Client: Taiwan Semiconductor Manufacturing Co., Ltd.

(NYSE: TSM / TSE: 2330)

Auditor: Deloitte

(1) Understanding of the client

TSMC is a corporation incorporated in 1987 in Republic of China (R.O.C.). TSMC is a foundry in the
semiconductor industry. The company mainly engages in the manufacturing, outsourcing, packaging and
selling semiconductor devices. TSMC manufactured a wide range of products for more than 500
customers in 2020. The semiconductor products were used in a wide range of electronic applications,
such as computers, mobile phone, communication devices, servers and data centres, automotive, and
many other devices and applications. TSMC competitors are other global chipmaker companies,
including MediaTek, Qualcomm, Samsung, Intel Corporation and Foxconn.

Currently, TSMC is the largest and most advanced contract chipmaker in the world, accounting for 54%
of total foundry revenue globally in 2020. In recent years, TSMC has benefited from the increasing
demand for semiconductor and the surge in prices of semiconductor chips since the last quarter of 2020
amid a global supply crunch (Lee, 2021). To keep up with rising demand, TSMC has intensively focused n
the R&D (R&D) activities over recent years. The company spent over 109 billion New Taiwan dollars on
R&D in 2020. Additionally, the Management of TSMC expected to invest USD$100b on the expansion of
capacity to support the manufacturing over the next three years (Wu, 2021).

(2) Evaluate audit risk

We evaluate the inherent risk and raised concern about the following Risk of Material Misstatement.

Revenue recognition

TSMC revenue has increased remarkably over recent years. The large volume of sales transaction might
pose the cut-off risk at the year end.

Capitalization of development cost

The classification between research cost, which will be expensed off in the period, and capitalized
development cost requires the assessment of the Management whether the cost incurred meets the
criteria of intangible fixed assets.

Impairment loss of fixed assets

The fast-paced advancement in technology might make the useful life of fixed assets lower than
originally expected by the Management, and also be an indicator for the impairment loss of fixed assets,
particularly the fixed assets used to produce an out of date products types, such as old chipset. The
impairment test might be complex and requires judgment and many techniques to figure out the fair
value of fixed assets.

Considering these factors, we assessed that the inherent risk of TSMC is higher.

About the detection risk, we, Deloitte, have audited TSMC over recent 5 years and have a deep
understanding about the business and control of the Client. However, taking into account that the
Company is a listed entity and there is a large volume of transactions in the Client the detection risk is
considered as medium risk.
Overall, the audit risk is determined at High risk.

(3) Going-concern risk

We assessed that there is no going-concern risk, due to

 The revenue has still been in a steadily increasing trend. The revenue in 2020 increased 31%
compared to that of 2019. The revenue in first 9 months of 2021 has increased by 17.5% year on
year. Although the Company has lost a big customer (Hi-Silicon) in 2020 due to the embargo
sanction on this customer, the lost revenue was compensated by other big customers.
 The Company have always been profitable over recent 5 years and maintained the positive net
cash flow with strong positive cash flow from operating activity.
 The debt/equity ratio was only 0.16, while the current ration stayed at 1.77, presenting a
healthy liquidity and gearing ratio.
 The Company have still intensively spent on investing on fixed assets to expand the business.
The cash outflow on the acquisition of fixed assets was $16.5 billion and $18 billion in 2019 and
2020 respectively.
 The Company still holds the competitive advantage against other main competitors including
Intel and Samsung with the advancement in 3nm technology chipset.

(4) Key audit matter

Property, plant and equipment (PPE): The start of depreciation related to PPE classified as construction
in progress (CIP).

The PPE balance as at 30 June 2021 was 61.7 billion, accounting for 55% of total assets, in which the CIP
balance accounts for nearly 40%. The continual investment in new technology as stated by the
Management indicates that the balance of this account is expected to remain the most material asset
account.

CIP should be transferred to PPE and commence the depreciation when the assets are ready for their
planned use. The assessment of when to start to depreciate CIP involve the determination of when the
assets are ready for their intended use. To determine this, the Managment might use subjective
judgments and assumption about the condition needed for the assets to be capable of operating
properly as originally expected use. Any changes in these judgments and assumptions could have a
substantial influence on the commencement date of depreciation, thereby significantly impact the
depreciation expense in the Statement of Profit or Loss and the accumulated depreciation expense
balance in Statement of Financial Position.

(5) Revenue and its key assertion

The revenue is the most material P&L account and also the key metric performance of the Company,
therefore we identify it as a key account. The key assertion are as follows.

 Occurrence: Revenues that have been recorded did actually occur and are related to the
Company.
  Completeness: All revenue transactions that should have been recorded have actually been
recorded. The volume of sales transaction of TSMC during the year is extremely large, which
might make the revenue transactions being missed
 Accuracy: All revenue transactions have been recorded at correct value.
 Cut-off: All revenues have been recorded in the proper accounting period. Revenue recorded at
near year end might not satisfy the performance obligation yet due to the incoterm applied to
these transactions.
 Presentation: Sufficient and proper disclosure related to revenues have been made.

(6) Overall Planning Materiality

We identify that the primary user of TSMC’s financial statement will be the investors. Revenue might be
the most important metric that draw the intention of investor due to:

 The revenue as a metric for market share is a key indicator for the leading position of TSMC
 Revenue is the critical component in the financial statement where the management pays their
considerable attention in order to evaluate the performance of the management team.
 Revenue is the main driver for the net profit.

As detection risk was medium and the overall risk was high, we decided to set the materiality level at
0.8% of total revenue.

The revenue in the 9 months of 2021 was $40.870 million. We proportionated this amount to full year
2021, resulting in the approximately $54,500 million revenue in 2021 e. Therefore, the materiality will
be $436 million.

(7) Conduct analytical procedure and visualisation

We used the yearly revenue in recent years and monthly revenue in 2020 and 2021 for analytical
procedure.
 1,800,000 100%

1,600,000 90%

1,400,000 80%
70%
1,200,000
60%
1,000,000
50%
800,000
40%
600,000
30%
400,000 20%
200,000 10%
- 0%
2016 2017 2018 2019 2020 2021

9 months Full year 9m proportion

Figure 1: Yearly Revenue Analysis, unit: NT$ millions (TSMC, 2021)

Overall, the revenue has steadily increased over the period from 2016-2021 (the full year revenue of
2021 is proportionated from actual revenue of 9m2021), mainly due to the increasing demand for
mobile phone. The significant increase was mainly due to increase in average selling price of higher
advanced technology products and increase in demand during 2020, which resulted from increasing
demand for personal mobile phone and laptop due to the COVID-19 lockdown. The revenue of 9 months
stably accounted for around 72% of full year revenue. The revenue fluctuation is in line with our
expectation. There is no exception noted here.

180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
-
Jan Feb Mar Apr Ma Jun Jul Aug Sep Oct Nov Dec

2020 2021

Figure 2: Monthly Revenue of 2020 and 2021, unit: NT$ millions (TSMC,
2021)
Monthly revenue in 2021 shows a similar pattern with 2020. The revenue was often low in February due
to the Lunar New Year Eve. Revenue started to increase high since Jun due to the launch of new iPhone
series from Apple – the biggest customer of TSMC. The fluctuation is in line with our expectation.

(8) Audit report for the 2021 audit

We assessed that there is no material misstatement in the Revenue account because:

 The global demand for chipset is still increasing, resulting in high revenue of TSMC
 Yearly and monthly revenue fluctuation is reasonable
 Other substantive procedures did not identify any material misstatement

Therefore, our audit opinion is unmodified.

 INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF
TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LIMITED

Opinion

We have audited the financial report of Taiwan Semiconductor Manufacturing Co., Ltd. (the Company)
and its subsidiaries (the Group), which comprises the consolidated balance sheet as at 31 December
2021, the consolidated income statement, the consolidated statement of changes in equity and the
consolidated statement of cash flows for the year then ended, and notes to the financial statements,
including a summary of significant accounting policies, and the directors' declaration.

In our opinion, the accompanying financial report of the Group is in accordance with the Corporations
Act 2001, including:

(i) giving a true and fair view of the Group's financial position as at 31 December 2021 and of its financial
performance for the year then ended; and

(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001.

Basis for Opinion

We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under
those standards are further described in the Auditor's Responsibilities for the Audit of the Financial
Report section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in
our audit of the consolidated financial statements of the current period. These matters were addressed
in the context of our audit of the consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matter How our audit addressed this matter

The assessment of when to start to depreciate
CIP involve the determination of when the assets
are ready for their intended use. To determine
this, the Management might use subjective
judgments and assumption about the condition
needed for the assets to be capable of operating
properly as originally expected use. Any changes
in these judgments and assumptions could have a
substantial influence on the commencement date
of depreciation
Our audit procedures related to this evaluation
included the following, among others:
 Understood the policy used to identify
when to comment depreciation
 Tested the operating effectiveness of the
controls used over the evaluation
 Made samples and trace to supporting
documents to evaluate the
reasonableness of determination of
depreciation commencement date.

Responsibilities of the Directors for the Financial Report

The directors are responsible for the preparation of the financial report that gives a true and fair view in
accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal
control as the directors determine is necessary to enable the preparation of the financial report that
gives a true and fair view and is free from material misstatement, whether due to fraud or error.

Auditor's Responsibilities for the Audit of the Financial Report

Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free
from material misstatement, whether due to fraud or error, and to issue an auditor's report that
includes our opinion.
Reference

1. Lee, Y., 2021. 2 charts show how much the world depends on Taiwan for semiconductors.
[online] CNBC. Available at: <https://www.cnbc.com/2021/03/16/2-charts-show-how-much-the-
world-depends-on-taiwan-for-semiconductors.html> [Accessed 12 October 2021].
2. Mineral Resources Limited, 2021. FY21 Annual Financial Report. [online] Mineral Resources
Limited, pp.120-123. Available at: <https://clients3.weblink.com.au/pdf/MIN/02405706.pdf>
[Accessed 12 October 2021].
3. Taiwan Semiconductor Manufacturing Company Limited, 2021. Financial Statements. TSMC
Annual Report 2020. Taipei: Taiwan Semiconductor Manufacturing Company Limited, pp.6-18,
39.
4. Taiwan Semiconductor Manufacturing Company Limited. 2021. TSMC 2021 monthly revenue -
Taiwan Semiconductor Manufacturing Company Limited. [online] Available at:
<https://investor.tsmc.com/english/monthly-revenue/2021> [Accessed 12 October 2021].
5. Wu, D., 2021. TSMC to Spend $100 Billion Over Three Years to Grow Capacity. [online]
Bloomberg. Available at: <https://www.bloomberg.com/news/articles/2021-04-01/tsmc-to-
invest-100-billion-over-three-years-to-grow-capacity> [Accessed 12 October 2021].