Understanding an Entity: Walkthrough of Processes
A walkthrough is a procedure performed by an auditor to gain an understanding of a significant business process and trace the flow of relevant transactions from initiation through financial statement reporting and disclosure. The walkthrough helps the auditor identify potential control weaknesses, assess the risks of material misstatements, and design further audit procedures. The following steps outline how to perform a walkthrough and document the flow of relevant transactions:
- Select a significant business process: Choose a significant business process that directly or indirectly impacts the entity’s financial statements, such as revenue recognition, procurement, inventory management, or payroll.
- Obtain process documentation: Obtain any available process documentation, such as process flowcharts, narratives, or standard operating procedures, to gain an initial understanding of the process.
- Identify key personnel: Identify the personnel involved in the selected business process, including those responsible for initiating transactions, approving transactions, recording transactions, and reconciling or reviewing transactions.
- Interview key personnel: Conduct interviews with key personnel to gain insights into their roles, responsibilities, and understanding of the business process. Ask open-ended questions to encourage a detailed explanation of the process and related controls.
- Trace a sample transaction: Select a sample transaction and trace it through each step of the business process, from initiation to financial statement reporting and disclosure. This may involve examining source documents, system inputs, and system outputs, as well as observing the execution of control activities.
- Evaluate control activities: Assess the design and effectiveness of control activities at each step of the process, considering factors such as segregation of duties, authorization, approval, and reconciliation procedures. Identify any potential control weaknesses or gaps in the process.
- Document the walkthrough: Create clear and comprehensive documentation of the walkthrough, including a process flowchart or narrative that details the flow of relevant transactions and the related control activities. Highlight any identified control weaknesses or risks and describe how they may impact the financial statements.
- Assess the risks of material misstatements: Based on the walkthrough findings, assess the risks of material misstatements at the assertion level for the relevant financial statement items. This information will be used to plan further audit procedures, including tests of controls and substantive procedures.
- Communicate findings: Share any identified control weaknesses or risks with the appropriate level of management, and discuss potential remediation actions or improvements.
By performing a walkthrough of a significant business process and documenting the flow of relevant transactions, auditors can gain a thorough understanding of the process, identify potential control weaknesses, and design further audit procedures to address the risks of material misstatements.
