Howard Street Jewelers Case Study
1. The Levis overlooked several internal control concepts that could have prevented Betty’s embezzlement from the company.
• Segregation of duties: Betty had responsibilities in too many areas. She maintained the cash, the cash receipts, and the sales records for Howard Street Jewelers. This not only provided Betty with plenty of opportunity, but also gave her the means to conceal the theft.
• Authorization of transactions: Betty was able to put items on layaway without authorization from management.
• Physical controls: Cash should have been reconciled by management and cash shortages noted by management. The fact that the Levis were unaware of cash shortages indicates that there were poor physical controls when it came to cash counts.
2. In the first circumstance, in which the CPA was simply involved with the company’s tax returns, the CPA does not have any responsibility to pursue the matter as the CPA was not auditing the client. However, the cash shortages should have been brought to the owner’s attention as soon as they were noticed. A working relationship between an entity and the CPA is one of mutual trust and there would have been no harm in informing the owners that cash shortages were occurring.
In the second circumstance, in which the CPA was responsible for auditing and compiling the company’s financial statements, the CPA would have to practice due diligence and investigate and gather evidence that fraud was occurring. If this was the case, then Betty would have been discovered before her fraud equaled 350,000 dollars. 3. In order to be successful at implementing internal controls, the Trubeys need an organizational structure and a control environment. I would recommend that they establish core values that they want practiced within their business and a way that those values can be communicated to the staff daily. For instance, during training, they can review those ethical values and implement a way to recognize those that practice those
• Segregation of duties: Betty had responsibilities in too many areas. She maintained the cash, the cash receipts, and the sales records for Howard Street Jewelers. This not only provided Betty with plenty of opportunity, but also gave her the means to conceal the theft.
• Authorization of transactions: Betty was able to put items on layaway without authorization from management.
• Physical controls: Cash should have been reconciled by management and cash shortages noted by management. The fact that the Levis were unaware of cash shortages indicates that there were poor physical controls when it came to cash counts.
2. In the first circumstance, in which the CPA was simply involved with the company’s tax returns, the CPA does not have any responsibility to pursue the matter as the CPA was not auditing the client. However, the cash shortages should have been brought to the owner’s attention as soon as they were noticed. A working relationship between an entity and the CPA is one of mutual trust and there would have been no harm in informing the owners that cash shortages were occurring.
In the second circumstance, in which the CPA was responsible for auditing and compiling the company’s financial statements, the CPA would have to practice due diligence and investigate and gather evidence that fraud was occurring. If this was the case, then Betty would have been discovered before her fraud equaled 350,000 dollars. 3. In order to be successful at implementing internal controls, the Trubeys need an organizational structure and a control environment. I would recommend that they establish core values that they want practiced within their business and a way that those values can be communicated to the staff daily. For instance, during training, they can review those ethical values and implement a way to recognize those that practice those