1).

Assuming the CPA was only providing tax return services, as he is doing now, then the CPA does not
have responsibility to pursue this matter. But he has responsibility in these circumstances if he is
performing audit or review, since these activities provide assurance (reasonable assurance for audit,
limited assurance for review). If the CPA is performing audit, he should obtain reasonable assurance
about whether the financial statements as a whole are free from material misstatement, and whether the
misstatements are from error or fraud. If he is performing review, he is required to inquire as to the
accounting practices and principles used by the business, know the procedures for recording and
accumulating financial information, know the managements responsibility for internal control,
managements responsibility to prevent and detect fraud and to have knowledge of fraud. On the other
hand, compilation provides on assurance on the entitys financial statements. The objective of a
compilation is to compile unaudited financial information into financial statements, schedules or reports
based on information supplied by the client.

2). The internal control concept the Levis ignored was segregation of duties. This is a control intended to
prevent fraud or error. Betty had too many responsibilities that should have been performed by more than
one person. She handled the cash that came in, maintained the cash receipts and the sales records. No
one individual should perform more than one of the following; recording transactions, authorizing
transactions and maintaining custody over the assets. Betty sells the jewelries, puts items in layaway,
records sales, maintains cash receipts and accepts cash. This resulted in Betty having incompatible
duties.

3.) Five Internal Control Activities

Control Environment
a. Organizational structure this will provide a basis for planning, directing, and controlling operations of
the jewelry store. It is needed to separate some responsibilities such as authorization of transactions,
record keeping for transactions and custody of assets. The organizational structure, if successfully
implemented, should lead to segregation of duties
b. Assignment of authority / responsibility individuals need to be properly resourced and made fully
aware of their responsibilities and of how their actions interrelate with the actions of others and contribute
to the objectives of the entity
Control Activities
c. Physical controls include controls that provide physical security over both records and other assets

d. Accounting information systems this will provide inventory controls, records of transactions and the
database for the financial / accounting data
Monitoring
e. Performance reviews this is the ongoing and periodic assessment of the quality of internal control
performance that will determine whether controls are operating as intended and will be modified when
needed