Question Description

Question Description

1- Answer the questions2- the answers must be correct and accurate 3- The plagiarism must be ZERO

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Howard Street Jewelers, Inc.
Lore Levi was worried as she scanned the most recent monthly bank statement for the
Howard Street Jewelers. 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 records—a 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.
Questions
1. Identify the internal control concepts that the Levis overlooked or ignored.
2. When Lore Levi informed the CPA of her suspicions regarding Betty, what responsibilities, if any, did
the CPA have to pursue this matter? Alternately, assume that, in addition to preparing tax returns for
Howard Street Jewelers, the CPA (a) audited the business’s annual financial statements,
(b) reviewed the annual financial statements, and (c) compiled the annual financial statements.
3. Assume that you have a small CPA firm and have been contacted by a husband and wife, Chris and
Brooke Arbeitman, who are in the final stages of negotiating to purchase a local jewelry store. Chris
will prepare jewelry settings, size jewelry for customers, and perform related tasks, while Brooke will
be the head salesclerk. The Arbeitmans 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 $300,000
and that annual sales average $1,400,000, 30 percent of which occur in the six weeks prior to
Christmas.
The Arbeitmans are interested in retaining you as their accountant should they purchase the store. They
know little about accounting and have no prior experience as business owners. They would require
assistance in establishing an accounting system, monthly financial statements for internal use, annual
financial statements to be submitted to their banker, and all necessary tax returns. Chris and Brooke are
particularly concerned about control issues—given the dollar value of inventory that will be on hand in
the store and the significant amount of cash receipts that will be processed daily.
You see this as an excellent opportunity to acquire a good client. However, you have not had a chance to
prepare for your meeting with the Arbeitmans because they came in without an appointment. You do not
want to ask them to come back later since that may encourage them to check out your competitor across
the street.
Required: Provide the Arbeitmans with an overview of the key internal control issues they will face in
operating a jewelry store. In your overview, identify at least five control activities you believe they should
implement if they acquire the store. You have never had a jewelry store as a client but you have several
small retail clients. Attempt to impress the Arbeitmans with your understanding of internal control issues
for small retail businesses.
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