Most accounting systems have the ability to generate exception reports that immediately identify control procedure failures or transactions that are out of the norm so that management can determine whether any special action is needed.
a. Identify how the auditor might use each of the following four types of exception reports (labeled 1. through 4. below) in assessing the effectiveness of controls.
b. For each type of exception report address the following question.
If the exceptions are properly followed up and corrected, would the fact that many exceptions occurred affect the auditor's judgment of the effectiveness of controls and the auditor's assessment of control risk? Explain.
1. A list of all invoices over $5,000 for which credit was not preauthorized by the credit manager (the computer program is designed so that if the authorization is not provided within 24 hours of the original notice to the credit manager, the shipment is made as if it were authorized). This exception report goes to the credit manager.
2. A report of any sales volume to one customer exceeding $2 million in a month sent to the sales manager with a copy to the credit manager.
3. A report of exceptions for which shipping documents and packing slips did not reconcile.
4. A report noting that goods ordered were not shipped (or back-ordered) within five days of receipt of the order as is required per company policy.