Technologies AG

2215-Auditing-2223_T3

Homework

Lea Krapf | 57127 Teresa Finsterwald | 54573

Table of Contents

Introduction....................................................................................................................... 3

Materiality ........................................................................................................................ 4

Review Financial Statements ............................................................................................. 6

Inherent Risk ................................................................................................................... 10

Substantive Testing ......................................................................................................... 12

References ....................................................................................................................... 14

Appendix ......................................................................................................................... 15

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Introduction
Founded in 1999, Infineon Technologies AG is a semiconductor manufacturer based in
Germany, which was created as a spin-off from the semiconductor operations of its parent
company, Siemens AG. With a workforce of approximately 56,200 employees and a well-
balanced customer portfolio (including Hyundai, Samsung, Delta, Bosch and Thales), Infineon
is ranked among the top ten semiconductor manufacturers globally and is known as the global
leader in automotive, power management, energy efficient technologies and IoT. Infineon
operates in all major regions of the world and is listed on the Frankfurt Stock Exchange and in
the USA on the over-the-counter market OTCQX. In fiscal year 2022, the company reported
sales of €14 billion. The company´s products enable secure and efficient use of energy,
facilitate connectivity, and offer advanced security solutions. The company's revenue streams
are categorized into the following four sections:

Automotive (45% of revenue)

Infineon is a leading supplier of semiconductor solutions for the automotive industry, providing
the following core applications: Assistance systems and safety systems, comfort electronics,
infotainment, powertrain and security.

Power & Sensor Systems (29% of revenue)

Infineon offers a range of power and sensor products for applications such as audio amplifiers,
BLDC motor, cellular communications infrastructure, charging stations for electric vehicles,
HiRel, human-machine-interaction, Internet of Things, LED and conventional lighting
systems, mobile devices and power management.

Industrial Power Control (13% of revenue)

Infineon's products for the industrial sector include energy generation, energy storage,
energy transmission, home appliances, industrial drives, industrial power supplies, industrial
robotics, industrial vehicles and traction.

Connected Secure Systems (13% of revenue)

Infineon provides security solutions for a variety of applications, including Industrial, Smart
Home, Home Appliance, Health & Lifestyle, Media, Gaming & Compute, Automotive,
Payment and Identification.

Firstly, we will discuss in this paper materiality, specifically its definition, the reasons for our
choice of benchmark, our determinations of materiality, performance materiality, and clearly
trivial amount, and the underlying rationales.
Furthermore, we will also present an overall review of Infineon’s past 2 years’ financial
statements from 2021 and 2022, specifically analysing the variations between both years.
Moreover, we will select 3 captions that are significant concerning inherent risk and should be
analysed more closely to detect any financial misstatements. Lastly, we will provide a
suggestion for substantive testing of one caption stating the underlying assertions and how to
perform the test.

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Materiality
The International Standard on Auditing (ISA) declares that misstatements, including
omissions, in financial statements are considered material if, individually or aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis
of the financial statements (ISA 200.6). These misstatements, which denote the difference
between the reported supposed to the required amount, classification, presentation, or
disclosure of the financial statement item to accord to the applicable financial reporting
framework, can arise from error or fraud (ISA 200.13i). But as there is no set rule or standard
for determining the correct benchmark and percentage to arrive at materiality, professional
judgement is necessary.

To determine materiality, we firstly need to define a benchmark and we identified 3 suitable

options in the consolidated financial statements that are commonly used by auditors: Profit
before tax (EBT), total revenues, and total assets.
As Infineon is a manufacturing company and is publicly listed, we deem the EBT be the most
adequate option based on our professional judgement. The EBT increased immensely over the
past three years, particularly due to the significantly small EBT in 2020 because of the Covid-
19 pandemic and supply chain shortages. Therefore, we decided to perform an average of
Infineon’s EBT of the last 3 years (2020: € 424 million; 2021: € 1,319 million; 2022: € 2,723
million; 3-year average: € 1,489 million) to arrive at a more robust benchmark to calculate
materiality. We determine materiality to be 5% of the 3-year EBT average, setting the
percentage according to the ISA 320.A7 suggestion for profit-oriented manufacturing
businesses and the Norwegian Research Council’s findings for materiality calculation.
Therefore, the materiality for the financial statement we determined based on our professional
judgment is € 74.4 million.

Materiality 5% of 3 year average EBT

€ 74.4 million 5% of €1,489 million

Performance materiality provides a smaller key figure than overall materiality to reduce the
aggregation risk of uncorrected or undetected misstatements to an acceptable level and provide
a safety net against the risk of undetected misstatements. Performance materiality is typically
between 50% and 75% of overall materiality depending on the risk of misstatements influenced
by the extent of the control environment and previous years’ experiences.
Infineon Technologies AG established multiple coordinated risk management and control
system elements such as the “Risk and Opportunity Management System”, “Internal Control
System with respect to financial reporting processes” and “Compliance Management System”.
The main focus of the Internal Control System (ICS) is on the financial reporting process and
its monitorization to minimize the risk of misstatements using preventive and detective
controls.
The assessment of Infineon’s financial reports, particularly the risk and opportunity report and
independent auditor’s report sections, leads to our assumption that the company has established
a good internal control environment.

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Therefore, based on our professional judgement we determined the performance materiality to
be 75% of overall materiality, which is € 55.8 million in absolute terms.

Performance Materiality 75% of Materiality

€55.8 million 75% of €74.4 million

The clearly trivial amount describes the amount below which misstatements would be clearly
trivial and, thus, do not need to be accumulated as they clearly would not have a material effect
on the financial statements. It is a small percentage of overall materiality and every
misstatement above this key figure and below overall materiality must be assessed and
accumulated by the auditor.
Based on our professional judgement of the risk profile of the company, we determine the
clearly trivial amount to be 5% of overall materiality, which is € 3.72 million in absolute terms.

Clearly trivial amount 5% of Materiality

€3.72 million 5% of €74.4 million

To conclude materiality, if a misstatement amounts to more than overall materiality, it must be

reported as a qualification by the auditor and if it is below the clearly trivial amount, it is clearly
inconsequential and insignificant for the report. In between those thresholds, auditors must
report all misstatements and compile aggregate values to determine material misstatements that
may indicate the risk of fraud. It is also important to analyse the qualitative factors of
misstatements, such as their effect on the Profit and Loss statement.

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Review Financial Statements
Income Statement

Revenue
The company's revenue grew steadily since 2020, with an increase of about 29% from 2020 to
2021 and from 2021 to 2022. The Automotive sector accounts for 47% of total revenue,
growing at a rate of 35% from 2021 to 2022, making it the main revenue driver, followed by
Power & Sensor Systems, which accounts for 29% of total revenue and has a growth rate of
25%.

2022 2021 2020

14.218 11.060 8.567
+29% +29%

COGS
In 2022, COGS account for 57% of revenues. They show an increase over the last three years
with 17% from 2020 to 2021 and 19% from 2021 to 2022. The increase in costs was mainly
due to the increase in cost of raw materials, supplies and purchased goods (45%) as well es the
increase in cost of purchased services (32%). However, since the cost of goods sold is
increasing at a lower rate than revenue, and the cost of goods sold as a percentage of revenue
is about 68% in 2020, 61% in 2021, and only 57% in 2022, we can assume that the company
has become more efficient.

2022 2021 2020

-8.087 -6.800 -5.791
+19% +17%

Net Earnings
Net Earnings show a strong increase of 218% from 2020 to 2021. They continue growing by
86% from 2021 to 2022. The strong increase is primarily due to high costs and low revenues
in 2020 due to the impact of the Covid 19 pandemic and Infineon's recovery in 2021 and 2022.

2022 2021 2020

2.179 1.169 368
+86% +218%

Margin
The increasing Gross Profit Margin as well as the increasing Profit Margin show a more
efficient cost management of Infineon.

2022 2021 2020

Gross Profit Margin 43% 39% 32%
Profit Margin 15% 11% 4%

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Balance Sheet

Overall, the company shows an increase in its total assets of 15% from 2021 to 2022 (2020 to
2021 6%) and an almost not recognizable increase in its total liabilities of 0.3% from 2021 to
2022 (2020 to 2021 1.3%).

2022 2021 2020

Total Assets 26.912 23.334 21.999
+15% +6%
Total Liabilities 11.968 11.933 11.780
+0,3% +1,3%

Cash and cash equivalents

Cash and cash equivalents increased from 2020 to 2021 by 5% and from 2021 to 2022 by 22%
due to increased business activities (30% increase of operating cash flow).

2022 2021 2020

1.438 1.759 1.851
+22% +5%

Inventories
2022, inventories consisted of raw materials and supplies (15% of Inventory), work in progress
(63% of inventory) as well as finished goods and merchandise (21% of inventory). They
account for 11% of total assets and showed an increase of 6% in 2021 and a strong increase of
41% in 2022.

2022 2021 2020

3.081 2.181 2.052
+41% +6%

PP&E
Property, plant and equipment account for 21% of total assets and increased by 8% in 2021 and
by 25% in 2022. The increase was generated by a increase in technical equipment and
machinery as well as in payments on account and construction in progress.

2022 2021 2020

5.545 4.443 4.110
+25% +8%

Goodwill
Goodwill, being the main driver which accounts for 26% of total assets, increased slightly in
2021 and increased by 19% in 2022. This increase was mostly due to foreign currency effects
which increased by 1582% in 2022, nothing more was stated. Additionally mention worthy

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would be the executed impairment test in 2022 on all CGUs which did not result in an
impairment of goodwill.

2022 2021 2020

7.083 5.962 5.897
+19% +1%

Trade Payables
Trade Payables increased 2021 by 35% and 2022 by 44%. This increase resulted mainly from
the increase in business volume (revenue increase by 29%).

2022 2021 2020

2.260 1.569 1.160
+44% +35%

Long-term financial debt

Long term financial debt showed a decrease in 2021 by 12% and a continuing decrease of 15%
in 2022. The decrease was due to the repayment of two bonds at maturity and one early
repayment of a bond with variable interest.

2022 2021 2020

4.910 5.752 6.528
-15% -12%

Equity
There is an increase of 12% in 2021 and 31% in 2022 in total Equity. This increase is mainly
attributable to retained earnings and other reserves, most of which are attributable to foreign
currency translation differences.

2022 2021 2020

14.944 11.401 10.219
+31% +12%

Liquidity Analysis
Looking from a liquidity standpoint, Infineon shows a decrease in its Cash Ratio, its Quick
Ratio as well as its Current Ratio. Net Working Capital only increased by 1.5% comparing this
to the great increase of revenue (29%) displays superior Net working capital management.

2022 2021
Cash Ratio 0,26 0,39
Quick Ratio 1,14 1,37
Current Ratio 1,69 1,86
Net Working Capital 3.865 3.809

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Statement of Cashflows

Operating Activities
Infineon shows a strong increase of 69% in 2021 and 30% in 2022. This increase was mostly
due to more efficient management in trade payables (57%) and additionally increasing income
tax and an increasing change in other assets and other liabilities were partly contributing to this
increase.

2022 2021 2020

3.980 3.065 1.811
+30% +69%

Investing Activities
The cashflow from investing activities decreased heavily by 68% from 2020 to 2021. In 2022
there was a renewed increase of 7%. Increasing proceeds from sales of financial investments
and decreasing purchases of property, plant and equipment were the most changing captions.

2022 2021 2020

-2441 -2284 -7172
-7% +68%

Financing Activities
Regarding the financing activities, the company shows an extreme decrease by 114% in 2021
which contributed to a negative net cash. In 2022 it shows a continuing decrease by 111%.
This was mainly due to a decrease of proceeds from issuance of long-term financial debt and
an increase in repayments of long-term financial debt.

2022 2021 2020

-1.869 -885 6.274
-111% -114%

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Inherent Risk
Determining the inherent risk involves taking into consideration various factors, such as the
company's nature and industry. Inherent risk is the susceptibility of an assertion about a class
of transaction, account balance or disclosure to a misstatement that could be material, either
individually or when aggregated with other misstatements, before consideration of any related
controls (ISA 200.13n). As per ISA 200.a38, captions that involve intricate calculations and/or
accounting estimates, captions affected by external factors or unique circumstances, and
captions influenced by the company's core operational activities are likely to have a higher
inherent risk.

We will now present 3 captions (two from the financial position and one from the income
statement of Infineon) that we deem relevant for the analysis and explain the inherent risk that
is associated with each one. We selected the following: Revenue, Inventories and Long-term
financial debt.

Income Statement
The revenue caption refers to the total earning the company generates through its core
operations and Infineon reported revenue of € 14,218 million in the fiscal year ending
September 30th, 2022. Infineon is generating its revenue mainly from the sales of finished
products and attributes its 29% increase to the previous year to the high demand for
semiconductor products and the increasing manufacturing capacity (increasing volume and
price of the sold products) and positive exchange rate effects as a significant revenue share is
earned in US dollar. The company is a global player and generates revenue through multiple
distribution channels across the world, thus, the inherent risk is considered high for revenues
as the collection, aggregation and estimation of earnings and outstanding payables are very
complex.

Financial Position
The inventories caption refers to all items, goods, merchandise, and materials held by the
companies for selling in the market to earn a profit. Infineon measures its inventories at the
lower of historical acquisition or fully absorbed production cost using the weighted-average
method for calculation and net realizable value. Net realizable value corresponds to realizable
sale proceeds under normal business conditions less estimated expected costs to complete and
sell. Production cost comprises costs of material, production wages and an appropriate portion
of attributable overheads, along with attributable depreciation and amortization on property,
plant and equipment and other intangible assets. Overhead markups are determined on the basis
of normal capacity utilization levels. Write-downs to net realizable value are recorded on
inventories using a consistent approach throughout Infineon and are determined at the product
level for technically obsolete and slow-moving inventories based on the revenue expected to
be generated by the relevant product. Inventories include an asset resulting from sales with a
right of return, representing Infineon’s right to recover products from customers upon payment
of the reimbursement obligation. The valuation is made by reference to the previous book value
of the products. The supply chain issues due to China’s Covid politics, and the Russian invasion
of Ukraine contributed to high volatility and a significant price increase of raw materials,
energy and semiconductor parts, influencing sales expectations and production costs.
As the valuation of inventory includes a lot of estimation, such as expected revenue or expected
costs for completion, the presented value on the balance sheet is subject to a high inherent risk.

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The long-term financial debt caption refers to outstanding debt that the company owes a third-
party creditor and that is payable beyond 12 months. Infineon has € 4,910 million in long-term
debt at the end of September 2022 and the financial debt section (No. 15, p.116), splits this up
into several bonds, loans and notes with differing interest rates. This caption has a low inherent
risk as all these obligations can be checked in supporting financial contracts/agreements.

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Substantive Testing
Captions above materiality need to pass a test of substantive testing (ISA 330.18). As Infineon
is a manufacturing company producing products with an extensive inventory comprising more
than 3 billion euros in value and a high inherent risk associated with this balance sheet
component, we decided to choose inventories to plan a substantive testing procedure. Since
Substantive Testing consists of two different forms - “Substantive Analytical Procedures” and
“Test of Details” - we decided on one of them. Based on our professional judgment and because
we do not have extensive and detailed information about the business of Infineon we´ve
decided to use the Test of Details (ToD). Therefore, we will use substantive sampling and
random selection. This will ensure that all items in the inventory have the same probability of
being selected and tested. This will ultimately allow us to draw conclusions about the “whole
population”. To audit inventories (ISA 501), we will consider the following assertions:
Existence, Completeness, Rights & Obligations, Accuracy and Valuation, as well as
Presentation and Disclosure.

Existence
As part of testing for existence, we will firstly select a statistical sample of inventory items
from the inventory control register the company has. We will observe the annual inventory
counting procedures of Infineon regarding low-value materials. Regarding the high-value
materials we will match the selected statistical sample of inventory items to the physical items
kept in the warehouses by checking barcodes or serial numbers personally.

Completeness
To verify the completeness of the inventory list, we would walk through the warehouse and
randomly locate barcode or serial numbers for inventory counting and verify that they are
included in the inventory list. If all selected tags are included in the inventory count, we would
have reasonable assurance that the inventory count is complete and that the inventory reported
includes all inventory transactions that have been occurred during the accounting period.

Rights and Obligations

In order to check the rights and obligations, we will examine whether the item shown in the
balance sheet really belongs to the company, whether it has already been sold or whether it is
held by a third party. For this purpose, we need to verify the ownership of the item in question.
If the item is held by a third party, we must ensure that the item does not appear on the balance
sheet and is separated from other items in the inventory count. For items that are supposed to
belong to the company, we will check the purchase invoices or the purchase contract to ensure
that the inventory really belongs to the company.

Accuracy and Valuation

To verify accuracy and valuation, we first review the inventory valuation method used by
Infineon. We will then independently value each randomly selected item and compare the book
value to the market value. We will then seek out a responsible co-worker who can provide us
with information on the presence of obsolete inventory. With this information, we can then test
if these specific items are properly tagged and stored and if the item is written down to its
market value, if applicable. Similarly, for damaged inventory. Here we will do an assessment
and verify that the items are being depreciated correctly. Overall, we will then be able to check

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if the inventory balances truly reflect its economic value.

Presentation and Disclosure

Looking at Presentation and Disclosure, we will test if all the selected items are classified as
inventory in the balance sheet. Also it is important to check if the items are allocated in the
correct caption of inventories which are: “Raw materials and supplies“, “Work in progress“
and “Finished goods and merchandise“. Doing that we will be able to agree or disagree on the
fact that inventory is properly classified and disclosed in the notes.

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References

AG, I. T. (n.d.). Company - Infineon Technologies. Infineon. Retrieved February 25, 2023,
from https://www.infineon.com/cms/en/about-infineon/company/
CFI Team. (2022, December 4). Materiality Threshold in Audits. Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/accounting/materiality-threshold-in-

audits/
Infineon Technologies AG. (2023). Company presentation.
https://www.infineon.com/dgdl/IFX_FY2023_Q1_web_EN.pdf?fileId=5546d461778
2987a017786d615b30003
KPMG IFRG Limited. (2020). Disclosure checklist Guide to annual financial statements -
IFRS Standards. https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2020/09/2020-
disclosure-checklist.pdf

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Appendix

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