1. The Levis overlooked several internal control concepts that could have prevented Betty’s embezzlement from the company. • Segregation of duties: Betty had responsibilities in too many areas. She maintained the cash, the cash receipts, and the sales records for Howard Street Jewelers. This not only provided Betty with plenty of opportunity, but also gave her the means to conceal the theft. • Authorization of transactions: Betty was able to put items on layaway without authorization from management. • Physical controls: Cash should have been reconciled by management and cash shortages noted by management. The fact that the Levis were unaware of cash shortages indicates that there were poor physical controls when it came to cash counts.
2. In the first circumstance, in which the CPA was simply involved with the company’s tax returns, the CPA does not have any responsibility to pursue the matter as the CPA was not auditing the client. However, the cash shortages should have been brought to the owner’s attention as soon as they were noticed. A working relationship between an entity and the CPA is one of mutual trust and there would have been no harm in informing the owners that cash shortages were occurring. In the second circumstance, in which the CPA was responsible for auditing and compiling the company’s financial statements, the CPA would have to practice due diligence and investigate and gather evidence that fraud was occurring. If this was the case, then Betty would have been discovered before her fraud equaled 350,000 dollars.
3. In order to be successful at implementing internal controls, the Trubeys need an organizational structure and a control environment. I would recommend that they establish core values that they want practiced within their business and a way that those values can be communicated to the staff daily. For instance, during training, they can review those ethical values and implement a way to recognize those that practice those values at least once a month. This creates an understanding amongst staff that the company places a high value on ethics. The key internal control issues that the Trubeys will face while owning a jewelry store are physical controls, segregation of duties, and authorizations. The five control activities that I would recommend based on these issues are outlined and explained below: • Duties should be shared amongst staff. Placing cashiers on an alternating schedule between selling and cashiering splits the responsibilities and provides each staff member with the ability to assess the work of the others. This practice can reduce the opportunity for cash theft as it cannot be easily concealed. Even though Myrna would be head salesclerk as an owner of the business, she should also welcome staff to review her work to enforce a system of integrity.
• Transaction authorization should be required for any transaction over a certain amount deemed high risk by management. An example of this would be one sales clerk and one manager must sign the sales record to indicate that not only the sale occurred but that it was recorded appropriately. Returns should be authorized by a member of management as well. • Cash should be controlled on a daily basis. A good system for this is to audit the register at the end of each employee’s shift. Any point of sale system will indicate the amount that is supposed to be in the register at the time of audit. The owners should establish a policy of rewarding cash counts that are exact, and reprimands for cash shortages or overages in excess of twenty dollars. This also eliminates the guesswork of who is responsible for any cash shortage and lets the employees know that their accuracy will be checked by a member of management.
• Deposits should be reconciled by a member of management. All deposits should require two signatures verifying the accuracy of the deposit total and that it was deposited to the bank. When verifying the deposit receipts, all figures should match what was recorded, including the date. • There should be physical security for inventory items. In the case of a jewelry store, where inventory is highly priced, it should be locked away with keys and key control should be implemented. Other physical security items would include security cameras and physical inventory counts twice a year. These five internal control activities, if implemented, will give the Trubeys the opportunity to excel in their business.