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Howard Street Jewelry Accounting Case Study on Internal Controls
1.        The main internal control concept the Levis ignored was segregation of duties.  No one
person should be responsible for all transactions from the beginning to the end.  Betty had too
many responsibilities that were interwoven and should have been performed by more than one
person.  She handled the cash that came in, maintained the cash receipts and the sales
records.  Another concept that this relates to is that no one individual should perform more
than one of the following; recording transactions, authorizing transactions and maintaining
custody over the assets.  Betty was able to do all three; selling jewelry, putting items in
layaway, recording sales, maintain cash receipts and accepted the cash.  Betty was allowed to
have incompatible duties which allowed her to commit fraud of $350,000.



2.        The case states that the CPA served as their accountant for almost 40 years providing
a wide range of accounting and business issues.  The responsibility that the CPA has to
pursue this matter is dependent on the time of this fraud relating to what services were
provided by the CPA.  It is also dependent on what services the CPA is providing now.  
Assuming the CPA was only providing tax return services, as he is doing now, than the CPA
does not have responsibility to pursue this matter.  

The answer is not the same if the CPA is performing an audit, review or compilation.  The CPA
is liable in these circumstances.  There are two types of liabilities that the CPA can have;
common law liability and statutory law liability.  The liability that the CPA has in this case is
common law liability.  Since it is a privately owned company, the CPA will not have statutory
liability.  

The CPA must exercise due professional care, and if the CPA was performing one of the three
tasks mentioned, then he probably was not exercising due professional care since this is a
small company and over $350,000 in fraud was committed.  It was also mentioned that the CPA
mentioned that there were occasional shortages in the cash receipts records that seemed
larger than normal for a small retail business.  

$350,000 is a material amount for this business and would change the users of financial
statements viewed the financial statements.  It was so material, that it almost forced the store to
close.  



3.        I do not agree with dropping what I am working on to try to sell a new client on my
services.  So the answer to this question is dependent on how desperate I am for a new client.  
If I did not have a chance to prepare for the meeting and they did not have an appointment, I
would ask the potential client to come back shortly.  

There are three major reasons for sending the client away; the first is I will not drop what I am
doing for somebody who does not have an appointment.  A CPA firm is not something that you
window shop, and the potential client could have picked up the phone to make an appointment
instead of just walking in.  This client already seems too needy and not responsive to other
peoples’ schedules.  This deal could be lucrative, and I would not want to lose them to my
competition, but as I mentioned, I am not worried about somebody window shopping for a CPA
firm.  

The second reason I would send them away is because I did not have time to prepare and I
would want to be sure that I knew enough about the industry and other factors so I would be
able to not lose the client by sounding uneducated on the subject.    

The third reason I would not see the client right away is because the services this person
needs can wait a few hours or even days.  This is not something he needs me right away for.  
Therefore, when I make them come back later, it would not be a major inconvenience for them.

Once I did meet with them, there would be five internal control issues I would discuss with
them.  They are organizational structure, physical controls, accounting information systems,
assignment of authority / responsibility and performance reviews.  

Even though this is a very small family owned business, an organizational structure is still
necessary.  This will provide a basis for planning, directing, and controlling operations of the
jewelry store.  This organizational structure will need to separate some responsibilities such as
authorization of transactions, record keeping for transactions and custody of assets.  The
organizational structure, if successfully implemented, should lead to segregation of duties.

Physical controls include controls that provide physical security over both records and other
assets.  In the case of a small jewelry store, an example would be numbered invoice sheets
(sales receipts) so any skip in numbers would indicate that an employee may have pocketed
the cash from the sale.  The number on the receipt can trace it back to who the salesperson
was and it would be very difficult to steal cash transactions.  Physical security would be a safe
for the layaway items, or locks on the cabinets with only selected employees having access to
the keys.  

The accounting information system would provide inventory controls, records of transactions
and the database for the financial / accounting data.  The AIS can provide daily cycle counts so
an entire storewide inventory is not needed as often.  If the cycle counts are above a certain
percentage, then the physical inventory can be delayed.  

The assignment of authority and responsibility ties into the organizational structure /
segregation of duties.  The employees need to have an understanding of what their functions
are to include, doing more may jeopardize the internal controls by unsegregating the duties.  

Performance reviews compare where the company is standing compared to past years and to
forecasted budgets.  Any deviation can imply that something may be wrong with the internal
controls and it should be investigated further by the CPA.