Advance Audit Case: INTERNAL CONTROL ISSUES

Q1. The following are the internal control concepts that the Levis overlooked:

Physical controls: The Levis family should have taken the initiative of enacting periodic counting and
comparison on the amounts that were on cash, layaways, inventory records and sales.

Segregation of duties: Betty had access to all the business’ cash receipts and was also tasked with
recording all the sales. This meant that she was in very good position to conceal any embezzlement that
she might have executed. As a result, she should not have been responsible for all these duties. The
Levis ought to have embraced an active role by initiating segregation of duties as opposed to putting
excessive trust to one individual.

Authorization of transactions: Betty should have been receiving authorization from the management
of transactions such as layaways. This should make the management aware of all the in process and
current transactions.

Physical safeguards: The Levis should have contemplated of having locks , security cameras and
physical barriers to ensure that they protect the property, which would have protected betty from
stealing.

Q2:

The responsibilities that the CPA would have had in this case were dependent on the role he was
undertaking in the business. If he was only offering tax services, he did not have a responsibility to
pursue the matter. However, he should have reported any shortcomings that he might have
encountered. In this case, the CPA should have reported the cash receipts records that he did not think
made sense for such small business.

In this case CPA was also offering auditing and other accounting services to business, he had a
responsibility of pursuing the matter. Given that he noticed the shortages in cash receipts records, he
would have had the obligation to gather more evidence to ascertain whether there were aspects of
fraud taking place.

Q3:
Having an inventory safe: This ensures that the products available in the store cannot be accessed by
anyone hence minimizing prospects of theft

Single person accessing the cash register: This control measure will ensure that there is the concept of
accountability among the employees. It becomes easier to trace any shortcomings.

Segregation of duties: It should be clear what every employee ought to be doing, and no one should be
given control of more than one activity to help counter prospects of covering fraud.

Physical Controls: The management should check the cash register after every business day to help
ascertain the cash receipts to prevent misappropriation.

Safeguards: This should come in form of locks, physical barriers, and cameras to help protect the
property within the premises from any loss.

Submitted by:

Camille T. Lawsin BSA5