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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

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oh okay that's the wrong pin remember

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the right pin i put it in

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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

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so we want to check that the control is

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operating effectively we want to check

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that the operation of the control is

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working because remember

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we know that when the control

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stops working

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what happens my regular viewers will

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know this when the control stops working

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then we have an increased risk

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of errors and misstatements

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all right and we definitely don't want

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that we don't want to have misstatements

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going

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into the financial um record records and

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the

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the accounting of the firm so to recap

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i'm going to scroll quickly back up

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number one identify the potential

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misstatements

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number two decide whether you want to

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prevent or detect

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number three design an effective

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and efficient internal control thinking

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about the cost versus the benefit

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that cost could be the time it takes the

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dollars

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to actually implement it the effort it

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might take

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think about whether you want manual or

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automated systems

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and then consider the monitoring what

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are we doing to monitor this control

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to make sure that it's always working is

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it if something goes wrong a system

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flags with us

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so now let's look at a practical example

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so in my practical example i'm going to

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think about

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a retail operation and i'm using a

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retail operation

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because it's something that we can

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imagine in our minds we've all been

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shopping to a store now i need to find

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something oh let's just i have a

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notebook here

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so a big thank you to uh microsoft for

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uh

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they sent me a notebook the other day

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i'm an mie expert which is a microsoft

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innovative

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um educator expert and i got a little

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goodie bag from them includes a notebook

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so say we're

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a retail operation and we're selling

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fancy notebooks so let's say this is

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like you know it's leather and it's

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really fancy

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so what is the risk so let's start with

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step one

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the risk is going to be

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theft of inventory

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all right if people steal the inventory

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they're not buying it and we're not

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making revenue so we've got our risk

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of misstatement is a theft of inventory

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and we might also have the so let's talk

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about the theft of inventory risk

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so then i have to think prevent

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or detect so that's p or d in this one i

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definitely want

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to try and prevent theft okay i don't

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want to detect the theft

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after it's happened i want to try and

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prevent people from stealing

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my item from my storm so prevent or

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detect

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now number three comes the actual part

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of

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designing the internal control well i

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want something

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that will stop people from stealing my

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product i got a couple of different

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options

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here and it might be that i might need

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to have multiple things in place

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i could have security cameras

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all right but if i have security cameras

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someone's going to need to be watching

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them so if i have security cameras

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that could be a deterrent potentially

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i could also have rfid

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stickers

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on the inventory

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all right so an rfid sticker or one of

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those security tags so

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often it could be like a little sticker

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that's placed on an individual item or

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it could be a big removable tag so if

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you bought clothing

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from a department store often those will

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have like a big tag on it

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that the sales checkout person will have

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00:13:10,000 --> 00:13:11,040
to remove so

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an rfid sticker or some sort of security

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00:13:14,240 --> 00:13:15,519
tag

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or security tag

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now given that this is a book like

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00:13:22,480 --> 00:13:24,079
a hole i don't want to punch a hole in

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00:13:24,079 --> 00:13:25,839
my notebook for the tag

362
00:13:25,839 --> 00:13:27,920
so a little rfid sticker might be a good

363
00:13:27,920 --> 00:13:30,079
idea and that's why a lot of stuff comes

364
00:13:30,079 --> 00:13:33,920
shrink wrapped in plastic that is um

365
00:13:33,920 --> 00:13:35,279
just so

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that they can then stick the rfid

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00:13:37,040 --> 00:13:38,800
sticker on there and it's come a long

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00:13:38,800 --> 00:13:39,680
way

369
00:13:39,680 --> 00:13:41,360
the old days rfid stickers were really

370
00:13:41,360 --> 00:13:43,440
expensive now i'm seeing supermarkets

371
00:13:43,440 --> 00:13:44,000
even

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use them on things like expensive meat

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products so

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i've got my security cameras i've got my

375
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rfid stickers

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um i'm going to have with the rfid

377
00:13:55,040 --> 00:13:55,839
sticker

378
00:13:55,839 --> 00:14:00,839
needed with that is going to be the rfid

379
00:14:00,839 --> 00:14:03,839
detectors

380
00:14:04,240 --> 00:14:07,600
at the store oops

381
00:14:07,600 --> 00:14:11,519
can't spell store entry exit

382
00:14:11,519 --> 00:14:13,279
that is also why a lot of stores will

383
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only have one entry exit point

384
00:14:15,760 --> 00:14:18,320
so that they can put those big gates up

385
00:14:18,320 --> 00:14:20,160
and often you will see those gates will

386
00:14:20,160 --> 00:14:22,079
be covered in advertising and things so

387
00:14:22,079 --> 00:14:23,600
you don't notice that it's there so

388
00:14:23,600 --> 00:14:24,240
you've got

389
00:14:24,240 --> 00:14:27,360
your rfid your stickers etc

390
00:14:27,360 --> 00:14:32,560
the last thing that we might do is also

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00:14:32,639 --> 00:14:35,760
a store bag check

392
00:14:36,720 --> 00:14:38,320
all right so that when you leave the

393
00:14:38,320 --> 00:14:39,839
store they say look

394
00:14:39,839 --> 00:14:42,560
uh can you open your bag you know bags

395
00:14:42,560 --> 00:14:44,000
of a bigger size

396
00:14:44,000 --> 00:14:47,120
to make sure that that's happening so

397
00:14:47,120 --> 00:14:50,639
that's an example here for the fact that

398
00:14:50,639 --> 00:14:53,839
we've got our theft let's do another

399
00:14:53,839 --> 00:14:56,240
example my next example is still going

400
00:14:56,240 --> 00:14:58,079
to go back to my notebooks

401
00:14:58,079 --> 00:15:01,920
but my risk is going to be

402
00:15:01,920 --> 00:15:07,600
the risk of charging the customer

403
00:15:07,760 --> 00:15:11,120
the wrong price right and that

404
00:15:11,120 --> 00:15:13,839
is going to result for us in inaccurate

405
00:15:13,839 --> 00:15:15,680
sales so that's affecting our accuracy

406
00:15:15,680 --> 00:15:16,959
assertion

407
00:15:16,959 --> 00:15:20,160
now of course in terms of prevention or

408
00:15:20,160 --> 00:15:22,560
detection i want to try and

409
00:15:22,560 --> 00:15:26,160
prevent okay then coming

410
00:15:26,160 --> 00:15:29,360
into the control

411
00:15:29,360 --> 00:15:31,279
one thing that i could do and i can

412
00:15:31,279 --> 00:15:33,120
remember the days where when you went to

413
00:15:33,120 --> 00:15:34,320
the supermarket

414
00:15:34,320 --> 00:15:36,160
you didn't actually have barcodes there

415
00:15:36,160 --> 00:15:37,519
was a little sticker that somebody

416
00:15:37,519 --> 00:15:39,279
manually added to the product and then

417
00:15:39,279 --> 00:15:40,880
you typed it in

418
00:15:40,880 --> 00:15:43,519
into the cash register so we could use

419
00:15:43,519 --> 00:15:46,399
barcode scanning

420
00:15:46,399 --> 00:15:50,160
barcodes on goods

421
00:15:50,160 --> 00:15:53,360
and scan

422
00:15:53,360 --> 00:15:56,480
at the register

423
00:15:56,480 --> 00:15:59,360
okay so that's going to be my control

424
00:15:59,360 --> 00:16:00,000
now

425
00:16:00,000 --> 00:16:02,160
in terms of the control it's very cheap

426
00:16:02,160 --> 00:16:03,440
it's efficient you have to have

427
00:16:03,440 --> 00:16:05,519
obviously a cash register system

428
00:16:05,519 --> 00:16:07,600
but the one thing that we want to do

429
00:16:07,600 --> 00:16:11,680
here in terms of the monitoring

430
00:16:13,279 --> 00:16:15,680
all right is that we might want to do

431
00:16:15,680 --> 00:16:17,440
something like

432
00:16:17,440 --> 00:16:22,800
check price overrides

433
00:16:22,800 --> 00:16:24,320
all right so if somebody tries to

434
00:16:24,320 --> 00:16:26,000
override the price

435
00:16:26,000 --> 00:16:27,839
there's a couple of different options

436
00:16:27,839 --> 00:16:29,360
you could have you need

437
00:16:29,360 --> 00:16:31,600
manager whoops that's meant to be an r

438
00:16:31,600 --> 00:16:33,279
manager

439
00:16:33,279 --> 00:16:36,800
to approve any price overrides

440
00:16:36,800 --> 00:16:39,279
or at the end of the day you could have

441
00:16:39,279 --> 00:16:42,720
a daily report

442
00:16:42,880 --> 00:16:44,800
about those overrides and that's really

443
00:16:44,800 --> 00:16:46,079
common in retail stores where they'll

444
00:16:46,079 --> 00:16:46,800
say okay

445
00:16:46,800 --> 00:16:48,959
give me the day end of day report oh

446
00:16:48,959 --> 00:16:50,240
yeah this was overwritten because this

447
00:16:50,240 --> 00:16:51,440
was damaged

448
00:16:51,440 --> 00:16:53,360
this person had an extra discount this

449
00:16:53,360 --> 00:16:55,279
was the manager's discretion

450
00:16:55,279 --> 00:16:57,040
so you want to monitor how many prices

451
00:16:57,040 --> 00:16:58,720
were incorrect

452
00:16:58,720 --> 00:17:00,480
um often there's also a thing that says

453
00:17:00,480 --> 00:17:01,839
oh look if the shelf says

454
00:17:01,839 --> 00:17:04,640
five dollars but your thing says ten

455
00:17:04,640 --> 00:17:06,400
dollars you get whatever the shelf

456
00:17:06,400 --> 00:17:08,400
price is so that could be one of your

457
00:17:08,400 --> 00:17:10,160
override codes

458
00:17:10,160 --> 00:17:12,720
now i realized back here when i was

459
00:17:12,720 --> 00:17:14,160
designing the controls for

460
00:17:14,160 --> 00:17:17,520
the risk of theft then um

461
00:17:17,520 --> 00:17:20,959
the mo the store bag check um

462
00:17:20,959 --> 00:17:22,559
could be one of those monitoring

463
00:17:22,559 --> 00:17:24,319
controls so i realized i forgot that i

464
00:17:24,319 --> 00:17:26,000
forgot to talk about the monitoring

465
00:17:26,000 --> 00:17:30,480
but the store bag check could also

466
00:17:31,280 --> 00:17:35,120
be part of that monitoring process

467
00:17:35,120 --> 00:17:38,400
i hope that that clarifies to everybody

468
00:17:38,400 --> 00:17:42,559
how you can design an internal control

469
00:17:42,559 --> 00:17:44,880
and remember to take it step by step

470
00:17:44,880 --> 00:17:46,480
think about the risk

471
00:17:46,480 --> 00:17:48,799
do i want to prevent or detect what are

472
00:17:48,799 --> 00:17:50,799
the control activities that i could do

473
00:17:50,799 --> 00:17:53,440
automated or manual or with our systems

474
00:17:53,440 --> 00:17:55,440
or a combination of both

475
00:17:55,440 --> 00:17:56,880
and then what am i going to put in place

476
00:17:56,880 --> 00:17:59,520
to monitor to make sure that control

477
00:17:59,520 --> 00:18:01,760
works properly so i want to thank you

478
00:18:01,760 --> 00:18:03,440
for watching this video of course if you

479
00:18:03,440 --> 00:18:05,679
haven't already consider subscribing

480
00:18:05,679 --> 00:18:07,919
for all of those internal auditors out

481
00:18:07,919 --> 00:18:09,600
there you might want to check out

482
00:18:09,600 --> 00:18:11,360
autotopia it's a new

483
00:18:11,360 --> 00:18:13,440
internal audit community that i'm

484
00:18:13,440 --> 00:18:14,640
involved with

485
00:18:14,640 --> 00:18:17,200
it has free resources that people are

486
00:18:17,200 --> 00:18:17,840
sharing

487
00:18:17,840 --> 00:18:20,360
internal con audit checklists and

488
00:18:20,360 --> 00:18:22,240
documentation

489
00:18:22,240 --> 00:18:24,880
and we've also got regular webinars to

490
00:18:24,880 --> 00:18:25,919
help you become

491
00:18:25,919 --> 00:18:28,080
a better internal auditor i'm really

492
00:18:28,080 --> 00:18:30,720
excited to be part of the autotopia team

493
00:18:30,720 --> 00:18:32,960
i'll be working with them to create some

494
00:18:32,960 --> 00:18:34,640
content for some courses

495
00:18:34,640 --> 00:18:36,880
that they're going to have big thank you

496
00:18:36,880 --> 00:18:38,799
i want everybody to stay safe

497
00:18:38,799 --> 00:18:40,960
stay well i've checked myself on the

498
00:18:40,960 --> 00:18:43,200
vaccination schedule i'm hopefully

499
00:18:43,200 --> 00:18:45,440
going to be vaccinated in september or

500
00:18:45,440 --> 00:18:46,720
october of this year

501
00:18:46,720 --> 00:18:48,880
so i'm really excited about that but

502
00:18:48,880 --> 00:18:51,360
stay safe stay well wherever you are

503
00:18:51,360 --> 00:18:57,840
and i'll see you next time

504
00:19:03,720 --> 00:19:09,570
[Music]

505
00:19:12,400 --> 00:19:14,480
you