ensuring proper classification and supporting documentation. Risk: The complexity of product transitions and demand volatility pose risks. Auditors should assess risk assessment processes, demand forecasting methodologies, and internal controls to mitigate these risks effectively. Internal control: Supply chain complexity necessitates effective internal controls over inventory tracking, demand forecasting, and supplier relationships. Auditors should evaluate the design and operating effectiveness of internal controls in these areas. Materiality: The significant inventory provisions and purchase obligations underscore their materiality to the financial statements. Auditors must assess materiality thresholds and perform appropriate audit procedures for these amounts. Management: Auditors must evaluate the reasonableness of forward-looking statements, considering supporting evidence, assumptions, and external factors. They should also assess the adequacy of disclosures related to uncertainties, risks, and underlying assumptions.1. Costs and fluctuations: In the fiscal year 2023, NVIDIA incurred inventory provisions for excess inventory and purchase commitments of $2.17 billion, according to the MD&A section of the company's SEC 10-K filing. This suggests that expenses associated with inventory management fluctuated. According to the report, inventory costs were $1.04 billion for inventory already on hand and $1.13 billion for inventory purchase commitments exceeding forecasted demand. These specifics demonstrate how the business analyzes expenses and variations in inventory levels. 2. Supply Chain Management: The MD&A section demonstrates that the complexity of NVIDIA's products and the state of the supply chain have both had an influence. The company's supply, which includes its available inventory, purchase commitments, and prepaid supply agreements, has increased dramatically, according to the study. It further claims that at the conclusion of the fiscal year 2023, more than half of NVIDIA's entire supply was represented by purchase commitments and prepaid supply agreements. This evidence shows that NVIDIA understands the significance of efficient supply chain management and is examining the difficulties and complexity involved. 3. Environmental, Social, and Governance (ESG) and Sustainability. NVIDIA is committed to environmental sustainability, addressing climate change impacts, and integrating ESG principles into its operations. Regarding climate change, NVIDIA addresses climate impacts throughout its product lifecycle and evaluates risks associated with current and emerging regulations and market impacts. Additionally, NVIDIA aims to purchase or generate enough renewable energy to match 100% of their global electricity usage for their offices and data centers by the end of the fiscal year 2025. Also, NVIDIA plans to create Earth-2, a digital twin of the Earth, using their AI and Omniverse platforms. This project will allow scientists, companies, and policymakers to make ultra-high-resolution predictions of climate change's impact and explore mitigation and adaptation strategies. 4. Contingencies and liabilities: As of January 29, 2023, NVIDIA has not recorded any accrual for contingent liabilities associated with the legal proceedings mentioned. This indicates that they believe the liabilities, while possible, are not probable. It is stated that the possible loss or range of loss in these matters cannot be reasonably estimated at the present time. NVIDIA also mentions that they are involved in legal actions that arise in the ordinary course of business. While they cannot guarantee favorable outcomes, they believe that the ultimate outcome of these actions will not adversely affect their operating results, liquidity, or financial position. Make sure to use the following concept and provide audit planAudit of the Acquisition and Payment Cycle: Tests of Controls and Substantive Tests of Transactions and Accounts Payable Gain a comprehensive understanding of the acquisition and payment cycle, including the related business processes and internal controls in place. Evaluate the effectiveness of the internal controls relevant to the acquisition and payment cycle. Execute tests of controls to determine if the identified control activities are operating effectively. This may involve inquiries, observations, inspections, and reperformance of control procedures. Identify key transaction classes: Identify the significant ones within the acquisition and payment cycle. Examples may include purchases, accounts payable, and cash disbursements. Choose the proper sample size from the listed transaction classes, and conduct a substantive test of the transaction, such as reconciling, verifying, and looking through any supporting documentation. Conduct analytical methods, verify outstanding amounts, and test account payable balances, such as vendor statements. Evaluate the results, determine if any material misstatements exist, and consider their implications for the financial statements. Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts Identify the key accounts within the acquisition and payment cycle that require verification. This may include accounts payable, purchases, and cash disbursements. Obtain supporting documentation such as invoices, purchase orders, reports, and bank statements. Reconcile accounts and verify the accuracy of recorded transactions. Perform analytical procedures, and compare current balances with prior periods, industry benchmarks, or other relevant factors. Investigate significant differences or discrepancies: Assess the results of the verification procedures and determine if any adjustments or further investigation are necessary. Audit of the Payroll and Personnel Cycle Understand the payroll and personnel processes such as hiring, time records, payroll processing, and payroll disbursement. Evaluate the effectiveness of the internal controls relevant to the payroll and personnel cycle. Perform tests of controls to determine if the identified control activities are operating effectively. Select a sample of payroll transactions and perform substantive tests to ensure accuracy, completeness, and validity. Verify the accuracy and completeness of payroll liabilities. Assess the results of the tests of controls and substantive tests in the payroll and personnel cycle. Determine if any material misstatements exist and consider their impact on the financial statements. Audit of the Inventory and Warehousing Cycle Obtain a thorough understanding of the organization's inventory and warehousing processes, including inventory counting, valuation, cost allocation, and physical movement. Evaluate the effectiveness of the internal controls relevant to the inventory and warehousing cycle. Execute tests of controls to determine if the identified control activities are operating effectively. Select a sample of inventory transactions like purchase orders, receiving reports, inventory records, and sales invoices and perform substantive tests to ensure accuracy, completeness, and valuation. Perform physical inventory count. Test inventory valuation and cost allocation Determine if any material misstatements exist and consider their impact on the financial statements. Audit of the Capital Acquisition and Repayment Cycle identify the accounts and the unique characteristics of the capital acquisition and repayment cycle. Evaluate the effectiveness of controls relevant to capital acquisition and repayment cycle. Test capital acquisition transactions, including loan agreements, reviewing contracts, purchase orders, verifying capital repayments, and reconciling outstanding loan balances. Evaluate the organization's compliance with the terms and conditions of financing arrangements, such as loan covenants, debt service requirements, and restrictions on capital expenditures. Assess the results of the tests of controls and substantive tests in the capital acquisition and repayment cycle. Determine if any material misstatements exist and consider their impact on the financial statements
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