What is a Walk-Through Test?

Walk-Through Test

A walk-through test is an audit procedure used to trace a transaction from its origin through the company’s information systems to the point where it is reflected in the financial statements. The purpose of this procedure is to assess the effectiveness and reliability of a company’s internal controls surrounding financial reporting.

During a walk-through test, auditors typically do the following:

1. Identify a Transaction: Select a sample transaction in a specific area under review, such as sales, accounts payable, or inventory management.
2. Follow the Transaction: Trace the transaction step by step from its initiation (e.g., customer order for a sale, receipt of goods for accounts payable) to its conclusion (e.g., recognition of revenue, payment to vendor).
3. Check Documentation: Examine all relevant documents and records related to the transaction to ensure they are properly authorized, recorded, and stored. This may include invoices, purchase orders, shipping documents, and journal entries.
4. Interview Personnel: Speak with employees involved in processing the transaction to understand their roles and responsibilities. This is done to assess whether employees understand and are following company policies and procedures.
5. Test Controls: Assess whether controls are in place and operating effectively at each step of the transaction process. This could involve checking if approvals are properly documented, whether segregation of duties exists, or if automated controls are functioning correctly.
6. Evaluate: Make an initial determination regarding the reliability and effectiveness of the internal controls based on the walk-through. This information is used to plan the remaining audit procedures.

Example of a Walk-Through Test

Let’s consider a simplified example featuring a fictional company called “GreenTech,” which specializes in selling eco-friendly technology products. The auditors are specifically interested in evaluating the company’s internal controls over its accounts payable process. Here is how they could conduct a walk-through test:

To understand and evaluate the effectiveness of internal controls over the accounts payable cycle at GreenTech.

For this walk-through, the auditors select a sample invoice from a major supplier, “EcoSupplies,” for an order of solar panels worth $10,000.

Steps of the Walk-through:

1. Initiating the Purchase

• What the Auditors Do: Review the initial purchase order issued by GreenTech’s purchasing department to EcoSupplies.
• Key Controls to Test: Authorization of the purchase order, including proper managerial signatures.

2. Receiving the Goods

• What the Auditors Do: Trace the transaction to the goods receipt document that confirms the solar panels were received.
• Key Controls to Test: Verification of goods upon receipt, matching the goods to the initial purchase order, and segregation of duties between receiving and purchasing departments.

3. Invoice Processing

• What the Auditors Do: Examine the invoice from EcoSupplies to ensure it matches both the purchase order and goods receipt.
• Key Controls to Test: Three-way match between the purchase order, goods receipt, and supplier invoice. Also, check if the invoice is stamped as approved by the appropriate manager.

4. Payment Authorization

• What the Auditors Do: Review the payment authorization process to confirm that it is carried out per company policy.
• Key Controls to Test: Proper approval from the manager or finance department before payment processing.

5. Payment Execution

• What the Auditors Do: Confirm that the $10,000 payment to EcoSupplies was processed and accurately recorded in the financial statements.
• Key Controls to Test: Segregation of duties (the person authorizing the payment should not be the one executing it) and accurate record-keeping.

6. Interviews

• What the Auditors Do: Speak with employees involved in each step, from initial purchase to payment.

7. Evaluation

• What the Auditors Do: Based on their observations, auditors conclude whether the internal controls are effective and if any weaknesses require further scrutiny or recommendations for improvement.

Conclusion:

The walk-through test gives the auditors a comprehensive view of the accounts payable process at GreenTech and allows them to assess the effectiveness of internal controls. If they find any weaknesses or exceptions, they can plan additional audit procedures to investigate further.