0:00:00.240,0:00:03.120
what's up audit fans i'm back and today

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we're looking at designing

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internal controls a big thank you to

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charlene who wrote to me

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uh through facebook and said oh look i'd

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really love something

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about how to design internal controls

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this isn't something that the auditor

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would normally

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do because when we design internal

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controls for our client we

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actually create a self-review

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independence threat

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but if you're an internal auditor or

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you're providing some recommendations

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or if you're studying and it's quite a

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common question to be asked

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what sort of internal controls should be

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used

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to minimize a particular risk today i'm

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going to address it with a four-step

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process

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let's get into it

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[Music]

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hi and welcome to amanda loves to audit

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my name is amanda i do love

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audit and i'm really excited to be

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here back again on my youtube channel

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we're just starting out

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university semester here in australia so

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it's full steam ahead for me

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really really busy but i wanted to give

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a shout out to

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all of my returning viewers from places

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like

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canada indonesia namibia nigeria south

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africa usa

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germany uganda did i say again it twice

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no

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ghana it's really amazing somebody in

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the comments asked if i'm malaysian

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and i'm not so my parents are both from

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china

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in the guangzhou region of china i

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don't speak any chinese so my parents

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came here my mom came here when she was

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five years old

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my dad came in his teenage years

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and when my mum was growing up she

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went to kindergarten not knowing any

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english

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so when she talked with an accent she

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received a lot of bullying

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even then you know a lot of racism

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against asians so

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when she had kids and we were the only

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asian kids in our school

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she said i want you to sound aussie i

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want you to be able to blend in so that

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if you can sound like everybody else

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then hopefully you won't experience the

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same

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levels of racism and discrimination

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that she experienced as a child growing

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up

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and so when i was i think three or four

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years

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old my mother said to my grandmother

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uh who she looked after us a lot she

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said look that's it we're not speaking

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any chinese anymore

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english only so i really only know

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enough

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cantonese to get by at yamcha i know

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that i want to eat

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haa gao cha sil baos um

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paigwat dantats i know that i don't want

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to eat the fung jao which is

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the chicken foot but really that's the

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extent of

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my chinese language skills so that's

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enough about me

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i've been a tiny bit busy recently um

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i've just won the national teaching

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excellence award

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for the business economics law and

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related

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category i'll have a video more on that

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a little bit later because i'm doing a

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big speech

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a whole lot of other things so i was

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really excited to

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receive that and all of you out there in

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youtube land were a really big part of

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that as well so

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i did a survey a little while ago asking

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about whether you thought the resources

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were high quality

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and some feedback and a lot of those

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quotes and a lot of those

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pieces of information made it into my

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application so thank you

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so much to everybody that's out there

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that filled in that survey

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for everyone who's new welcome i love

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audit

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and you'll hear that you'll see that in

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everything that we do so i'm just going

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to switch camera positions a little bit

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so that then i can have my writing

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coming up here so just hang on

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so today we're getting into how do i

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design an internal control it's a really

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common exam

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question just to see that you can do the

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other perspective

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and if you're studying management

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accounting how to design an internal

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control can be really important because

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management accounting is about

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number one doing accounting from within

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the firm but also

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designing the management systems that

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make sure that

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everyone in the organization is working

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together moving in the same direction

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there are going to be four steps in our

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process so step number one

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is going to be about identifying

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the potential misstatement

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now the reason that we need to do this

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is that remember a control is a response

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to a risk so essentially we have to

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identify the risk what is the potential

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misstatement

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the potential error that could occur so

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that's

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step number one then step number two

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and i'm going to just move that up a

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little bit is

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we have to ask ourselves the question do

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we want to

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prevent the issue from happening or

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are we trying to detect an error

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afterwards so in a lot of circumstances

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where it's a control around a process

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i want to try and prevent right

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prevention is always better than a cure

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so you have to think am i going to

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prevent

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or do i want to detect now detecting is

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about

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picking up that there's a mistake

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perhaps after a process has happened

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so you have a manufacturing process

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you're making a good and then

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there is quality control so you know you

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have everything in the process the

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machines doing the right things checking

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their parts

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and the quality control at the end is to

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make sure

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that you detect any issues before they

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go out you know the product goes out to

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the customer so you have to think

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do i want to try and prevent or do i

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want to try and detect

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now i'm going to do this with a live

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example as well after so i'm just going

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to go through the theory first

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so part one identify the potential

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misstatement so what is the risk

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part two am i thinking about preventing

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or detecting

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then you actually need to design

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and effective

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and efficient

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internal control now what do i mean by

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effective

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effective i mean that it has to work it

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has to prevent

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the error that you've got and when i say

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efficient

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i mean that efficient is it's not going

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to cost us too much resources

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because remember when it comes to

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internal controls

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you have to think about the cost versus

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the benefit

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so in a supermarket to make sure that

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people don't

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steal from a supermarket i could make

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every single person have to go through

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an airport

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x-ray screening type of thing when they

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leave the store

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that would be very very beneficial

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however it would cost a lot in terms of

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time

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for my customers effort

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to get it done and also

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it would be really expensive okay

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so i need to balance the benefit

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of preventing or detecting a

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misstatement with the cost

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so you're going to think about that in

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your design now

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also when you're thinking about the

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design you have to consider whether you

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want

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a manual control so somebody physically

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doing something versus some sort of

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automated or

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i t or systems

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based solution okay because if you do

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have

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something that needs a manual control

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remember humans can make mistakes

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with an automated system you've got to

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be really careful because

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if you don't program the system

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correctly it can still make a mistake so

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if you don't program it correctly it

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could still

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go wrong so our

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fourth thing that we want to think about

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is monitoring

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all right are we doing something to

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check the control

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essentially we need to make sure that we

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are

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checking the

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operation

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of the control

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okay a really great example of that

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monitoring aspect

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is if we have a bank and you go with

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your card

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and uh i have one in my pocket actually

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so here's my card um for my bank account

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i go to the atm i put it in i get the

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pin wrong

0:09:01.440,0:09:03.839
oh okay that's the wrong pin remember

0:09:03.839,0:09:05.440
the right pin i put it in

0:09:05.440,0:09:08.240
the bank at the end of the day we'll get

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a report

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that says what are all the cards where

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an incorrect pin was entered

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or perhaps an incorrect pin was entered

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more than

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three times or we actually chewed up the

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card

0:09:20.240,0:09:22.000
so we want to check that the control is

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operating effectively we want to check

0:09:23.839,0:09:25.360
that the operation of the control is

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working because remember

0:09:27.120,0:09:31.839
we know that when the control

0:09:31.839,0:09:34.800
stops working

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what happens my regular viewers will

0:09:38.320,0:09:40.800
know this when the control stops working

0:09:40.800,0:09:44.240
then we have an increased risk

0:09:44.240,0:09:51.839
of errors and misstatements

0:09:52.080,0:09:53.440
all right and we definitely don't want

0:09:53.440,0:09:55.279
that we don't want to have misstatements

0:09:55.279,0:09:55.680
going

0:09:55.680,0:09:59.040
into the financial um record records and

0:09:59.040,0:09:59.360
the

0:09:59.360,0:10:02.160
the accounting of the firm so to recap

0:10:02.160,0:10:04.480
i'm going to scroll quickly back up

0:10:04.480,0:10:06.880
number one identify the potential

0:10:06.880,0:10:08.079
misstatements

0:10:08.079,0:10:10.000
number two decide whether you want to

0:10:10.000,0:10:11.680
prevent or detect

0:10:11.680,0:10:15.600
number three design an effective

0:10:15.600,0:10:17.519
and efficient internal control thinking

0:10:17.519,0:10:19.680
about the cost versus the benefit

0:10:19.680,0:10:22.000
that cost could be the time it takes the

0:10:22.000,0:10:22.880
dollars

0:10:22.880,0:10:25.040
to actually implement it the effort it

0:10:25.040,0:10:26.160
might take

0:10:26.160,0:10:28.079
think about whether you want manual or

0:10:28.079,0:10:30.720
automated systems

0:10:30.720,0:10:33.040
and then consider the monitoring what

0:10:33.040,0:10:35.760
are we doing to monitor this control

0:10:35.760,0:10:37.519
to make sure that it's always working is

0:10:37.519,0:10:39.040
it if something goes wrong a system

0:10:39.040,0:10:40.560
flags with us

0:10:40.560,0:10:44.240
so now let's look at a practical example

0:10:44.240,0:10:46.320
so in my practical example i'm going to

0:10:46.320,0:10:48.000
think about

0:10:48.000,0:10:51.120
a retail operation and i'm using a

0:10:51.120,0:10:52.320
retail operation

0:10:52.320,0:10:55.040
because it's something that we can

0:10:55.040,0:10:56.800
imagine in our minds we've all been

0:10:56.800,0:10:59.440
shopping to a store now i need to find

0:10:59.440,0:11:00.640
something oh let's just i have a

0:11:00.640,0:11:01.920
notebook here

0:11:01.920,0:11:05.440
so a big thank you to uh microsoft for

0:11:05.440,0:11:05.760
uh

0:11:05.760,0:11:07.040
they sent me a notebook the other day

0:11:07.040,0:11:08.959
i'm an mie expert which is a microsoft

0:11:08.959,0:11:09.920
innovative

0:11:09.920,0:11:12.320
um educator expert and i got a little

0:11:12.320,0:11:13.920
goodie bag from them includes a notebook

0:11:13.920,0:11:14.880
so say we're

0:11:14.880,0:11:17.920
a retail operation and we're selling

0:11:17.920,0:11:19.600
fancy notebooks so let's say this is

0:11:19.600,0:11:21.200
like you know it's leather and it's

0:11:21.200,0:11:22.079
really fancy

0:11:22.079,0:11:24.720
so what is the risk so let's start with

0:11:24.720,0:11:26.399
step one

0:11:26.399,0:11:30.079
the risk is going to be

0:11:30.079,0:11:33.200
theft of inventory

0:11:34.079,0:11:35.519
all right if people steal the inventory

0:11:35.519,0:11:36.800
they're not buying it and we're not

0:11:36.800,0:11:39.040
making revenue so we've got our risk

0:11:39.040,0:11:42.560
of misstatement is a theft of inventory

0:11:42.560,0:11:44.959
and we might also have the so let's talk

0:11:44.959,0:11:47.279
about the theft of inventory risk

0:11:47.279,0:11:51.680
so then i have to think prevent

0:11:51.680,0:11:55.120
or detect so that's p or d in this one i

0:11:55.120,0:11:56.000
definitely want

0:11:56.000,0:11:59.040
to try and prevent theft okay i don't

0:11:59.040,0:12:00.320
want to detect the theft

0:12:00.320,0:12:01.760
after it's happened i want to try and

0:12:01.760,0:12:04.160
prevent people from stealing

0:12:04.160,0:12:07.600
my item from my storm so prevent or

0:12:07.600,0:12:08.399
detect

0:12:08.399,0:12:11.839
now number three comes the actual part

0:12:11.839,0:12:12.320
of

0:12:12.320,0:12:15.200
designing the internal control well i

0:12:15.200,0:12:16.079
want something

0:12:16.079,0:12:18.399
that will stop people from stealing my

0:12:18.399,0:12:20.000
product i got a couple of different

0:12:20.000,0:12:21.200
options

0:12:21.200,0:12:24.079
here and it might be that i might need

0:12:24.079,0:12:26.639
to have multiple things in place

0:12:26.639,0:12:30.800
i could have security cameras

0:12:30.800,0:12:32.720
all right but if i have security cameras

0:12:32.720,0:12:34.160
someone's going to need to be watching

0:12:34.160,0:12:36.560
them so if i have security cameras

0:12:36.560,0:12:40.560
that could be a deterrent potentially

0:12:40.560,0:12:46.079
i could also have rfid

0:12:46.079,0:12:48.720
stickers

0:12:49.360,0:12:53.519
on the inventory

0:12:53.519,0:12:55.920
all right so an rfid sticker or one of

0:12:55.920,0:12:57.760
those security tags so

0:12:57.760,0:12:59.440
often it could be like a little sticker

0:12:59.440,0:13:01.040
that's placed on an individual item or

0:13:01.040,0:13:03.040
it could be a big removable tag so if

0:13:03.040,0:13:04.399
you bought clothing

0:13:04.399,0:13:06.079
from a department store often those will

0:13:06.079,0:13:07.839
have like a big tag on it

0:13:07.839,0:13:10.000
that the sales checkout person will have

0:13:10.000,0:13:11.040
to remove so

0:13:11.040,0:13:14.240
an rfid sticker or some sort of security

0:13:14.240,0:13:15.519
tag

0:13:15.519,0:13:19.040
or security tag

0:13:19.040,0:13:22.480
now given that this is a book like

0:13:22.480,0:13:24.079
a hole i don't want to punch a hole in

0:13:24.079,0:13:25.839
my notebook for the tag

0:13:25.839,0:13:27.920
so a little rfid sticker might be a good

0:13:27.920,0:13:30.079
idea and that's why a lot of stuff comes

0:13:30.079,0:13:33.920
shrink wrapped in plastic that is um

0:13:33.920,0:13:35.279
just so

0:13:35.279,0:13:37.040
that they can then stick the rfid

0:13:37.040,0:13:38.800
sticker on there and it's come a long

0:13:38.800,0:13:39.680
way

0:13:39.680,0:13:41.360
the old days rfid stickers were really

0:13:41.360,0:13:43.440
expensive now i'm seeing supermarkets

0:13:43.440,0:13:44.000
even

0:13:44.000,0:13:45.920
use them on things like expensive meat

0:13:45.920,0:13:47.199
products so

0:13:47.199,0:13:49.839
i've got my security cameras i've got my

0:13:49.839,0:13:52.639
rfid stickers

0:13:52.639,0:13:55.040
um i'm going to have with the rfid

0:13:55.040,0:13:55.839
sticker

0:13:55.839,0:14:00.839
needed with that is going to be the rfid

0:14:00.839,0:14:03.839
detectors

0:14:04.240,0:14:07.600
at the store oops

0:14:07.600,0:14:11.519
can't spell store entry exit

0:14:11.519,0:14:13.279
that is also why a lot of stores will

0:14:13.279,0:14:15.760
only have one entry exit point

0:14:15.760,0:14:18.320
so that they can put those big gates up

0:14:18.320,0:14:20.160
and often you will see those gates will

0:14:20.160,0:14:22.079
be covered in advertising and things so

0:14:22.079,0:14:23.600
you don't notice that it's there so

0:14:23.600,0:14:24.240
you've got

0:14:24.240,0:14:27.360
your rfid your stickers etc

0:14:27.360,0:14:32.560
the last thing that we might do is also

0:14:32.639,0:14:35.760
a store bag check

0:14:36.720,0:14:38.320
all right so that when you leave the

0:14:38.320,0:14:39.839
store they say look

0:14:39.839,0:14:42.560
uh can you open your bag you know bags

0:14:42.560,0:14:44.000
of a bigger size

0:14:44.000,0:14:47.120
to make sure that that's happening so

0:14:47.120,0:14:50.639
that's an example here for the fact that

0:14:50.639,0:14:53.839
we've got our theft let's do another

0:14:53.839,0:14:56.240
example my next example is still going

0:14:56.240,0:14:58.079
to go back to my notebooks

0:14:58.079,0:15:01.920
but my risk is going to be

0:15:01.920,0:15:07.600
the risk of charging the customer

0:15:07.760,0:15:11.120
the wrong price right and that

0:15:11.120,0:15:13.839
is going to result for us in inaccurate

0:15:13.839,0:15:15.680
sales so that's affecting our accuracy

0:15:15.680,0:15:16.959
assertion

0:15:16.959,0:15:20.160
now of course in terms of prevention or

0:15:20.160,0:15:22.560
detection i want to try and

0:15:22.560,0:15:26.160
prevent okay then coming

0:15:26.160,0:15:29.360
into the control

0:15:29.360,0:15:31.279
one thing that i could do and i can

0:15:31.279,0:15:33.120
remember the days where when you went to

0:15:33.120,0:15:34.320
the supermarket

0:15:34.320,0:15:36.160
you didn't actually have barcodes there

0:15:36.160,0:15:37.519
was a little sticker that somebody

0:15:37.519,0:15:39.279
manually added to the product and then

0:15:39.279,0:15:40.880
you typed it in

0:15:40.880,0:15:43.519
into the cash register so we could use

0:15:43.519,0:15:46.399
barcode scanning

0:15:46.399,0:15:50.160
barcodes on goods

0:15:50.160,0:15:53.360
and scan

0:15:53.360,0:15:56.480
at the register

0:15:56.480,0:15:59.360
okay so that's going to be my control

0:15:59.360,0:16:00.000
now

0:16:00.000,0:16:02.160
in terms of the control it's very cheap

0:16:02.160,0:16:03.440
it's efficient you have to have

0:16:03.440,0:16:05.519
obviously a cash register system

0:16:05.519,0:16:07.600
but the one thing that we want to do

0:16:07.600,0:16:11.680
here in terms of the monitoring

0:16:13.279,0:16:15.680
all right is that we might want to do

0:16:15.680,0:16:17.440
something like

0:16:17.440,0:16:22.800
check price overrides

0:16:22.800,0:16:24.320
all right so if somebody tries to

0:16:24.320,0:16:26.000
override the price

0:16:26.000,0:16:27.839
there's a couple of different options

0:16:27.839,0:16:29.360
you could have you need

0:16:29.360,0:16:31.600
manager whoops that's meant to be an r

0:16:31.600,0:16:33.279
manager

0:16:33.279,0:16:36.800
to approve any price overrides

0:16:36.800,0:16:39.279
or at the end of the day you could have

0:16:39.279,0:16:42.720
a daily report

0:16:42.880,0:16:44.800
about those overrides and that's really

0:16:44.800,0:16:46.079
common in retail stores where they'll

0:16:46.079,0:16:46.800
say okay

0:16:46.800,0:16:48.959
give me the day end of day report oh

0:16:48.959,0:16:50.240
yeah this was overwritten because this

0:16:50.240,0:16:51.440
was damaged

0:16:51.440,0:16:53.360
this person had an extra discount this

0:16:53.360,0:16:55.279
was the manager's discretion

0:16:55.279,0:16:57.040
so you want to monitor how many prices

0:16:57.040,0:16:58.720
were incorrect

0:16:58.720,0:17:00.480
um often there's also a thing that says

0:17:00.480,0:17:01.839
oh look if the shelf says

0:17:01.839,0:17:04.640
five dollars but your thing says ten

0:17:04.640,0:17:06.400
dollars you get whatever the shelf

0:17:06.400,0:17:08.400
price is so that could be one of your

0:17:08.400,0:17:10.160
override codes

0:17:10.160,0:17:12.720
now i realized back here when i was

0:17:12.720,0:17:14.160
designing the controls for

0:17:14.160,0:17:17.520
the risk of theft then um

0:17:17.520,0:17:20.959
the mo the store bag check um

0:17:20.959,0:17:22.559
could be one of those monitoring

0:17:22.559,0:17:24.319
controls so i realized i forgot that i

0:17:24.319,0:17:26.000
forgot to talk about the monitoring

0:17:26.000,0:17:30.480
but the store bag check could also

0:17:31.280,0:17:35.120
be part of that monitoring process

0:17:35.120,0:17:38.400
i hope that that clarifies to everybody

0:17:38.400,0:17:42.559
how you can design an internal control

0:17:42.559,0:17:44.880
and remember to take it step by step

0:17:44.880,0:17:46.480
think about the risk

0:17:46.480,0:17:48.799
do i want to prevent or detect what are

0:17:48.799,0:17:50.799
the control activities that i could do

0:17:50.799,0:17:53.440
automated or manual or with our systems

0:17:53.440,0:17:55.440
or a combination of both

0:17:55.440,0:17:56.880
and then what am i going to put in place

0:17:56.880,0:17:59.520
to monitor to make sure that control

0:17:59.520,0:18:01.760
works properly so i want to thank you

0:18:01.760,0:18:03.440
for watching this video of course if you

0:18:03.440,0:18:05.679
haven't already consider subscribing

0:18:05.679,0:18:07.919
for all of those internal auditors out

0:18:07.919,0:18:09.600
there you might want to check out

0:18:09.600,0:18:11.360
autotopia it's a new

0:18:11.360,0:18:13.440
internal audit community that i'm

0:18:13.440,0:18:14.640
involved with

0:18:14.640,0:18:17.200
it has free resources that people are

0:18:17.200,0:18:17.840
sharing

0:18:17.840,0:18:20.360
internal con audit checklists and

0:18:20.360,0:18:22.240
documentation

0:18:22.240,0:18:24.880
and we've also got regular webinars to

0:18:24.880,0:18:25.919
help you become

0:18:25.919,0:18:28.080
a better internal auditor i'm really

0:18:28.080,0:18:30.720
excited to be part of the autotopia team

0:18:30.720,0:18:32.960
i'll be working with them to create some

0:18:32.960,0:18:34.640
content for some courses

0:18:34.640,0:18:36.880
that they're going to have big thank you

0:18:36.880,0:18:38.799
i want everybody to stay safe

0:18:38.799,0:18:40.960
stay well i've checked myself on the

0:18:40.960,0:18:43.200
vaccination schedule i'm hopefully

0:18:43.200,0:18:45.440
going to be vaccinated in september or

0:18:45.440,0:18:46.720
october of this year

0:18:46.720,0:18:48.880
so i'm really excited about that but

0:18:48.880,0:18:51.360
stay safe stay well wherever you are

0:18:51.360,0:18:57.840
and i'll see you next time

0:19:03.720,0:19:09.570
[Music]

0:19:12.400,0:19:14.480
you