Hw case 3.2 Howard Street Jewelers, Inc.
1. Identify the internal control concepts that the Levis overlooked or ignored?
The very first concept of internal control that is huge for this situation was the lack of segregation of duties. Betty had unrestricted access to all the cash, cash receipts, and the sales records. She handled all the transaction from the beginning of each sale to the very end. She had too much power and the duties should have been spilt among multiple employees. She could manipulate all of the proper authorization and documentation that dealt with the business transaction. In total, this led the business owners being out $350,000.
2. When Lore Levi informed the CPA of her suspicions regarding Betty, what responsibilities, if any, did the CPA have to pursue this matter? Alternately, assume that, in addition to preparing tax returns for Howard Street Jewelers, the CPA (a) audited the business’s annual financial statements, (b) reviewed the annual financial statements, and (c) complied the annual financial statements.
The CPA does have a responsibility in this matter because he has been their accountant for many years and also on top of tax work he audits the company’s financial statements. So in a way he should have been more on top of this situation but when it was formerly address by Mrs. Levi he did say he noticed stuff was not adding up. The CPA first should start by looking at the sales journal entries and verify that each sale is recorded correctly to the cash ledger or accounts receivable ledger. He should then look into the inventory purchases from suppliers and compare the two. If they are purchasing inventory because they are out of stock on items that have been sold then those items should be marked in the cash/accounts receivable ledgers. This should immediately fix this particular issue because items were being sold without being recorded and then new inventory was being ordered.
3. The five control activities that need to be implemented in order for this business to perform would be separation of duties, proper authorizations, and physical control of assets, proper documentation, and independent checks. For separation of