WEBVTT

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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

00:12:00.320 --> 00:12:01.760
after it's happened i want to try and

00:12:01.760 --> 00:12:04.160
prevent people from stealing

00:12:04.160 --> 00:12:07.600
my item from my storm so prevent or

00:12:07.600 --> 00:12:08.399
detect

00:12:08.399 --> 00:12:11.839
now number three comes the actual part

00:12:11.839 --> 00:12:12.320
of

00:12:12.320 --> 00:12:15.200
designing the internal control well i

00:12:15.200 --> 00:12:16.079
want something

00:12:16.079 --> 00:12:18.399
that will stop people from stealing my

00:12:18.399 --> 00:12:20.000
product i got a couple of different

00:12:20.000 --> 00:12:21.200
options

00:12:21.200 --> 00:12:24.079
here and it might be that i might need

00:12:24.079 --> 00:12:26.639
to have multiple things in place

00:12:26.639 --> 00:12:30.800
i could have security cameras

00:12:30.800 --> 00:12:32.720
all right but if i have security cameras

00:12:32.720 --> 00:12:34.160
someone's going to need to be watching

00:12:34.160 --> 00:12:36.560
them so if i have security cameras

00:12:36.560 --> 00:12:40.560
that could be a deterrent potentially

00:12:40.560 --> 00:12:46.079
i could also have rfid

00:12:46.079 --> 00:12:48.720
stickers

00:12:49.360 --> 00:12:53.519
on the inventory

00:12:53.519 --> 00:12:55.920
all right so an rfid sticker or one of

00:12:55.920 --> 00:12:57.760
those security tags so

00:12:57.760 --> 00:12:59.440
often it could be like a little sticker

00:12:59.440 --> 00:13:01.040
that's placed on an individual item or

00:13:01.040 --> 00:13:03.040
it could be a big removable tag so if

00:13:03.040 --> 00:13:04.399
you bought clothing

00:13:04.399 --> 00:13:06.079
from a department store often those will

00:13:06.079 --> 00:13:07.839
have like a big tag on it

00:13:07.839 --> 00:13:10.000
that the sales checkout person will have

00:13:10.000 --> 00:13:11.040
to remove so

00:13:11.040 --> 00:13:14.240
an rfid sticker or some sort of security

00:13:14.240 --> 00:13:15.519
tag

00:13:15.519 --> 00:13:19.040
or security tag

00:13:19.040 --> 00:13:22.480
now given that this is a book like

00:13:22.480 --> 00:13:24.079
a hole i don't want to punch a hole in

00:13:24.079 --> 00:13:25.839
my notebook for the tag

00:13:25.839 --> 00:13:27.920
so a little rfid sticker might be a good

00:13:27.920 --> 00:13:30.079
idea and that's why a lot of stuff comes

00:13:30.079 --> 00:13:33.920
shrink wrapped in plastic that is um

00:13:33.920 --> 00:13:35.279
just so

00:13:35.279 --> 00:13:37.040
that they can then stick the rfid

00:13:37.040 --> 00:13:38.800
sticker on there and it's come a long

00:13:38.800 --> 00:13:39.680
way

00:13:39.680 --> 00:13:41.360
the old days rfid stickers were really

00:13:41.360 --> 00:13:43.440
expensive now i'm seeing supermarkets

00:13:43.440 --> 00:13:44.000
even

00:13:44.000 --> 00:13:45.920
use them on things like expensive meat

00:13:45.920 --> 00:13:47.199
products so

00:13:47.199 --> 00:13:49.839
i've got my security cameras i've got my

00:13:49.839 --> 00:13:52.639
rfid stickers

00:13:52.639 --> 00:13:55.040
um i'm going to have with the rfid

00:13:55.040 --> 00:13:55.839
sticker

00:13:55.839 --> 00:14:00.839
needed with that is going to be the rfid

00:14:00.839 --> 00:14:03.839
detectors

00:14:04.240 --> 00:14:07.600
at the store oops

00:14:07.600 --> 00:14:11.519
can't spell store entry exit

00:14:11.519 --> 00:14:13.279
that is also why a lot of stores will

00:14:13.279 --> 00:14:15.760
only have one entry exit point

00:14:15.760 --> 00:14:18.320
so that they can put those big gates up

00:14:18.320 --> 00:14:20.160
and often you will see those gates will

00:14:20.160 --> 00:14:22.079
be covered in advertising and things so

00:14:22.079 --> 00:14:23.600
you don't notice that it's there so

00:14:23.600 --> 00:14:24.240
you've got

00:14:24.240 --> 00:14:27.360
your rfid your stickers etc

00:14:27.360 --> 00:14:32.560
the last thing that we might do is also

00:14:32.639 --> 00:14:35.760
a store bag check

00:14:36.720 --> 00:14:38.320
all right so that when you leave the

00:14:38.320 --> 00:14:39.839
store they say look

00:14:39.839 --> 00:14:42.560
uh can you open your bag you know bags

00:14:42.560 --> 00:14:44.000
of a bigger size

00:14:44.000 --> 00:14:47.120
to make sure that that's happening so

00:14:47.120 --> 00:14:50.639
that's an example here for the fact that

00:14:50.639 --> 00:14:53.839
we've got our theft let's do another

00:14:53.839 --> 00:14:56.240
example my next example is still going

00:14:56.240 --> 00:14:58.079
to go back to my notebooks

00:14:58.079 --> 00:15:01.920
but my risk is going to be

00:15:01.920 --> 00:15:07.600
the risk of charging the customer

00:15:07.760 --> 00:15:11.120
the wrong price right and that

00:15:11.120 --> 00:15:13.839
is going to result for us in inaccurate

00:15:13.839 --> 00:15:15.680
sales so that's affecting our accuracy

00:15:15.680 --> 00:15:16.959
assertion

00:15:16.959 --> 00:15:20.160
now of course in terms of prevention or

00:15:20.160 --> 00:15:22.560
detection i want to try and

00:15:22.560 --> 00:15:26.160
prevent okay then coming

00:15:26.160 --> 00:15:29.360
into the control

00:15:29.360 --> 00:15:31.279
one thing that i could do and i can

00:15:31.279 --> 00:15:33.120
remember the days where when you went to

00:15:33.120 --> 00:15:34.320
the supermarket

00:15:34.320 --> 00:15:36.160
you didn't actually have barcodes there

00:15:36.160 --> 00:15:37.519
was a little sticker that somebody

00:15:37.519 --> 00:15:39.279
manually added to the product and then

00:15:39.279 --> 00:15:40.880
you typed it in

00:15:40.880 --> 00:15:43.519
into the cash register so we could use

00:15:43.519 --> 00:15:46.399
barcode scanning

00:15:46.399 --> 00:15:50.160
barcodes on goods

00:15:50.160 --> 00:15:53.360
and scan

00:15:53.360 --> 00:15:56.480
at the register

00:15:56.480 --> 00:15:59.360
okay so that's going to be my control

00:15:59.360 --> 00:16:00.000
now

00:16:00.000 --> 00:16:02.160
in terms of the control it's very cheap

00:16:02.160 --> 00:16:03.440
it's efficient you have to have

00:16:03.440 --> 00:16:05.519
obviously a cash register system

00:16:05.519 --> 00:16:07.600
but the one thing that we want to do

00:16:07.600 --> 00:16:11.680
here in terms of the monitoring

00:16:13.279 --> 00:16:15.680
all right is that we might want to do

00:16:15.680 --> 00:16:17.440
something like

00:16:17.440 --> 00:16:22.800
check price overrides

00:16:22.800 --> 00:16:24.320
all right so if somebody tries to

00:16:24.320 --> 00:16:26.000
override the price

00:16:26.000 --> 00:16:27.839
there's a couple of different options

00:16:27.839 --> 00:16:29.360
you could have you need

00:16:29.360 --> 00:16:31.600
manager whoops that's meant to be an r

00:16:31.600 --> 00:16:33.279
manager

00:16:33.279 --> 00:16:36.800
to approve any price overrides

00:16:36.800 --> 00:16:39.279
or at the end of the day you could have

00:16:39.279 --> 00:16:42.720
a daily report

00:16:42.880 --> 00:16:44.800
about those overrides and that's really

00:16:44.800 --> 00:16:46.079
common in retail stores where they'll

00:16:46.079 --> 00:16:46.800
say okay

00:16:46.800 --> 00:16:48.959
give me the day end of day report oh

00:16:48.959 --> 00:16:50.240
yeah this was overwritten because this

00:16:50.240 --> 00:16:51.440
was damaged

00:16:51.440 --> 00:16:53.360
this person had an extra discount this

00:16:53.360 --> 00:16:55.279
was the manager's discretion

00:16:55.279 --> 00:16:57.040
so you want to monitor how many prices

00:16:57.040 --> 00:16:58.720
were incorrect

00:16:58.720 --> 00:17:00.480
um often there's also a thing that says

00:17:00.480 --> 00:17:01.839
oh look if the shelf says

00:17:01.839 --> 00:17:04.640
five dollars but your thing says ten

00:17:04.640 --> 00:17:06.400
dollars you get whatever the shelf

00:17:06.400 --> 00:17:08.400
price is so that could be one of your

00:17:08.400 --> 00:17:10.160
override codes

00:17:10.160 --> 00:17:12.720
now i realized back here when i was

00:17:12.720 --> 00:17:14.160
designing the controls for

00:17:14.160 --> 00:17:17.520
the risk of theft then um

00:17:17.520 --> 00:17:20.959
the mo the store bag check um

00:17:20.959 --> 00:17:22.559
could be one of those monitoring

00:17:22.559 --> 00:17:24.319
controls so i realized i forgot that i

00:17:24.319 --> 00:17:26.000
forgot to talk about the monitoring

00:17:26.000 --> 00:17:30.480
but the store bag check could also

00:17:31.280 --> 00:17:35.120
be part of that monitoring process

00:17:35.120 --> 00:17:38.400
i hope that that clarifies to everybody

00:17:38.400 --> 00:17:42.559
how you can design an internal control

00:17:42.559 --> 00:17:44.880
and remember to take it step by step

00:17:44.880 --> 00:17:46.480
think about the risk

00:17:46.480 --> 00:17:48.799
do i want to prevent or detect what are

00:17:48.799 --> 00:17:50.799
the control activities that i could do

00:17:50.799 --> 00:17:53.440
automated or manual or with our systems

00:17:53.440 --> 00:17:55.440
or a combination of both

00:17:55.440 --> 00:17:56.880
and then what am i going to put in place

00:17:56.880 --> 00:17:59.520
to monitor to make sure that control

00:17:59.520 --> 00:18:01.760
works properly so i want to thank you

00:18:01.760 --> 00:18:03.440
for watching this video of course if you

00:18:03.440 --> 00:18:05.679
haven't already consider subscribing

00:18:05.679 --> 00:18:07.919
for all of those internal auditors out

00:18:07.919 --> 00:18:09.600
there you might want to check out

00:18:09.600 --> 00:18:11.360
autotopia it's a new

00:18:11.360 --> 00:18:13.440
internal audit community that i'm

00:18:13.440 --> 00:18:14.640
involved with

00:18:14.640 --> 00:18:17.200
it has free resources that people are

00:18:17.200 --> 00:18:17.840
sharing

00:18:17.840 --> 00:18:20.360
internal con audit checklists and

00:18:20.360 --> 00:18:22.240
documentation

00:18:22.240 --> 00:18:24.880
and we've also got regular webinars to

00:18:24.880 --> 00:18:25.919
help you become

00:18:25.919 --> 00:18:28.080
a better internal auditor i'm really

00:18:28.080 --> 00:18:30.720
excited to be part of the autotopia team

00:18:30.720 --> 00:18:32.960
i'll be working with them to create some

00:18:32.960 --> 00:18:34.640
content for some courses

00:18:34.640 --> 00:18:36.880
that they're going to have big thank you

00:18:36.880 --> 00:18:38.799
i want everybody to stay safe

00:18:38.799 --> 00:18:40.960
stay well i've checked myself on the

00:18:40.960 --> 00:18:43.200
vaccination schedule i'm hopefully

00:18:43.200 --> 00:18:45.440
going to be vaccinated in september or

00:18:45.440 --> 00:18:46.720
october of this year

00:18:46.720 --> 00:18:48.880
so i'm really excited about that but

00:18:48.880 --> 00:18:51.360
stay safe stay well wherever you are

00:18:51.360 --> 00:18:57.840
and i'll see you next time

00:19:03.720 --> 00:19:09.570
[Music]

00:19:12.400 --> 00:19:14.480
you