University Audit Risk Assessment Report: Tesla Inc. Financials

This report offers a comprehensive analysis of the audit risks associated with Tesla Inc., focusing on key areas such as business risk, revenue recognition, cash and cash equivalents, and supplier and inventory management. The report identifies potential impacts on the company's financial statements and details appropriate auditing procedures, including tests of controls and substantive testing, to verify account balances and mitigate identified risks. The analysis considers the company's unique position in the electric vehicle and energy sector, incorporating factors like technological changes and their effects on revenue. The report also assesses the company's going concern assumption and materiality levels, providing a thorough evaluation of Tesla's financial health and the associated audit challenges. Finally, it provides recommendations to improve the overall value of the audit and reduce the risks in major areas.

By student name
Professor
University
Date: 19th May, 2019.
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Executive Summary
This assignment is based on analyzing the audit risks associated with the audit of a
specific company and providing recommendations as and when needed to improve
the overall value of audit and reducing the risks in major area. The company that
has been chosen for this assignment is Tesla Inc. The various areas of risk that has
been identified included business risk, internal risk and various other sources of
risk. The company is a major dealer in electric car manufacturing and one example
of the risk would be the changes in the technology that has brought in automation
and that has affected the overall revenue of the company when it comes to electric
car manufacture. Thus we see that there are many such risk prone areas and all of
these are analyzed and opinion on the going concern assumption of the company
has also put forth. The materiality level of the company has also been put forward
and analysis of the company has been done based on the financials of few years. In
the end of the report, suitable audit methods and audit procedures like test of
controls, and various other measures of substantive testing has been done to verify
the account balances of the company and the audit risks.
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Table of Contents
Introduction................................................................................................................ 4
Tesla Inc- Company Background.............................................................................4
Audit Risk and Audit Assessment............................................................................4
Importance of Audit Risk Assessment.....................................................................5
Analysis...................................................................................................................... 6
Major areas of Risk.................................................................................................. 6
Business Risk Assessment....................................................................................... 6
Tesla Inc: Audit Risk Area........................................................................................... 7
Recognition of the Revenue....................................................................................7
Cash and Cash equivalents and Financial Instruments...........................................8
Supplier and Inventory Management......................................................................9
Conclusion................................................................................................................ 10
References............................................................................................................... 11
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Introduction
Tesla Inc- Company Background
The company that has been chosen for this assignment is Tesla Inc, the company is
an American automotive and energy based company that is based in California. The
major thing that the company specializes is manufacturing of electric cars and solar
panel manufacturing. The company has been operating various panels and is major
vehicle manufacturing company based in California. The company was founded in
2003 and has been in operation since last ten years. It has been named as one of
the world’s largest plug-in passenger car manufacturer in 2018. There has been
huge increase in the overall sales of the company in the U.S. by 280% from 48,000
in 2017 to 182,400 in 2018. The operations of the company has also expanded to
different countries and given that the overall revenue of the company has increased
and that has also increased the risks with relation to the audit and the going
concern of the company that is analyzed in the assignment here (Boghossian,
2017). . The company is a major dealer in electric car manufacturing and one
example of the risk would be the changes in the technology that has brought in
automation and that has affected the overall revenue of the company when it
comes to electric car manufacture. Thus we see that there are many such risk prone
areas and all of these are analyzed and opinion on the going concern assumption of
the company has also put forth.
Audit Risk and Audit Assessment
Audit refers to the independent examination of the books of the company and helps
in understanding that the books of the company are free from mistakes and are
prepared in the required manner and the users can depend on that and decide if
they want to invest in this company or not. In case any errors are found then the
auditor needs to check the statements and make recommendation and mention the
same in their audit report. The stakeholders depend on the audit report to check
whether they want to invest in the company or not.
Audit risk refers to the risk that the auditor may face due to the failure of the
auditor to detect material misstatement from the books of the company. The
different kind of risk includes inherent risk, control risk and detection risk. Other
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kind of risk like business risk shall also be analyzed that would affect the growth of
the company (Borit & Olsen, 2012). The going concern ability of the company is the
ability to go in operation till end and there is no thought of the company dissolving.
So this is also an important matter that the auditor needs to check and then they
need to mention the same in the audit report of the company. It is imperative that
proper knowledge of the audit model is obtained and proper knowledge about the
company is important to fight this risk and develop a plan that can help in reducing
the risk and maximizing the benefits and transparency that is involved with audit.
Few of the audit risks have been stated below:
Inherent Risk – These are risks that occur when the management of the company
has not put proper controls in place and the major risks that are there will be
related to facts and figures that are related in the financials of the company. Thus
these are risks that occur when the management is not putting proper controls
(Freeman, et al., 2004).
Control Risk - It is a risk that is related to material misstatement that is related to
facts and figures that occurs due to lack of proper control and when the internal
control of the company is not that efficient. It is significant that internal controls
should be designed in such a manner that there is least amount of error in the
books of the business and the auditor should make sure the books of the company
thoroughly to find any such error involved.
Detection Risk – This is a risk that occurs when the auditor fails to detect any error
or material misstatement in the books of the company. It occurs due to the failure
on part of the auditor and thus detection risk occurs when the audit methods are
not in place and thus it is significant that proper audit methods are in place and no
sample checks so that risk can be detected easily.
Thus we see that these are the few risks that are related to audit and audit
methods. The existence of these risks in the financial statements and that can be
attributed to the negligence on part of the management and the auditor and thus it
is important that these risks should be avoided so that the stakeholders get the best
representation of the financial statements and that should be free of charge from all
kind of mistakes. In this assignment the various business risks and other risk have
been analyzed and recommendations have been provided (Iggers, 2018).
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Importance of Audit Risk Assessment
It is not possible that the auditors can check the books of the company for each and
every item and there are high chances that when the auditor checks sample checks,
there are chances that they miss out few things and that makes the overall audit
more prone to risk. Thus while conducting the audit, the company needs to a risk
based audit approach. The main aim of the auditor it to reduce the overall risks that
are involved with the company, and the audit that is conducted (Johan, 2018).
It is important that auditor follows the code of ethics when they are auditing the
books of the company and be certain that the financial statements are clear and in
case they find any such error they need to mention the same in their audit report
and inform the management about that. There are certain standardized procedures
that are there which the auditor can follow, however when it comes to managing
the books of the company and conducting the audit the auditor needs to follow their
own guts and instinct and make their own perception and give their opinion
accordingly. Every company functions differently and thus audit methods need to
focus on that company specifically. It is important that the auditor is able to identify
the key audit areas and risk assessment should be properly, examples of major risk
area would be high amount of credit instruments, giving out large amount of
dividends etc. So these are specific for each company separately and so the
judgement of the auditor comes into play over anything else (Kusnadi & Wei, 2017).
The auditor is expected to show their own critical thinking when they are managing
the affairs of the company. Thus customizing the audit methods would be very
important and this will not only help in identification of the material misstatement
and risk involved but also reducing the same.
Analysis
Major areas of Risk
The major objective of audit is to find any underlying errors and mistakes and take
decisions based on that. There is a risk involved that the annual statements of the
company will not show the correct position of the books of the company, the correct
fiscal position of the company and the investors checks upon the financial
statements and the audit report to take vital decisions whether they want to invest
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in the company or not (Norberg, 2018). In respect to the manufacturing sector there
are audit risks that are related to corporate governance, capital adequacy, changes
in the technology, risk-based compensation and different kind of investments
among others. So in this case we shall now explore the different risk areas that the
company faces and how the auditors can get over the same.
Business Risk Assessment
Business risk is that risk that might affect a company in such a manner that the
largely profit of the group is depleting. Business risks can be classified on several
ways. The company suffers from various elements of risk that includes credit risk,
supplier risk and inventory risk. In this assignment first the audit risks have been
identified and then the recommendations have been given to reduce the risk
involved.
Tesla Inc: Audit Risk Area
When the books of the company are audited, there are certain material items that
require special attention from the auditor, given the volume of the transactions, the
kind of transactions involved, the importance of the same to the company. The
auditor have checked the books of the company, and have given their own opinion
on this matters in which there can be chances and risks of material misstatement
and risk involved overall (Ruth, 2018). The auditors of the company are able to find
these areas in which there is major risk elements involved, few of them are stated
below:
Recognition of the Revenue
Revenue recognition is an important element and there are a lot of assumptions
and methods that are involved with respect to this. In the given case the company
recognizes revenue based on various methods that include checking whether the
arrangement exists or not, whether the delivery has taken place and there are no
chances of the customer not accepting the products and whether there is a
reasonable assurance of the collection. The company has three different kind of
revenue like automotive revenue, automotive leasing revenue and resale value
guarantees and other financing programs (Truong, et al., 2008). The company has
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various agreements based on which they are generating revenue from the
customers that involves with a resale value guarantee to the customers and the
leasing partners. Thus this forms a major part of the overall revenue that the
company earns and thus the auditor needs to check it deliberately so that there is
no risk involved. The implications involved that there might be over or under
statement of the revenue and the assumptions applied by the management in
recognizing the revenue is correct or not.
Audit methods Applied
The auditor needs to obtain knowledge of the internal controls that has been placed
by the management of the company, along with that he needs to check that the
recognition of the revenue is based in the respective accounting and auditing
standards that has been framed by the authorities. In case the auditor thinks that
this has not been done then they can state this in their audit report. The auditor
needs to check the agreements with respect to lease and resale and make sure that
the terms of the agreements are in favor of the company, with respect to
recognition of the revenue the auditor should check that the stated conditions are
met and then only the revenue earned in reflected in the financial statements
(Truong, et al., 2008). The auditor should also apply analytical and persuasive audit
methods that would help in understanding the major areas in which there might be
high chances of risk, in this case the auditor should take help from valuation
specialist also in order to calculate the resale value of the leasing agreements
involved. They should also check through sample checks and analysis that the
books of the company with respect to recognition of the revenue are free from all
kind of errors. On quarterly basis the vehicles resale value in the market is also
checked to see if there is any loss that the company has to bear in case of any of
these contracts.
Cash and Cash equivalents and Financial Instruments
The cash equivalents are considered those highly liquid investments with an original
maturity of less than three months from the date of the purchase and thus
considered cash equivalents. The cash equivalents are considered of money market
funds. The company has a restricted cash balance and the restricted cash balance
is compromised primarily of cash as collateral for sales to lease partners with a
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resale value agreements. The restricted cash includes of cash that is received from
certain fund investors that is not used and is held to make certain payments and
that is under various secured debt facilities (Vieira, et al., 2017). The financial
instruments consists of customer notes receivable under the legacy of the MyPower
loan program and there are a lot of loans that the management is providing against
these credited statements and thus they are considered as financial instruments
and there is a lot of judgment that is involved on part of the management on how
they are valuing these cash and cash equivalents and also making sure that the
value of cash restrictions is not affecting the overall liquidity position of the
company and not affecting the overall financial position of the company
accordingly. The risks that has been stated in the financial statements includes with
respect to cash and cash equivalents includes-
Credit risk – The financial instruments exposes the business to few risk, as majorly
the cash is mostly invest in money market funds and deposited in high credit quality
financial institutions primarily based in the US. These deposits may be more than
that of the excess insured limits. Thus there exists risk that is associated with high
risk swaps and thus that needs to be mitigated by the management by proper
spreading of the funds in different areas and managing the same (Webster, 2017).
Audit methods Applied
The auditor needs to check the account balances to check the overall material
misstatement in this case. It will involve getting knowledge about the company, the
knowledge about the various investment made by the management, the overall
amount related to the cash and cash equivalents needs to be checked. Analytical
procedures like ratio analysis can be applied to check the overall liquidity position of
the company. The auditor also need to obtain understanding about the controls
applied by the management of the company, there are high chances that the
policies of cash restrictions are not correct, thus the auditor needs to check that
also. The overall effect of the interest swaps also need to be considered to see how
it is affecting the flow of funds and whether the company is suffering huge losses
because of that. So these are few audit methods that the auditor has to apply to
ensure the overall account balances and check the authenticity of the same. The
auditor has to confirm whether the management has put proper disclosures in the
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notes to account with regards to the cash restrictions and the investment of the
funds in this case (Wendt, 2018).
Supplier and Inventory Management
It is important that the auditor checks the inventory with respect to Tesla, as the
company is a manufacturing based company and they are procuring their
inventories from different part of the world, and thus it is important to have
knowledge on how the inventories are being used and stored. The company faces
inventory related risk as the valuation of the inventories are based on cost or net
realizable value whichever is lower. In case of cost that is computed based on the
method of standard costing and that includes the energy storage products and
vehicles. The actual cost is calculated based on FIFO basis. The carrying value of the
inventory is also reviewed to check if it exceeds the net realizable value. The excess
and the obsolete inventories need to be written down off and that is based upon
assumption of the current and the future demand. If there is excess inventory over
the future demand then that is written off by the company (Wellmer, 2018). Timely
updates are needed and in case there is any change in the estimated selling prices
or the set cost prices then the company needs to check the same because a small
change will make the financial statement materially misstated.
The company also needs to manage the suppliers of the raw material that provides
products that is needed in manufacturing. As we see that the company is mostly
having a single source supplier and in case the supplier fails to deliver the
requirements at the acceptable prices and time , along with maintaining the quality
then would affect the overall production of the company. Thus that is one of the
major risk that the management is facing and they need to look for other supplier
also as a back-up who can promote the production of the company.
Audit methods applied
The auditor needs to understand the method of valuation that the company is
applying for its inventories and whether or not they are following the required
accounting and auditing standards that govern the valuation of the inventory and
showing the same in the books to accounts of the company. The auditor also needs
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to get an understanding about the internal controls applied by the management
with respect to the inventors and if not these controls are functioning appropriately.
With respect to the supplier, they need to get an understanding about the major
suppliers and if the management has some precautions taken in case these
suppliers fails to provide them the required materials at the right time (Kaufmann,
2017). So there should be some reserve in place with respect to that and with
respect to inventory also there should be some controls in place to protect the
company against these fluctuations in the prices and costs. The auditor also needs
to check whether proper disclosures have been mentioned in the notes to account
as per the assumption made and the accounting and auditing procedures followed
by the management of the company.
Conclusion
Based on the study above it can be said that the auditing is a very important
procedure and obtaining knowledge about the audit being conducted and the way
the annual statements of the company have been prepared and audited is very
important. The need for importance of obtaining knowledge about the business is
very critical, and audit risk is inherent to audit and the way the audit is conducted.
The auditor needs to obtain the audit procedures and audit methods that would
help them in analyzing these risk prone areas and reducing the overall risk
associated with the company. In case of this manufacturing entity the company
faces many specific risk that is related to the credit risk, supplier risk and risk
related to the inventory management of the company. The auditor also faces risk
that is related to the detection risk, control risk and the inherent risk that comes
with audit. Audit is done to improve the overall transparency of the financial
statements and make the stakeholders aware about the overall financial position of
the company and whether they can invest in the company or not. So we see how
important risk assessment is when it comes to audit and why it is important for the
auditor too apply their own judgment in this.
In the mentioned company the auditor has given an opinion that the books of the
company are devoid from all kind of errors and have based their opinion on the
several audit methods and procedures that are applied by them to check the
various account balances and the materiality involved with them. The audit
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methods applied by the company involves analytical and persuasive audit
procedures that they need to apply like ratio analysis, analysis through account
balance check, obtaining knowledge about the company and the control applied by
the authorities. The report identifies the various areas of risk and also state the
various audit method that the auditor have applied. The report also states why risk
assessment is important and why companies should undertake that. Overall this will
help in making the quality of audit of and making the financial statements better
and providing more information to the shareholders who are investing in the
company and getting their dues from that company, so generating returns is the
key and thus investors all around the world depends on these audit report to get
better insight of the company and its operations. It is the responsibility of the
auditors to make sure that they follow the code of ethics and applying their own
judgment and taking precautions that would help in reducing the risk of the audit
and the steps taken by the management of the company.
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Added And Return On Cost Of Capital In Measuring Corporate Performance. Jurnal
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Kaufmann, W., 2017. The Problem of Regulatory Unreasonableness. First ed. New
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