Howard Street Jewelers Case

Howard Street Jewelers, Inc.

1. Internal control concepts that the Levis overlooked or ignored:

* Segregation of duties: Through the information in the case, we know that Betty had access to all cash receipts and was in charge of recording all layaway sales, and daily sales. She was in a position to perpetrate and conceal her embezzlement. She should not have been responsible for all those duties. The management should have taken an active role in making sure they had established segregation of duties instead of trusting employees blindly.

* Physical Controls: The Levis should have done periodic counting and comparison with the amounts shown on cash, sales, layaways, and inventory records.

* Authorization of Transactions: Betty should get authorization on transactions such as layaways so management is aware of the current and in-process transactions.

* Retention of Records: The documentation of records should be accessible to management and key employees who deal directly with customers. Alvin had no idea where the layaway sales tickets were and was unable to help the customer. This could negatively affect the sales of the store.

* Physical safeguards: The store should have security cameras, locks, and physical barriers to protect property. For instance, by having security cameras, management would have caught Betty stealing from the store and would have known about a mistrusted employee before losing a lot of money.

2. The CPA mainly offered tax services for the Levis, he did not have any responsibility to pursue the suspicions regarding Betty because he was not auditing Howard Street Jewelers. However, since he did notice occasional shortages in the cash receipt records that seemed larger than normal for a small retail business; he should have mentioned it to the management. The CPA must display due diligence.

If in addition to providing tax services to the Levis the CPA audited, reviewed, and compiled the annual financial statements for Howard Street Jewelers, then the auditor would be responsible for pursuing the matter. Since the CPA had noticed occasional shortages in the cash receipts records that were larger than normal for a small business he would have had to gather evidence to make sure that a fraud was occurring. Had the CPA been providing these additional services, the embezzlement by Betty would have been caught sooner and would have not approached the $350,000.

3. 5 Control activities that should be implemented:

* Segregation of duties: Segregate the authorization of transactions, recording of transactions, and custody of the related assets. Even though this is a small jewelry store, you still need to separate duties because it is easier for individuals to hide any fraudulent activities.

* Performance

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