Howard Street Jewelers Inc.Case Study

Submitted By: CLAMONTE, Patricia Joie M. CLAMONTE, Patrick Jay M. ALBITO, Joel M. DORIA, Carla Jane A. SALVADOR, Dayanara TOLENTINO, Diana Rose 3BSA-1 Submitted To: LEABRES, Ronald S., CPA Instructor, Auditing and Assurance Principles

Howard Street Jewelers Inc. A Case Study

Araullo University – PHINMA Education Network College of Management and Accountancy Maharlika Highway, Bitas, Cabanatuan City 3100

1. When Mrs. Levi informed the CPA about her suspicions regarding Betty, the CPA does not accrue any responsibility in the pursuance of the matter, for the reason that he is only doing their taxes. However, if he in the conduct of his services to the company notices any incorrect or misleading records, he should have discussed it to the Levi’s for them to know if there are any problems. On the other hand, let us assume that the CPA does not only prepares the tax returns for Howard Street Jewelers Inc. he also; (a) audited the business annual financial statement, then he should have the responsibility to report to the audit committee any hint of fraud in the statements. (b) reviewed the annual financial statement, he would have the responsibility to notify the Levi’s any inconsistency he may find. (c) compiled the annual statement, he will also have the responsibility to report to the Levi’s any incongruence in the company’s records. 2. The internal control concepts that the Levis ignored were a. Segregation of duties – Betty had performed different functions in the company which in fact shall be done by different individuals. She actually handled the cash that came in, the maintenance of cash receipts as well as the recording of sales, which in substance shall not be allowed to be done by a single individual. The Levis had allowed Betty to do incompatible jobs which allows her to embezzle the amount of $350,000. b. Physical safeguarding of assets – Betty has an unrestricted access to the company’s cash giving her the ability to manipulate the cash transactions even before the actual sales. c. Proper Authorizations – Betty has the authority to record sales returns also she has the access to the jewelry items which should not have been the case. The authority should have been given to a manager superior to her. d. Independent checks – Because of the trust the management has to Betty, the activities she had performed was never evaluated or checked for any hints of fraud. e. Proper documentation – The company depends on filing papers for their documentation which in fact they should have used a properly fit system to avoid any problems on proper documentation.

Howard Street Jewelers Inc | A Case Study

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3. As a CPA, I do believe that it is not proper to present any of your opinion to your potential clients about things you are not prepared for or without enough knowledge regarding their concerns. Also, as a CPA I will not sacrifice my credibility for the chance that my potential clients would come to my competitors. So I will actually ask my client to come back later when I am all ready and sure to what will I present to them. Once I did meet with them, there would be five internal control issues I would discuss with them. They are organizational structure, physical controls, accounting information systems, assignment of authority / responsibility and performance reviews. Even if the business is a family owned one, it will still need an organizational structure in order to be sure that there was no overlapping of duties, which can be threat to the company. With an organizational structure, it can be a basis for planning, directing and even the control of operations. Also, with it can be ensured that the duties and responsibilities are well separated to prevent fraud; it can finally lead to segregation of duties. Physical controls provide security to records as well as to asset. For a small jewelry shop, a physical control can be the numbering of sales receipts; with it numbered, any skip in numbers can be a sign that there is a theft in the cash from the sale. The number on the receipt can trace back who is the salesperson in charge so it will be difficult to steal cash transactions. The accounting information system would provide inventory controls, records of transactions and the database for the financial / accounting data. Having AIS the store will have daily counts of the entire inventory so a manual inventory will not be needed as often. The assignment of authority and responsibility ties into the organizational structure / segregation of duties. The employees need to have an understanding of what their functions are to include, doing more may jeopardize the internal controls by integration of the duties. Performance reviews compare where the company is standing compared to past years and to forecasted budgets. Any deviation can imply that something may be wrong with the internal controls and it should be investigated further by the CPA.

Howard Street Jewelers Inc | A Case Study

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