Question

Howard Street Jewelers, Inc.

Lore Levi was worried as she scanned the most recent monthly bank statement for the Howard Street Jewelers.1 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.

1. Identify the internal control concepts that the Levis overlooked or ignored.
2. Identify at least 5 internal controls that should be implemented to prevent/detect employee theft in a retail environment.
3. What types of audit procedures might have flagged this theft? Describe in detail how you would use each procedure you recommend.

Answer 1

Internal Control Concepts that Levis overlooked or ignored as are follows:

• Betty who was the cashier, was also the part time sales clerk handled all the cash as well as sales record. Also being in the company for 20 years she knew the business and its customers very well and was in a position to change records or manipulate them.
• Betty also had unrestricted access to the cash of the business and there was no person to cross check or verify her activities.

5 Internal Controls that should be implemented to prevent / detect employee theft in a retail environment:

1. Seperation of Duties - No single person must be responsible for 2 operations of the business that go hand in hand. For example - Handling Cash and Sales Record, since there is a possibility to misuse the advantage availablel with them. It is possible to omit the sale in the cash record and embezzle the cash received from the customer and there is a greater possibility of this going unnoticed in a small business where the employee is a trustworthy person working with the company for many years.
2. Conduct Regular Audits - Regular audits will pick out the embezzlements and any variations to the owner's notice early and will help the business to take appropriate steps to recover from the loss and prevent such happenings in the future.
3. Compulsory Vacations - Send the employee on compusory and free vacations during which it is possible to find out any thefts or embezzlements or frauds done by them.
4. Job Rotation - No single person shall perform the same job for a considerable amount of time, since it will lead to the possibility of misusing their position.
5. Cross Checking and Verifying - The jobs must be allocated among employees in such a manner that the job performed by one person is automatically checked / reviewed by the next person while performing his duties.

Audit Procedures that might have flagged this theft are:

• Physical Cash Verification - Verifyiing cash during audit will bring to notice any discrpancies in the handling of cash by the cashier.
• Sales Vouching - Verifying the sales voucher and reconciling them will bring to notice any missing sales invoice, when sales vouchers are serially numbered and this will rise the question of fraud.
• Surprise Checks - Conducting surprise checks with regard to the cash balance will also detect any theft or embezzlement when the cash on hand does not tally with the cash balance as per books.
• Reviewing Internal Control Systms - Reviewing the Internal Control System of the organisation and whether they are efficient or not will display the likeliness of errors or frauds in the organisation.
• Comparing Data - By comparing relevant data, files and information such as cash records, sales records, bank statements, it is possible to flag the theft.