"Howard Street Jewelers, Inc." case
Lore Levi was worried as she scanned the most recent monthly bank statement for the Howard
Street Jewelers.Footnote 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
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
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
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
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