Howard Street Jewelers, Inc. Lore Levi was worried as she scanned the most recent monthly bank statement
Question:
Howard Street Jewelers, Inc.
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 their CPA because for years he had given
them solid, professional advice on a wide range of accounting and business matters. So, it was only
natural for Lore to confide in him 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.
The following day, Alvin told Betty that he was unable to find the layaway sales ticket. Betty
expressed surprise and said she would search for the ticket herself. Within 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 recordsa simple oversight, Betty had explained.
As Alvin returned to his work, a troubling and sickening sensation settled into the pit of his stomach.
Over the next several weeks, Alvin studied the daily sales and cash receipts records. He soon
realized that his mother had been right all along. Betty, the trusted, reliable, longtime cashier of the
Howard Street Jewelers, was stealing from the business. The estimated embezzlement loss suffered
by Howard Street Jewelers over the term of Betty's employment approached $350,000.
Identify the internal control concepts that the Levis overlooked or ignored.
Identify at least 5 internal controls that should be implemented to prevent/detect employee theft in a retail environment.
What types of audit procedures might have flagged this theft? Describe in detail how you would use each procedure you recommend.
Expert Answer:
