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Submitted By:

CLAMONTE, Patricia Joie M.

CLAMONTE, Patrick Jay M.
DORIA, Carla Jane A.
SALVADOR, Dayanara

Submitted To:
Instructor, Auditing and
Assurance Principles
A Case Study
Araullo University PHINMA Education Network
College of Management and Accountancy
Maharlika Highway, Bitas, Cabanatuan City

Howard Street Jewelers Inc | A Case Study Page 1
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 Levis 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 Levis any inconsistency
he may find. (c) compiled the annual statement, he will also have the
responsibility to report to the Levis any incongruence in the companys 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
companys 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 Page 2
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.