As part of our audit process, we will request from Tesla Motors, written confirmation concerning representations made to us in connection with the audit. We will issue a written report upon completion of our audit of Tesla Motor’s financial statements. Our report will be addressed to the board of directors of Tesla Motor’s. We cannot provide assurance that an unmodified opinion will be expressed.
Circumstances may arise in which it is necessary for us to modify our opinion or withdraw from the engagement. Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial statements including our respective responsibilities. Regards,
Certified Public Accountants
Acknowledged and agreed on behalf of Tesla Motors by
_______________________________ {Sign Name Here}
_______________________________ {Print Name Here}
_______________________________ {Date}
Chapter 3: Preliminary Engagement Activities It is very important to understand the client’s business. The standards require it; the 2nd standard of Fieldwork also requires it. It is necessary in order to plan and perform our work. The auditor is expected to plan and perform an audit that provides reasonable assurance that material misstatements will be detected. Audit documentation should be prepared in sufficient detail to provide a clear understanding of its purpose, source, and the conclusions reached.
Two of the most important things though are to validate compliance with PCAOB standards and demonstrate support basis for conclusions on every relevant assertions. Auditors maintain ownership of documentation, even after the auditor-client relationship is over. Most importantly, associates of the audit team must uphold neutrality in fact and neutrality in appearance. Associates must be neutral and unbiased in every aspect of the audit, and also need to appear that way.
An associate may not offer consulting advice to Tesla on anything that can be potentially audited. And also any associate of the audit team shall not have any immediate family that is employed by Tesla. Audits of the financial statements will include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used & significant estimates made by management, and evaluating the overall financial statement presentation.
Audit procedures are used for 3 purposes: Risk assessment is used to gain an understanding of the client and the risks associated, tests of controls are used to test the operating effectiveness of the clients internal control procedures, and substantive procedures or analytical procedures are used to test for details of account balances. General audit procedures include inspection of records & documents, inspection of tangible assets, observations or inquiries, and recalculations. Assignments vary with the risk involved with the client.
Chapter 5: Consider Internal Control Auditors evaluate internal control for two reasons: To determine control risk planning & to provide an opinion of the effectiveness of internal control. It is very important to document the understanding of internal control through accounting and use of control system flowcharts. It is also important to assess preliminary control risk and perform tests of controls audit procedures. The major goal here is to be effective, but to also be efficient which can be implemented through observation and inquiry.
Focus on accounts that are significant to the company’s financial statements like sales or cost of goods sold. The Sarbanes-Oxley Act requires auditors to provide a estimation on the efficiency & effectiveness of internal controls. Auditors must evaluate the risk of material misstatement for each assertion. Per Section 404 of the Sarbanes-Oxley Act, management and auditors both hold certain obligations on reporting the internal control of the company.
Tesla may have internal controls in place to reduce the risk of material misstatement in their financial documents. But, the power & efficiency of these controls must be verified. If control risk is very high, plan on relying on internal control & increasing substantive testing of account balances. If control risk is low, test control design or operation and adjust substantive testing by decreasing it. Evaluation must be done for all relevant assertions for all significant accounts or disclosures.
Just as control risk is used to determine the nature, timing, and extent of substantive procedures, inherent risk is used to determine the nature, timing, and extent of tests of controls. There are also limitations to internal controls such as human error, management override, or a cost-benefit analysis. The concept of reasonable assurance recognizes that the cost of an entity’s internal control should not exceed the benefits that are expected to be derived. Chapter 7: Complete The Audit Analytical procedures are used to obtain a better understanding of the client and its industry.
In 1992, the AICPA recommended the use of an engagement risk approach in client acceptance/retention decisions. Consider the first standard of fieldwork (adequate planning & proper supervision). The amount of audit planning is a direct function of the size and complexity of the client. It is also an inverse function of the auditor’s knowledge of an experience with the client. The decisions that are made by consultations usually involve senior top management. The decisions that are made by consensus usually include the leadership team.
The objective of the examination of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, results of operations and cash flows in conformity with GAAP. The auditor’s report is the medium through which they express their opinion or if circumstances require, disclaim an opinion. An issue that was found was that although there may be multiple suppliers available, many of the components used in Tesla’s vehicles are purchased from a single source.
If these single source suppliers fail to satisfy requirements on a timely basis at competitive prices, the company could suffer manufacturing delays, a possible loss of revenues, or incur higher cost of sales, any of which could adversely affect the results of future inventory accounts. Do company results make sense in relation to industry and economic trends? Sarbanes-Oxley Act requires new audit engagement and concurring partner review every 5 years. Contingent liabilities may be identified during the search for unrecorded liabilities.
