Lore Levi was worried as she scanned the most recent monthly bank statement for the Howard Street Jewelers.1 For decades, she and her husband, Julius, had owned and operated the small business that they had opened after fleeing Nazi Germany during World War II. Certainly the business had experienced ups and downs before, but now it seemed to be in a downward spiral from which it could not recover. In previous times when sales had slackened, the Levis had survived by cutting costs here and there. But now, despite several measures the Levis had taken to control costs, the business’s cash position continued to steadily worsen. If a turnaround did not occur soon, Lore feared that she and her husband might be forced to close their store.

Lore had a theory regarding the financial problems of Howard Street Jewelers. On more than one occasion, she had wondered whether Betty the cashier, a trusted and reliable employee for nearly 20 years, might be stealing from the cash register. To Lore, it was a logical assumption. Besides working as a part-time sales clerk, Betty handled all of the cash that came into the business and maintained the cash receipts and sales records. If anybody had an opportunity to steal from the business, it was Betty.

Reluctantly, Lore approached her husband about her theory. Lore pointed out to Julius that Betty had unrestricted access to the cash receipts of the business. Additionally, over the previous few years, Betty had developed a taste for more expensive clothes and more frequent and costly vacations. Julius quickly dismissed his wife’s speculation.

To him, it was preposterous to even briefly consider the possibility that Betty could be stealing from the business. A frustrated Lore then raised the subject with her son, Alvin, who worked side by side with his parents in the family business. Alvin responded similarly to his father and warned his mother that she was becoming paranoid.

Near the end of each year, the Levis met with their accountant to discuss various matters, principally taxation issues. The Levis placed considerable trust in the CPA who served as their accountant; for years he had given them solid, professional advice on a wide range of accounting and business matters. It was only natural for Lore to confide in the accountant about her suspicions regarding Betty the cashier. The accountant listened intently to Lore and then commented that he had noticed occasional shortages in the cash receipts records that seemed larger than normal for a small retail business. Despite Julius’s protestations that Betty could not be responsible for any cash shortages, the accountant encouraged the Levis to closely monitor her work.

Embezzlements are often discovered by luck rather than by design. So it was with the Howard Street Jewelers. Nearly two years after Lore Levi had suggested that Betty might be stealing from the business, a customer approached the cash register and told Alvin Levi that she wanted to make a payment on a layaway item. Alvin, who was working the cash register because it was Betty’s day off, searched the file of layaway sales tickets and the daily sales records but found no trace of the customer’s layaway purchase. Finally, he apologized and asked the customer to return the next day when Betty would be back at work.........

Questions:-

1. Identify the internal control concepts that the Levis overlooked or ignored.
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) compiled the annual financial statements.
3. Assume that you have a small CPA firm and have been contacted by a husband and wife, John and Myrna Trubey, who are in the final stages of negotiating to purchase a local jewelry store. John will prepare jewelry settings, size jewelry for customers, and perform related tasks, while Myrna will be the head salesclerk.
The Trubeys intend to retain four of the current employees of the jewelry store–two salesclerks, a cashier, and a college student who cleans the store, runs errands, and does various other odd jobs. They inform you that the average inventory of the jewelry store is \($200,000\) and that annual sales average \($800,000\), 30 percent of which occur in the six weeks prior to Christmas.
The Trubeys are interested in retaining you as their accountant should they purchase the store. They know little about accounting and have no prior experience as business owners. They would require assistance in establishing an accounting system, monthly financial statements for internal use, annual financial statements to be submitted to their banker, and all necessary tax returns. John and Myrna are particularly concerned about control issues–given the dollar value of inventory that will be on hand in the store and the significant amount of cash receipts that will be processed daily.
You see this as an excellent opportunity to acquire a good client. However, you have not had a chance to prepare for your meeting with the Trubeys because they came in without an appointment. You do not want to ask them to come back later, since that may encourage them to check out your competitor across the street.

Required:

Provide the Trubeys with an overview of the key internal control issues they will face in operating a jewelry store. In your overview, identify at least five control activities you believe they should implement if they acquire the store.
You have never had a jewelry store as a client, but you have several small retail clients. Attempt to impress the Trubeys with your understanding of internal control issues for small retail businesses.