ACC 372 - 403 NVIDIA Corporation Audit Engagement Plan 1 East Jackson Blvd.

Chicago, IL 60604

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 2 Lisa Sedor, Ph.D. Assistant Professor DePaul University 1 East Jackson Blvd. Chi cago, IL 60604 Dear Ms. Sedor: We have prepared a report on our planning activat es for the audit engagement of NVIDIA Corporation for their upcoming fiscal year -end date of January 29, 2013. Included in this report is the analysis of NVIDIA s business environment, planning materiality, and the identification and assess ment of the risks of material misstatement. Our report integrates information pr esented in Q2 & Q1 FY2013, Q3 FY2013 CFO Commentary, and 2012 Form 10-K to perfo rm key elements of planning an effective and efficient audit engagement for NVID IA. Please don t hesitate to contact us should you have any questions or concern s. Sincerely, Abrar Mirza Jimmy He CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 3 Table of Contents Copies Auditor s Report Comparative Balance Sheet Income State ment Statement of Cash Flow Documentation of Client s Business and Environment K ey Drivers/Industry Performance Managements Strategic Goals and Incentives Impor tant Accounting Policies Company s Industry and Markets Recent Events Planning M ateriality Quantitative Materiality Qualitative Materiality Risks of Material Mi sstatement Financial Statement Account Level Financial Statement Assertion Level Closing References 13 14 14 17 17 18-19 12 13 13 7 7 8 8 10 10 11 11 CONFIDENTIAL

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November 13, 2012 ACC 372 - 403 Audit Engagement Plan 4 Copies Auditor s Reports To the Stockholders and Board of Directors of NVIDIA Corporation: In our opinion , the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NV IDIA Corporation and its subsidiaries at January 29, 2012 and January 30, 2011, and the results of their operations and their cash flows for each of the three y ears in the period ended January 29, 2012, in conformity with accounting princip les generally accepted in the United States of America. In addition, in our opin ion, the financial statement schedule listed in the index appearing under Item 1 5(a)(2) presents fairly, in all material respects, the information set forth the rein when read in conjunction with the related consolidated financial statements . Also in our opinion, the Company maintained, in all material respects, effecti ve internal control over financial reporting as of January 29, 2012, based on cr iteria established in Internal Control Integrated Framework issued by the Commit tee of Sponsoring Organizations of the Treadway Commission (COSO). The Company s management is responsible for these financial statements and financial statemen t schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial r eporting, included in Management s Report on Internal Control over Financial Rep orting appearing under Item 9A. Our responsibility is to express opinions on the se financial statements, on the financial statement schedule, and on the Company s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Acco unting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial s tatements are free of material misstatement and whether effective internal contr ol over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence suppor ting the amounts and disclosures in the financial statements, assessing the acco unting principles used and significant estimates made by management, and evaluat ing the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, a nd testing and evaluating the design and operating effectiveness of internal con trol based on the assessed risk. Our audits also included performing such other procedures, as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company s internal contro l over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financi al statements for external purposes in accordance with generally accepted accoun ting principles. A company s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records tha t, in reasonable detail, accurately and fairly reflect the transactions and disp ositions of the assets of the company; (ii) provide reasonable assurance that tr ansactions are recorded as necessary to permit preparation of financial statemen ts in accordance with generally accepted accounting principles, and that receipt s and expenditures of the company are being made only in accordance with authori zations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company s assets that could have a material effect o n the financial statements. Because of its inherent limitations, internal contro l over financial reporting may not prevent or detect misstatements. Also, projec

tions of any evaluation of effectiveness to future periods are subject to the ri sk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ P ricewaterhouseCoopers LLP San Jose, CA March 13, 2012 CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 5 Com parative Balance Sheet CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 6 Incom e Statem ent Statem ent of Cash Flows CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 7 Key Drivers of the NVIDIA/Industry Perform ance Nvidia (NVDA) is an American multinational technology company based out of Santa Carla, California. They have operations overseas as well and they are best know n for developing and selling graphics processing units (GPUs). Jen-Hsun Huang, C hris Malachosky, and Curtis Priem founded Nvidia in 1993. All three founders for merly worked in the IT industry for companies that are now rivals of Nvidia. Nvi dia currently employs more than 6000 people and has revenues of US$ 3.997 billio n for the fiscal year 2012. They are a public company listed on the NASDAQ. The company gained prominence when they invented their first GPU in 1999, since then the company has expanded within the visual computing market and has also establ ished itself as a key player in super, mobile and cloud computing. The mobile pr ocessors are used in smartphones, tablets and auto infotainment systems. PC game rs rely on Nvidia s GPUs to enjoy extraordinary new heights of video gaming; fur thermore, in the film industry Nvidia s devices are used to create visual effect s and researchers utilize GPU s to further their research with the help of high performance computing. The company leases design centers, sales and administrati ve office space in the western U.S. Internationally, the company leases space or owns facilities throughout Europe and Asia. In FY 2009, Nvidia completed its ac quisition of Ageia Technologies Inc., Ageia, an industry leader in gaming physic s technology. M anagem ents Strategic Goals and Incentives In my opinion Nvidia s primary growth strategy is to capture a larger and larger part of the market share, they do this by investing heavily in research and dev elopment and also by acquisitions of smaller companies. Another prominent key st rategy that the CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 8 enabled Nvidia to remain a dominant player in the market is innovation, to be sp ecific, Nvidia added programmability to its graphics chips, this enabled the com pany to compete with Intel by getting graphics chips to do non-graphics computin g tasks, opening doors for Nvidia to get into a wider range of devices. This str ategy has basically allowed them to extend the reach of their market from PC s t o anything that has visually rich expression. Im portant Accounting Policies Revenue Recognition According to the Management s discussion and analysis there are several critical accounting policies and estimates; these policies and estim ates are in accordance with the U.S. GAAP. For revenue recognition, the company recognizes revenue from product sales when the product has been delivered, the p rice is fixed or determinable and collection is reasonable assured. Purchase ord ers and contractual agreements are used as evidence of an arrangement. The compa ny considers delivery to occur upon shipment provided title and risk of loss hav e passed to the customer based on the shipping terms. Policy on sales to certain distributors, with rights of returns, is to defer recognition of revenue and re lated costs of revenue until the distributors resell the products, as the level of returns cannot be reasonably estimated. For rebates, which are offered to cus tomers as an incentive to promote sales, liability is recognized for these rebat es at the later of the date at which they record the related revenue, or the dat e, which the rebate is offered. License and development revenue For license and development revenue, the company uses percentage of completion method. It is bas ed on actual direct labor hours incurred to date as a CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 9 percentage of the estimated total direct labor hours required to complete the pr oject. The management regularly evaluates the actual status of each project to e nsure that the estimates to complete each contract remain accurate; revenue is r ecognized over the period the services are performed. The company also maintains a provision for estimated losses on contracts in the period in which loss becom es probable and can be reasonably estimated. Costs incurred in advance of revenu e recognized are recorded as deferred costs on uncompleted contracts. If the amo unt billed exceeds the amount of revenue recognized, the excess amount is record ed as deferred revenue. Royalty revenue is recognized related to the distributio n or sale of products that use their technologies under license agreements with third parties, it is recognized upon receipt of a confirmation of earned royalti es and when collectability is reasonable assured from applicable licensees. Acco unts receivables A standard allowance for doubtful accounts receivable for estim ated losses is maintained resulting from inability of the customers to make requ ired payments. The allowance is determined based on specific customer issues as well as on overall exposure. Accounts receivable are highly concentrated and mak e the firm vulnerable to adverse changes in their customers businesses, and to d ownturns in the industry and worldwide economy. The overall estimated exposure e xcludes significant amounts that are covered by credit default swaps. Inventory For inventories, the firm computes the value on an adjusted standard basis, whic h approximates actual cost on an average or FIFO basis. Inventory is written dow n to the CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 10 lower of cost or estimated market value. Obsolete or unmarketable inventory is c ompletely written off based upon assumptions about future demand and other estim ations. Warranty Liability Another crucial chunk of liabilities that are very co mmon within the technology industry is the warranty liability. Cost of revenue f or Nvidia includes the estimated cost of product warranties that are calculated at the point of revenue recognition. Since the products are of complex nature an d defects or failures may often arise, the firm invests in additional research a nd development efforts to find and correct the issue. Such efforts divert the ma nagements and engineers attention from the development of new products and techn ologies and may lead to an increase in the operating costs and subsequently redu ce gross margins. Determination of the amount of warranty charges related to the se issues require the management to make estimates and judgments based on histor ical experience, test data and various other assumptions. Com pany s Industry and M arkets Nvidia is broadly a part of the technologies industry; more specifically they fa ll under the Semiconductor and Related Device Manufacturing Industry . This indu stry has roughly about 881 companies and revenues exceeding US$ 500 Billion. Nvi dia holds the second largest market share in the graphic card manufactures indus try; according to Top Graphics Chip Makers Worldwide, 2009 . Nvidia has a share of 24.30% just behind Intel s share of 55.20%. The industry is very vast and art iculated. Graphic cards can be found in almost every consumer electronic device that encompasses a visual unit. They are present in mobile phones, TVs, computer s, gaming consoles, simulators etc. The industry has CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 11 positive outlooks as analysts assume that consumers will continue to buy electro nic devices like mobile phones, tablet s, laptop s etc., however since Nvidia is a manufacturing company an economic slowdown can have a multiplier effect that would affect sales of PC s used in businesses (which is a big market for Nvidia) and ultimately effect the sales for Nvidia. In August 2011, Nvidia predicted th e growth of its revenues to be between 4-6%, instead of just 4% as analysts pred icted, they indeed ended up surpassing analysts expectations. Moreover, the comp any has consistently satisfied or surpassed analysts expectations of sales. The Company s 10-Q reveal that Nvidia is subject to litigation arising from alleged defects in their previous generation MCP and GPU products which if determined co uld do subsequent damage to the business. Out of the US$ 475.9 Million, US$466.4 Million has been charged against the cost of revenue to cover anticipated custo mer warranty, repair, return, replacement and other costs arising from product d efects. Nvidia is also a party to other litigation, including patent litigation, which could affect their cash flow and financial results; they are party both a s a defendant and as a plaintiff. Changes in the US tax legislation regarding th eir foreign earnings could also impact their business. Recent Events & Risks Nvidia s 10-Q filing reveals some risks that they might be exposed to. To begin with they are subject to risks of owing property in the U.S, as well as China an d India. The risks include the possibility of environmental contamination and th e costs associated with the mitigation of the problems, adverse changes in the v alue of these properties, increased cash commitments, increased operating expens es etc. Also, because of an increased cost CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 12 associated with employee equity compensation, they may decide to increase cash c ompensation and decrease stock based compensation, Nvidia might be at a risk of employees not putting in their 100% and ultimately affecting their operating res ults as well as their competitive position. Moreover, the risk of fines, suspens ion of production, excess inventory, sales limitation and criminal and civil lia bilities exist if Nvidia fails to comply with applicable environmental regulatio ns. Also, as mentioned by Nvidia s auditors in form 10-K of 2011 and 2012, the r isk that internal control over financial reporting may not prevent or detect mis statements. This is a crucial element and shifts the control risk of the engagem ent to high and lowers the acceptable detection risk rate. Quantitative M ateriality Considerations Calculation: Total Assets, 7/29/2012 = $55,529,280,000 Planning Materiality = Amount From Table + (Percentage From Table x Base Amount) Planning Materiality = $1,600,000 + (0.00058 * $55,529,280,000 Planning Materiality = $4,820,600 Tolerate Misstatement Calculation = Planning Materiality x Factor Tolerable Misstatement = $4,820,600 x 0.75 Tolerable Misstatement = $3,615,450 The method that we chose to use is a method that is based on the total assets of the company as of the annual second quarter fiscal year of 2013. Using the 5% m ethod of the CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 13 percentage of net income to calculate quantitative materiality wouldn t be appro priate. Also it should be noted that total annualized revenue is less than the t otal assets of the year, which is also why we chose to use that base amount to b e the total assets. We used the second quarter financial statements to determine quantitative materiality. Qualitative M ateriality Considerations Because of the risk factors discussed above in the light of various reports and company s 10-Q and 10-K filings, and because of a high control risk and predeces sor auditor determining weak internal controls over financial reporting a lot of planning will have go in for determining materiality associated with different accounts. Firstly, I think revenue recognition is an important element and becau se of prior sales returns and defective inventory in my opinion that account wou ld a high risk one. Warranty and litigation liability would also have to be asse ssed and tested for material misstatements because of inherent risk and control risk factors and also because of ongoing multiple litigations. Also, because the company ones various intangible assets, mainly patents, tests would have to be carried out to make sure they are not overstated and these accounts are properly amortized. Company s goodwill should also be tested for impairments and subsequ ent overstatements. Because of weak internal controls, various liability and exp ense accounts such as accounts payable and other liabilities should be tested fo r understatements and fraudulent financial reporting. Risk of M aterial M isstatem ent Financial Statem ent Account Level CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 14 Nvidia Corporation seems to have very little financial risk as the company holds a substantial amount of cash on its books with very little to no debt. However, due to the nature of the business, we have assessed that the following accounts have a high risk of material misstatement and require additional or significant audit effort: Accounts Receivable, Inventory, Warranty Liabilities, and Goodwil l. Financial Statem ent Assertion Level In regards to Accounts Receivable, we are concerned with the performance of the account. The Accounts Receivable account is among the industry s worst with 33.6 4 days of inventory outstanding. This can only imply that the revenues are not b eing collected in an efficient manner leading to a high risk of material misstat ement. We are concerned that this amount would be understated and the high-risk assertion would be valuation. Nvidia maintains an allowance for doubtful account s receivable for estimated losses resulting from the inability for their custome rs to make required payments. Management decides this allowance, which consists of the amount preidentified for specific customer issues, and a general amount b ased on general estimated exposure. Their overall estimated exposure excludes si gnificant amounts that are covered by credit insurance and letters of credit. Sh ould financial health of their customers, the financial institutions providing c redit, or their credit insurance carriers were to deteriorate, additional allowa nces will be made that could affect their operating result. As a percentage of t heir gross accounts receivable, their allowance for doubtful accounts range betw een 0.2% and 0.3%. We need to obtain adequate and sufficient evidence that the e stimates for the doubtful accounts are CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 15 adequate at 0.2% - 0.3%. If the estimate is too low of an estimate then the amou nt of revenue being recognized will be understated and the high-risk assertion w ill also be calculation. In addition, we have to make sure their collection, and revenue recognition models are adequate. Warranty liabilities are another concern of ours. Due to the nature of any compa ny within the tech industry, warranty liability is huge. As mentioned before, th e estimated cost of product warranties are calculated at the point of revenue re cognition. Since the products are of complex nature and defects or failures may often arise, the firm invests in additional research and development efforts to find and correct the issue. Determination of the amount of warranty charges rela ted to these issues require the management to make estimates and judgments based on historical experience, test data and various other assumptions. The results of these judgments formed the basis for their estimate of total charge to cover anticipated customer warranty, repair, return, and replacement, and other associ ated costs. If and when actual repair, return, replacement, and other associated costs and/or actual field failure rates exceeds their estimates, they will reco rd additional reserves, which will result in an increase in the cost of revenue and in turn will materially harm their financial results. We are concerned that the warranty liability estimates could possibly be understated, which would resu lt in the high-risk assertion of completeness. Due to the very nature of their p roducts, due to the complexity, there will be defects and experiences of failure s due to a number of issues in design, fabrication, packaging, and materials use d within a system. We need to find reasonable assurance that the estimate models for the CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 16 estimate of the cost of warranties is accurate and adequate in predicating the n umber of products being sent back to be serviced. Inventory cost is another concern of ours. Inventory costs are computed on an ad justed standard basis, which approximates actual cost on average or FIFO basis. Nvidia s inventory consists of primarily the cost to semiconductors purchased fr om subcontractors. They write down their inventory based on the assumptions of f uture demands, future, product purchase commitments, and estimated manufacturing yield levels and market conditions. If their estimates are off, they will need to write-down additional future inventory, which will affect their operating res ult. We are concerned that the inventory estimates will be understated resulting in the high-risk assertion of completeness. We need to find reasonable assuranc e that their inventory write-off estimation model is accurate. Adopted during the fourth quarter of the fiscal year of 2012, Nvidia adopted the step zero approach that allows them to first assess qualitative factors to dete rmine if it is necessary to perform the two-step quantitative good will impairme nt test. Nvidia s review process compares the fair value of the reporting unit w here the goodwill resides to its carrying value. They determined that their repo rting units are equivalent to their operating segments, or components of an oper ating segment, for the purposes of completing their goodwill impairment test. Wh en determining the number of reporting units and the fair value, it requires usi ng judgment and is heavily based on estimates and assumptions. It should be note d that even Nvidia states that their fair value estimates on assumptions are bel ieved to be reasonable but are unpredictable and inherently uncertain. We are CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 17 concerned that the account is overstated, resulting in a high-risk assertion of completeness. Closing Note In planning for the Nvidia Corporation s 2013 audit engagement, we have establis hed sufficient and clear understanding of the company s operations, industry, an d recent events. We have also calculated and established quantitative and qualit ative materiality for the engagement. We have identified key accounts that have a significant risk of misstatement, and will require the need for additional aud it effort. CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 18 References "Semiconductors." Encyclopedia of Emerging Industries. Ed. Lynn M. Pearce. Detro it: Gale, 2012. Business Insights: Essentials. Web. 13 Nov. 2012. Document URL h ttp://bi.galegroup.com.ezproxy2.lib.depaul.edu/essentials/article/GALE%7CRN25 01 500089/fc342fcf405f6fdaa41df670e9414e38?u=depaul "Computer Peripheral Equipment, Not Elsewhere Classified." Encyclopedia of American Industries. Ed. Lynn M. Pearce. Detroit: Gale, 2012. Business Insights: Essentials. Web. 13 Nov. 2012. Document URL http://bi.galegroup.com.ezproxy2.lib.depaul.edu/essentials/article/ GALE%7CRN25 01400356/7222878a6da6b320d7cb4cc4bea5d398?u=depaul Hoover's Company Records - In-depth Records Nvidia Corporation. (November 6, 2012): LexisNexis Ac ademic. Web. Date Accessed: 2012/11/13. Nvidia, Corp. (2012). Q2 FY 201310-Q 2012. Retrieved from http://phx.corporateir .net/phoenix.zhtml?c=116466&p=irol-reportsannual Nvidia, Corp. (2012). Q1 FY 201310-Q 2012. Retrieved from http://phx.corporateir .net/phoenix.zhtml?c=116466&p=irol-reportsannual Nvidia, Corp. (2011). Q3 FY 201 310-Q 2011. Retrieved from http://phx.corporateir.net/phoenix.zhtml?c=116466&p=i rol-reportsannual Nvidia, Corp. (2012). Q3 FY 2013 CFO Commentary. Retrieved fro m http://nvidianews.nvidia.com/Releases/NVIDIA-Reports-Financial-Results-for-Thi rdQuarter-Fiscal-Year-2013-8b3.aspx Takahashi, Dean. "VentureBeat News About Tech, Money and Innovation."VentureBeat . VentureBeat, 4 Mar. 2011. Web. 12 Nov. 2012. CONFIDENTIAL

November 13, 2012 ACC 372 - 403 Audit Engagement Plan 19 <http://venturebeat.com/2011/03/04/qa-nvidia-chief-explains-his-strategy-forwinn ing-in-mobile-computing/>. "Top Graphics Chip Makers Worldwide, 2009." Market Sh are Reporter. Robert S. Lazich and Virgil L. Burton, III. 2011 ed. Detroit: Gale , 2011.Business Insights: Essentials. Web. 12 Nov. 2012. DON CLARK, Wall Street Journal. "Nvidia's Profit, Share Price Rise." Aug 12, 2011. Matthews, Lee. "Nvid ia Loses 10 Million GPU Order Due to Poor Linux Support." Computer Chips & Hardwar e Technology. N.p., 8 June 2012. Web. 13 Nov. 2012. <http://www.geek.com/article s/chips/nvidia-loses-order-due-topoor-linux-support-20120628/>. Hruska, Joe. "Ex tremeTech." ExtremeTech. N.p., 23 Mar. 2012. Web. 13 Nov. 2012. <http://www.extr emetech.com/computing/123529-nvidia-deeply-unhappy-withtsmc-claims-22nm-essentia lly-worthless>. CONFIDENTIAL