Account Why is it important? Control Related Issue Effective Controls Tests of Controls Sales Customer deposits Research and Development Young, technology based company so R&D is a significant factor in the financial reporting R&D may be capitalized when it should not be or expensed when it should be capitalized Two people, one accountant and one with the research and development team, should review the entry to capitalize or expense R&D and note the reasonableness of the entry. Ensure review document is signed by the reviewers attesting to the reasonableness and some type of analytical procedures were done to determine reasonableness from the prior year. If there is a significant increase, management's reason is sound. Tesla is a young, technology based company with unstable earnings. Investors rely on sales for these types of companies for prediction of future cash flows. Incentive to overstate sales to increase confidence from investors and the share price Sales person cannot enter sales into the system. One person without sales commission should enter the sale into the system. Management overrides must be reviewed by another sales person or manager before sale is final in system. Ensure no sales person has entered a sale and employee independent to the sale of the cars (e.g. no commission related to sales) has reviewed and okayed sale in system. Also, ensure another manager or sales person has signed off on manager overrides. See sales reason above. Customer deposits are recorded as liabilities until the customer signs a purchase agreement then the deposits are recorded as revenue. Management may have an incentive to recognize customer deposits as revenue instead of customer deposits right away to increase share price and investors' confidence. Automated system where customer deposits are originally recognized as liabilities until customer has signed a purchase agreement. Once the purchase agreement is entered into the system, an automatic journal entry is made to reduce customer deposits and increase revenues. Do a run through with a non-live copy of the system to ensure system makes automated journal entries. If any overrides, overrides are tested for support with reasonable support. Operating lease vehicles and Resale Value Guarantee See sales reason above. Only part of operating lease vehicles is recognized right away as revenue and the other amount is recognized when earned throughout the life of the lease. Management may have an incentive to recognize all of the revenue from the operating lease vehicles right away to increase share price and investors' confidence. System is automatically set up to recognize revenue after certain period of time. Purchase agreement is entered into system with correct number of months for the lease. Test to ensure one person not related to the sale or management has entered the purchase agreement with the correct number of periods. Management overrides are supported with reasonable support. Non-Cash Capital Expenditures Tesla had a material weakness in this account in the prior year's audit. Need to ensure they have addressed the issue. Also, capital expenditures are expected to increase in the coming year. May understate non- cash capital expenditures to make their cash flows and income look better than it actually is Automated system for recognizing capital expenditures and reporting them in the financial report. Only one person not related to any capital expenditures must review the support for the capital expenditures and another enters it into the system. Test to ensure one person has reviewed and signed off on the entry and another has entered it into the system. Test to ensure the system carries over to the presentation and disclosure part of the financials.
Sheet1AccountWhy is it important?Control Related IssueEffective
ControlsTests of ControlsResearch and DevelopmentYoung, technology
based company so R&D is a significant factor in the financial
reportingR&D may be capitalized when it should not be or
expensed when it should be capitalizedTwo people, one accountant
and one with the research and development team, should review the
entry to capitalize or expense R&D and note the reasonableness
of the entry.Ensure review document is signed by the reviewers
attesting to the reasonableness and some type of analytical
procedures were done to determine reasonableness from the prior
year. If there is a significant increase, management's reason is
sound.SalesTesla is a young, technology based company with unstable
earnings. Investors rely on sales for these types of companies for
prediction of future cash flows.Incentive to overstate sales to
increase confidence from investors and the share priceSales person
cannot enter sales into the system. One person without sales
commission should enter the sale into the system. Management
overrides must be reviewed by another sales person or manager
before sale is final in system.Ensure no sales person has entered a
sale and employee independent to the sale of the cars (e.g. no
commission related to sales) has reviewed and okayed sale in
system. Also, ensure another manager or sales person has signed off
on manager overrides.Customer depositsSee sales reason above.
Customer deposits are recorded as liabilities until the customer
signs a purchase agreement then the deposits are recorded as
revenue.Management may have an incentive to recognize customer
deposits as revenue instead of customer deposits right away to
increase share price and investors' confidence.Automated system
where customer deposits are originally recognized as liabilities
until customer has signed a purchase agreement. Once the purchase
agreement is entered into the system, an automatic journal entry is
made to reduce customer deposits and increase revenues.Do a run
through with a non-live copy of the system to ensure system makes
automated journal entries. If any overrides, overrides are tested
for support with reasonable support.Operating lease vehicles and
Resale Value GuaranteeSee sales reason above. Only part of
operating lease vehicles is recognized right away as revenue and
the other amount is recognized when earned throughout the life of
the lease.Management may have an incentive to recognize all of the
revenue from the operating lease vehicles right away to increase
share price and investors' confidence.System is automatically set
up to recognize revenue after certain period of time. Purchase
agreement is entered into system with correct number of months for
the lease. Test to ensure one person not related to the sale or
management has entered the purchase agreement with the correct
number of periods. Management overrides are supported with
reasonable support.Non-Cash Capital ExpendituresTesla had a
material weakness in this account in the prior year's audit. Need
to ensure they have addressed the issue. Also, capital expenditures
are expected to increase in the coming year.May understate non-cash
capital expenditures to make their cash flows and income look
better than it actually isAutomated system for recognizing capital
expenditures and reporting them in the financial report. Only one
person not related to any capital expenditures must review the
support for the capital expenditures and another enters it into the
system.Test to ensure one person has reviewed and signed off on the
entry and another has entered it into the system. Test to ensure
the system carries over to the presentation and disclosure part of
the financials.
