Howard Street Jewelers

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Case Overview

For forty years the Levis owned and operated a jewelry store. They had survived many financial ups and downs over the years, but the current declining cash position of the company was nearing critical. On more than one occasion Mrs. Levi had suspected Betty, a long term, reliable, employee for over twenty years, might be stealing from the company. Betty not only worked as a sales clerk, but she also handled all of the cash and bank deposits and maintained all of the sales and cash receipts records. She had unrestricted access to all of the cash. Mr. Levi and their son, Alvin, who also worked in the business, disregarded Mrs. Levi’s suspicions. When she went to her accountant, he revealed that he had noticed an
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Authorization to execute transactions, recording transactions, physical custody of assets, and periodic reconciliation of records to physical assets should each be performed by a different individual, (Louwers, Ramsay, Sinanson, Strawser, & Thibodeau, 2011). Information and communication happened within the Levi’s business, but it was not heeded. After Alvin did monitor Betty’s work, the daily sales and receipts records, he was able to detect the fraud. Better monitoring of inventory could have detected the fraud sooner as the unrecorded sales would have caused inventory levels to be lower than sales records indicted. Additionally, better monitoring of Betty’s unrealistic fashion and vacation trends should have been a red flag to the Levis.

2. When Lore informed the CPA of her suspicions regarding Betty, what responsibilities, if any, did the CPA have to pursue this matter? Alternatively, 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. SAS no. 99 and AU 316 require that an auditor detect fraud if it results in materially misstated financial statements (AICPA, 2007 and PCAOB ,2012). While no other rules require the CPA or auditor to detect fraud, statements of professional conduct such as the AICPA’s Principles of Professional

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