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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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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 AmandaLovesToAudit.

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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 our

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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 Uganda 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 mom 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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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 Yum Cha. I know

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that I want to eat

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ha gao, cha siu bao,

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pai gwat, dan tats. 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,

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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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an 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 got 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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IT 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 I have one in my pocket actually,

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so here's my card 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. I remember

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

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The bank at the end of the day, will 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

0:09:22.000,0:09:23.839
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

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into the financial records and

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

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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

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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

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because it's something that we can

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

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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 Microsoft for

0:11:05.440,0:11:05.760


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
Educator expert and I got a little

0:11:12.320,0:11:13.920
goodie bag from them and it 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 store, 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

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
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, woops

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
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 good

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 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
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,

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

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 there 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 considered 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
auditopia. 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 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 auditopia 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.

0:18:57.930,0:19:12.060
[Music]

0:19:12.400,0:19:14.480