Case 3.2 – Howard Street Jewelers, Inc.
1. The internal control concepts that the Levis ignored were
a. 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.
b. Physical safeguarding of assets – She physically handled all the cash that came in and had ample opportunity to skim the cash even before any transactions were recorded.
c. Proper Authorizations – Betty had authority to record and authorize the transactions which should not have been the case. She should not have the authority to record sales returns, or having access to layaway or jewelry items. This authority should be given to a manager above her.
d. Independent checks – the activity performed by Betty was never checked as there was trust placed in her.
e. Proper documentation – there were problems with maintaining proper trail documentation or with missing documentation which should have been monitored and entered into system to keep an easy track of instead of depending on filing papers.
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 CPA had the responsibility to follow up on the tip that was provided of possible fraud and carefully monitor and test the systems to make sure there was no fraud. The auditor failed to do so.
The CPA must exercise due professional
a. 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.
b. Physical safeguarding of assets – She physically handled all the cash that came in and had ample opportunity to skim the cash even before any transactions were recorded.
c. Proper Authorizations – Betty had authority to record and authorize the transactions which should not have been the case. She should not have the authority to record sales returns, or having access to layaway or jewelry items. This authority should be given to a manager above her.
d. Independent checks – the activity performed by Betty was never checked as there was trust placed in her.
e. Proper documentation – there were problems with maintaining proper trail documentation or with missing documentation which should have been monitored and entered into system to keep an easy track of instead of depending on filing papers.
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 CPA had the responsibility to follow up on the tip that was provided of possible fraud and carefully monitor and test the systems to make sure there was no fraud. The auditor failed to do so.
The CPA must exercise due professional