Qualitative evaluation of exceptions
A qualitative evaluation of exceptions is an investigation by the
auditor to determine the reason for each exception. It is a
necessary and critical part of audit testing. The auditor firstly
investigates how, why, when and where each exception occurred, and
secondly categories the exceptions into one of three categories
— atypical, systematic, random
[fn].
An atypical exception is a “one off” exception that is
unlikely to have occurred more than once. In control testing, the
auditor's detection of the overriding of a control procedure by
management (e.g. the approval of a bed debt write-off that should
not have been written off) may be, depending on the circumstances,
an atypical exception. In substantive testing, the detection by the
auditor of a misstatement such as the incorrect totalling of a
schedule of inventory by a person not responsible for other
calculations, may be atypical as it is unlikely to have occurred
more than once. However, see
The CPA Journal article
The Mythical Isolated Error.
A systematic exception is a non-random exception that is likely to
have occurred more than once on positively identifiable occasions.
For example, if the computer software responsible for costing the
retail inventory had used an out-of-date unit cost file, then the
consequent incorrect costing of inventory is classified as a
systematic exception as the same incorrect costing will have
occurred for all items of inventory included in that unit cost
file. Exceptions relating to matters of principle, as opposed to
application, may often be systematic exceptions.
A random exception is one that may, or even likely to, have
occurred more than once, but not on positively identifiable
occasions. For example, where the reason behind the failure to
approve a transaction was identified as human error (e.g. the
person approving the transaction could give no good reason as to
why the transaction was not approved — perhaps the person was
momentarily distracted while approving a batch of transactions),
then the exception would be classified as a random exception.
The auditor also determines whether the exception was
intentional or unintentional. An intentional exception may indicate
an intention on the part of management to deceive the auditor or
even perhaps the presence of fraud.
Audit testing procedures, index
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