Case 3.2 Howard Street Jewelers, Inc

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1. Identify the internal control concepts that the Levis overlooked or ignored. One of the most blatant oversights in internal controls was the lack of segregation of duties. A cashier should never be in a position that also handles all cash and sales records.

2. When Mrs. Levi informed the CPA of her suspicions regarding Betty, what responsibilities, if any, did the CPA have to pursue this matter? Because the CPA was just doing their taxes, he doesn't have any real responsibilities to pursue the matter any further. However, if he suspected something was amiss he should have discussed it with the Levi's to let them know there may be a problem. In addition to preparing tax returns for Howard Street Jewelers, alternately assume that the CPA (a) audited the business's annual financial statements. If the CPA were their auditor, he would have a responsibility to bring any hint of fraud to the attention of the audit committee. (b) reviewed the annual financial statements. If the CPA were hired to review the annual financial statements, he would be responsible to inform the Levi's of any discrepancies he may find. (c) Compiled the annual financial statements. He would be responsible to inform the Levi's of any discrepancies found.

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 $100,000 and that annual sales average $400,000, 30 percent of which occur in the six weeks prior to Christmas.

The Trubeys are...
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