Assume that you are a new partner at a large audit firm, which is looking to expand its client base. The firm is evaluating your performance based in part on your ability to find new audit clients, particularly those that appear to be in growth sector. The firm is looking to expand into high-tech industries, but is wary of adding very risky clients to its audit “portfolio.” You heard news that NVIDIA, one of the major graphics processor manufacturers in the world, has a good potential to grow in the high-tech sector. You also read a business article that the GPU industry has a solid prospect, with an increased demand for gaming devices and various alternative currency mining operations. You decide to check into the company’s operations. NVIDIA’s annual report paints a very positive picture of the company’s prospects, and you think that this company may be a good opportunity for your firm. You mention the idea to the managing partner (a.k.a. CEO), and he/she asks you to perform a “feasibility study” of NVIDIA account. Based on your recommendations, the firm will decide if it wants to commit the resources to going after NVIDIA.

Required:

1. Perform a financial performance & risk assessment. Obtain the last three years’ audited financials for NVIDIA. This would cover financial statements for fiscal years ended in January 31, 2021 through January 27, 2019. Also if you have an access to 10-K, the MD&A (management’s discussion & analysis) section of annual report will provide you with some good information, as well as the auditor’s report and the report of management. Using the financial statements, perform a preliminary analytical review (common-size, trend, & ratio analyses, as explained in chapter 5) of NVIDIA. At a minimum, you should compare the three years’ numbers to determine if there are any significant fluctuations in accounts, and calculate various financial ratios. (Keep this analysis fairly brief. For example, maximum two pages of presentation of key numbers and discussion of financial performance and risk. Remember, the point is to determine if you want NVIDIA as a client, not to audit)

2. Non-financial indicators. Perform a database search on popular media articles for a year or so. There will be a lot, particularly if you search on the internet, so limit your search to one or two business publications (WSJ, Business Week, Fortune, etc.). You may also check alternative sources, such as stock & SWOT reports, financial information service websites and litigation databases. Focus on articles that will enable you to assess the prospects & riskiness of NVIDIA, such as information about its products, stock performance, integrity of management, lawsuits, etc. Also focus on positive information, such as innovations and market strengths that may lead you to assess whether NVIDIA could maintain its competitive edge in its industry. Present the pertinent information you find critical in assessing potential risk (financial, operating, etc.) of NVIDIA. Again keep this section brief, while still providing enough relevant information. (Approximately, three pages).

3. Client Risk Assessment. From the information gathered in 1 and 2 above, present the strengths of NVIDIA as well as potential “red flags” or risk factors that may be present in auditing NVIDIA. Use the information regarding client acceptance (ch.3) & inherent risk assessment (ch.4) in your textbook as a guide, and also the discussion of earnings management and fraud risk assessment as discussed in class. Present this information in terms of “pros” and “cons” of accepting the engagement.

4. Conclusion. Finally, make a determination of whether you should pursue NVIDIA as an audit client (when making your recommendation, you may want to assess whether there is the potential to provide other services in addition to audit service).