Auditing

Howard Street Jewelry Accounting Case Study on Internal Controls

1. The main internal control concept the Levis ignored was 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.

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 responsibility that the CPA has to

pursue this matter is dependent on the time of this fraud relating to what services were

provided by the CPA. It is also dependent on what services the CPA is providing now.

Assuming the CPA was only providing tax return services, as he is doing now, than the CPA

does not have responsibility to pursue this matter.

The answer is not the same if the CPA is performing an audit, review or compilation. The CPA

is liable in these circumstances. There are two types of liabilities that the CPA can have;

common law liability and statutory law liability. The liability that the CPA has in this case is

common law liability. Since it is a privately owned company, the CPA will not have statutory

liability.

The CPA must exercise due professional care, and if the CPA was performing one of the three

tasks mentioned, then he probably was not exercising due professional care since this is a

small company and over $350,000 in fraud was committed. It was also mentioned that the CPA

mentioned that there were occasional shortages in the cash receipts records that seemed

larger than normal for a small retail business.

$350,000 is a material amount for this business and would change the users of financial

statements viewed the financial statements. It was so material, that it almost forced the store to

close.

3. I do not agree with dropping what I am working on to try to sell a new client on my

services. So the answer to this question is dependent on how desperate I am for a new client.

If I did not have a chance to prepare for the meeting and they did not have an appointment, I

would ask the potential client to come back shortly.

There are three major reasons for sending the client away; the first is I will not drop what I am

doing for somebody who does not have an appointment. A CPA firm is not something that you

window shop, and the potential client could have picked up the phone to make an appointment

instead of just walking in. This client already seems too needy and not responsive to other

peoples’ schedules. This deal could be lucrative, and I would not want to lose them to my

competition, but as I mentioned, I am not worried about somebody window shopping for a CPA

firm.

The second reason I would send them away is because I did not have time to prepare and I

would want to be sure that I knew enough about the industry and other factors so I would be

able to not lose the client by sounding uneducated on the subject.

The