The audit risk is generally evaluated based on accounting firm policy and professional judgment.

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The audit risk is generally evaluated based on accounting firm policy and professional judgment. Our firm requires us to assess low audit risk, which is to be 0.05, for the audit client that generally has stable financial condition and achieve steady financial performance. Tiffany is profitable company and has strong financial position: the net income in 2012 and 2011 are $416M and $439M respectively, Net assets in 2012 and 2011 are $2,611M and $2,349M respectively. In addition, the market share of the company in jewelry industry ranks No.1 in US and No. 2 in the world. They could keep their position continuously due to brand power and valuable employees. Therefore, we determined our overall audit risk to be 0.05. Risk Material…show more content…
In addition, due to the nature of jewelry, they are generally small and consist of a large number of items. This means that it is very difficult for the company to custody, control, and manage its inventory. Based on our evaluation above mentioned, we assessed the inherent risk of the inventory to be very high, which is 0.90. We also interviewed with management, inventory manager, and staffs and went through a number of documents which is related to inventory account, such as control manual and work instructions, to obtain basis to evaluate control risk of the inventory. As a result of our work, we realized that the company has reasonably sound internal controls of the inventory to obviate management fraud and diminish business risks. However, we found out there was a big embezzlement, which is related to inventory account. A former vice president of product development at Tiffany was accused of stealing $1.3 million worth of jewelry between January 2011 and February 2013. It implies that their internal control of the inventory has some weakness parts and need to be improved to prevent similar accidents. However, except for above one, we did not find any significant fraud or accident in the company that could increase a major risk of the company. Under our analysis, we evaluated evaluated the control risk to be slightly high (below the maximum), which is 0.60. Therefore, the RMM of the inventory for Tiffany equals 0.54 (IR x CR, which is 0.90*0.60).

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