A walkthrough test is an auditing technique that examines a process from initiation to completion. The purpose is to observe the effective implementation of internal controls devised by an organization.
An auditing team can evaluate any accounting and non-accounting process. The test should include recording, analyzing, and reporting the outcomes of the walkthrough effectively.
Let us discuss what is a walkthrough in auditing, how it is conducted, and what it delivers to an organization.
Walkthrough in Auditing
A walkthrough test is an examination of each step involved in a transaction. It is an auditing technique that is used during the auditing of an accounting system of a firm. Its purpose is to analyze the reliability of the accounting system.
Businesses devise internal controls to achieve corporate governance goals. These goals can be achieving financial objectives, regulatory compliance, operational performance, and so on.
Auditing uses different techniques to evaluate the effectiveness of internal controls. Walkthrough testing is one such auditing technique.
The purpose is to identify any errors, frauds, omissions, and misconduct in operations. Also, the walkthrough test evaluates whether the entity needs an improvement in internal controls implementation.
Frequency of Walkthrough Tests
An auditing team can perform walkthrough tests yearly. If the entity has performed an auditing walkthrough test in the previous years, it will continue the practice for the current year as well.
An auditor must first develop an understanding of internal controls. A walkthrough test is a good tool to evaluate an understanding of internal controls. Auditors can perform a yearly walkthrough test for that purpose.
How Walkthrough Tests in Auditing Work?
A walkthrough test’s prime objective is to determine a system’s reliability and the controls put in place to run that system. The results should help the management to identify the issues and weaknesses found in the system.
Auditors should first develop an understanding of internal controls implemented by an entity. They’ll then plan the walkthrough to test these controls and their effectiveness. They’ll also examine how the employees have implemented these internal controls.
A walkthrough test begins when a transaction or an accounting process is initiated. Then, auditors will follow the process at each step of the transaction.
The test then examines the initiation, recording, authorization, and documentation of the transaction in the account books of the entity.
The test will also identify authorized persons involved in a transaction and their roles in effectively implementing internal controls.
Auditors must focus on how internal controls at each step are implemented. Moreover, they should also examine how these controls can be improved further.
Also, they should observe the processes and methods adopted by the entity and discuss how weaknesses and inefficiencies can be removed from the system.
A walkthrough test may not be a formal process for small and medium-sized businesses. As these entities have a small number of transactions or a small volume, they can use an informal process to conduct the tests.
Example for Understanding the Walkthrough in Auditing
Suppose a company ABC manufactures stationery and office supplies. It receives an order worth $ 25,000 from a local retailer to purchase different stationery and office supplies.
The auditing team can plan a walkthrough auditing test to examine the whole transaction process and evaluate the internal controls.
In the first step, auditors will check ABC company’s pre-order preparations. This can include supplier contracts, warehousing arrangements, skilled labor, and inventory stock levels.
At this stage, the test will focus on identifying any loopholes in the readiness of the company to fulfill any order requirements. Also, they should note whether the order was placed according to the company’s policy and procedures.
Order Fulfillment and Operations
The next stage is to test the ABC company’s operational efficiency and internal controls. Auditors will examine whether the manufacturing staff had adequate preparations for order fulfillment.
The auditing team should also inspect whether the sales team has communicated the correct order quantities and specifications to the manufacturing team.
Next, the focus should be to evaluate whether the manufacturing took place according to the order requirements. Finally, the packaging and shipment of the order should be checked.
Invoicing and Payment Procedures
The next step in the transaction is an important accounting process. The auditors will evaluate the invoicing and payment procedures.
The auditing team should examine the authorization, recording, and processing of the invoicing and payment proceeds at this stage.
At this stage, the auditors can also evaluate the company policies such as their discount policy for early payments.
The walkthrough test should help the management to identify whether the staff properly implements such initiatives and how effective such initiatives are.
Documenting the Test Results
As much as the test itself, documenting and reporting the results are equally important. As in any auditing process, the walkthrough tests should back their claims with evidence.
Auditors must document each step in the transaction and must offer credible evidence. This step can include questionaries and employees’ responses as well.
Reporting the Walkthrough Test Results
Finally, the auditors will report their documented walkthrough test report. The report should include their fair and correct opinion as is standard practice with auditing.
Documenting Walkthrough Tests
An integral part of the walkthrough test is effectively documenting the observations and reports. An auditing tool cannot be effective unless it presents a credible report to the highest authority in an entity.
First, the auditing team must take notes, write observations, and even take snapshots of their observations during the test. They should also record the answers of employees and the management in response to their queries.
Then, the auditing team can compile a comprehensive report on the findings and observations. The aim should be to collectively identify any weaknesses and loopholes in the system.
Finally, the auditing must ensure their report is presentable to the highest authority in an entity. They can use flowcharts, diagrams, tabular forms, and other tools to present their report.
Walkthrough Tests and Internal Controls
The purpose of any auditing work is to present a fair opinion about an entity’s policies, procedures, and internal controls. A walkthrough test as an auditing technique aims the same as well.
The purpose of a walkthrough test is to analyze internal controls implementation. It should also help identify any room for improvement wherever possible.
A key point with any auditing is to differentiate between the effectiveness of internal controls and their implementation by the organization.
It means the auditors can evaluate whether a policy, procedure, or rule has become obsolete or requires an update on certain aspects.
Also, the failure or loophole points would differ for every organization. For instance, a product manufacturing entity would critically depend on its operational efficiency.
On the other hand, a service entity will depend largely on its marketing and sales functions.
Thus, evaluating the critical success factors and the effectiveness of internal controls concerning these factors is important.
Another key point to analyze is an entity’s response or risk management. It means the auditors can also evaluate the effectiveness of the response strategy of an organization. Put, it shows how an entity would correct its errors or take action against any misconduct.