Howard Street Jewelers, Inc Lore Levi was worried as she scanned the March 1983 bank statement for the PHoward Street Jewelers had owned and operated the small business. Certainly the business had experi- enced 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 hacd survived by cutting costs here and there. But now, despite several measures the Levis For more than four decades, she and her husband, Julius, Had taken to control costs, the business's cash position continued to steadily worsen. li a turnaround did not occur soon, Mrs. Levi feared that she and her husband might be forced to close their store Mrs Levi 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 Mrs. Levi, it was a logical assumption. Besides working as a parttime sales clerk, Betty handled all of the cash that came into the business and maintained the cash re- ceipts and sales records. If anybody had an opportunity to steal from the business, it was Betty Reluctantly, Mrs. Levi approached her husband about her theory. Mrs. Levi 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 ex pensive clothes and more frequent and costly vacations. Julius quickly dismissed his wife's speculation. To him, it was preposterous to even briefly consider the possi bility that Betty could be stealing from the business. A frustrated Mrs. Levi 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 almost 40 years he had given them solid, profes- sional advice on a wide range of accounting and business matters. It was only nat ural for Mrs. Levi to confide in the accountant about her suspicions regarding Betty the cashier. The accountant listened intently to Mrs. Levi 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. In the spring of 1985, a customer approached the cash register and told Alvin Levi that she wanted to make a payment on a layaway item. 1. Most of the facts of this case were reconstructed from information included in several legal opinions The following two articles served as additional sources for this case: Secunities Regulaion and Law Report, Accounting & Disclosure: Accounting Briels Vol. 23, No 21 (24 May 1991).814: Secunities Regu- lation and Lou Report Accounting & Disclosure:Accounting Briets, Vol.24. No. 19 (8 May 1992).708 SECTION THREE NTENAL CONTROL ISSUES Alvin, wh file of tomers o was working the cash register because it was Betty's day off, searched the layaway sales tickets and the daily sales records but found no trace of the cus layaway purchase. Finally he apologized and asked the customer to return The following day. Avin tod Betty that he was unable to find the layaway sales y expressed surprise and said she would search for the ticket herself. in a few minutes, Betty approached Alvin, waving the sales ticket in her hand. Alvin was stumped. He had searched the layaway sales file several times and simply could not accept Betty's explanation that the missing ticket had been there all along Suspicious, as well, was the fact that the sale had not been recorded in the sales ticket. Bett With records-a simple oversight, Betty had explained. As Alvin returned to his work, a troubling and sickening sensation settled into the stomach. Over the next several weeks, Alvin studied the daily sales and receipts records. He soon realized that his mother had been right all along. the trusted, reliable, longtime cashier of the Howard Street Jewelers, was steal- ing from the business. The estimated embezzlement loss suffered by Howard Street cash Jewelers over the term of Betty's employment approached $350,000. Questions 1. Identify the internal control concepts that the Levis overlooked or ignored. 2. When Mrs. 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. 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. 3. The Trubeys are interested in retaining you as their accountant should they purchase the store. They know little about accounting and have no prior ence 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 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 Howard Street Jewelers, Inc Lore Levi was worried as she scanned the March 1983 bank statement for the PHoward Street Jewelers had owned and operated the small business. Certainly the business had experi- enced 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 hacd survived by cutting costs here and there. But now, despite several measures the Levis For more than four decades, she and her husband, Julius, Had taken to control costs, the business's cash position continued to steadily worsen. li a turnaround did not occur soon, Mrs. Levi feared that she and her husband might be forced to close their store Mrs Levi 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 Mrs. Levi, it was a logical assumption. Besides working as a parttime sales clerk, Betty handled all of the cash that came into the business and maintained the cash re- ceipts and sales records. If anybody had an opportunity to steal from the business, it was Betty Reluctantly, Mrs. Levi approached her husband about her theory. Mrs. Levi 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 ex pensive clothes and more frequent and costly vacations. Julius quickly dismissed his wife's speculation. To him, it was preposterous to even briefly consider the possi bility that Betty could be stealing from the business. A frustrated Mrs. Levi 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 almost 40 years he had given them solid, profes- sional advice on a wide range of accounting and business matters. It was only nat ural for Mrs. Levi to confide in the accountant about her suspicions regarding Betty the cashier. The accountant listened intently to Mrs. Levi 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. In the spring of 1985, a customer approached the cash register and told Alvin Levi that she wanted to make a payment on a layaway item. 1. Most of the facts of this case were reconstructed from information included in several legal opinions The following two articles served as additional sources for this case: Secunities Regulaion and Law Report, Accounting & Disclosure: Accounting Briels Vol. 23, No 21 (24 May 1991).814: Secunities Regu- lation and Lou Report Accounting & Disclosure:Accounting Briets, Vol.24. No. 19 (8 May 1992).708 SECTION THREE NTENAL CONTROL ISSUES Alvin, wh file of tomers o was working the cash register because it was Betty's day off, searched the layaway sales tickets and the daily sales records but found no trace of the cus layaway purchase. Finally he apologized and asked the customer to return The following day. Avin tod Betty that he was unable to find the layaway sales y expressed surprise and said she would search for the ticket herself. in a few minutes, Betty approached Alvin, waving the sales ticket in her hand. Alvin was stumped. He had searched the layaway sales file several times and simply could not accept Betty's explanation that the missing ticket had been there all along Suspicious, as well, was the fact that the sale had not been recorded in the sales ticket. Bett With records-a simple oversight, Betty had explained. As Alvin returned to his work, a troubling and sickening sensation settled into the stomach. Over the next several weeks, Alvin studied the daily sales and receipts records. He soon realized that his mother had been right all along. the trusted, reliable, longtime cashier of the Howard Street Jewelers, was steal- ing from the business. The estimated embezzlement loss suffered by Howard Street cash Jewelers over the term of Betty's employment approached $350,000. Questions 1. Identify the internal control concepts that the Levis overlooked or ignored. 2. When Mrs. 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. 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. 3. The Trubeys are interested in retaining you as their accountant should they purchase the store. They know little about accounting and have no prior ence 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 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