HERAKLION

"Exception reporting" or "reporting by exception" means just that - so rather than report every transaction, say, and expect management to scrutinise it for any any exceptions, only the exceptions (as pre-defined) are reported for the attention of the reviewer. So this could be: - changes to "standing data" (e.g. new staff added to the payroll") - something missing that was expected (e.g. no pay slip for someone who is on the payroll) - exceeding some monetary threshold (e.g. a weekly wage in excess of $10.000) - impossible amounts (e.g. negative inventory quantities).

got it professor! Just one small doubt, if a clerk is responsible for say bank reconciliations, then for any unreconciled amounts can we suggest (as a part of TOC) that "enquire with the clerk if he prepared an exception report."

No. In any case "inquire" is not sufficient as a test of control (it merely provides information that might be useful in understanding the entity/risk assessment). You haven't quite got it - an exception report will invariably be generated automatically and when processing or extracting information from a large number of transactions of balances. For example, processing the payroll - the computer must be able to find the employee to process their hours worked (input). If that employee is missing from the standing data file, the process will generate a report that identifies this exception ("data no file") - someone (responsible) would need to check and correct as necessary. Perhaps it's a "new hire" (starter) and their first payslip has to be raised manually. Of if there is an exception that there are no hours for someone on the payroll ("file no data") - perhaps that's a leaver, who needs to be removed from the standing data. For a bank reconciliation - frankly, if there are unreconciled amounts, it's not reconciled! As a monitoring control, all monthly bank reconciliations should be reviewed and signed to confirm that it is correct.