Walk-through Test

A Walk-through Test is an auditing procedure an auditor employs to assess each step of a business transaction and validate its effectiveness and reporting. The process starts from the beginning of a transaction origin to the point it is reflected in the financial statements.

The test helps an auditor completely understand the transaction's nature and intent with proper documentation and proof indicating its way from its origin to its completion. In case of an error, it can be brought to the management's attention. It helps in examining the reliability of a firm's internal systems and controls.

• The walk-through test is the transaction audit that assesses each step, ensuring its reliability and authenticity.
• The auditor examines each step with proof and documentation to inform the management about its weaknesses, errors and deficiencies.
• It is recommended by the American Institute of Certified Public Accountants (AICPA) annually.
• A walk-through test is only a part of an entire audit; the auditor performs many other tests.
• While a walk-through test gives a detailed and comprehensive view of the transactions, it is expensive, tedious and time-consuming.

A walk-through test evaluates an organization's internal controls and financial transactions along with other factors, aspects, department operations, and the whole processing of tasks from the point they originate to the extent of their completion. It is one of the many tests an auditor performs to test the reliability and effectiveness of procedures with the objective of identifying deficiencies and weaknesses and regulating risk management to rectify the problems as soon as possible.

The level of walk-through test audit depends on the auditor; although most of the steps aren't always recommended or necessary, if done right, they increase the accuracy of the test. For example, the auditor can interview employees, or if they want to go into detail, they can trace every single document, observe the staff and analyze the process and every piece of paperwork available from the general ledger to financial statements, transaction entries, invoices, receipts, etc.

The size and nature of the walk-through test also depend on the size of the company; a major organization may require an in-detailed test with auditors closely monitoring and following the paper trail of transactions. At the same time, small firms can easily perform it without much hassle. The American Institute of Certified Public Accountants (AICPA) suggests that every firm must conduct a walk-through test once every year.

The steps followed in the process of a walk-through test are:

• Transaction identification - The auditor selects a sample transaction for testing, from any particular area, from sales to inventory management, from marketing to accounts payable.
• Following the transaction - The auditor starts from the very beginning of the transaction and starts following its traces ahead step by step following a thread of procedures from one area to another. For example, the process may start from the first customer order and end with the point of sale and payment receipts.
• Documentation - While examining the transaction, the auditor goes through every single piece of paperwork, receipts, reports, and documents related to the transaction and matches it with every step, ensuring appropriate recording, authorization, and processing. The documents are commonly invoices, cash receipts, journal entries, shipping documents, purchase orders, etc.
• Hold interviews - This step requires the auditor to connect with the employees who took part in the underlying transaction to determine their contribution and effort. It also helps in analyzing the employee's comprehension of company policies and regulations.
• Test controls - This step involves checking whether all the documents were properly approved and whether each area or employee performed their duties diligently. It shows that the transaction was in proper order and acknowledgment of all.
• Evaluation - The final step focuses on evaluating the entire system for its effectiveness and reliability. All the information collected is helpful in auditing and helps the management make better decisions to remove errors and deficiencies.

Below are two examples of walk-through tests:

Example #1

Suppose Gerrard owns a small cold drink manufacturing company. At the time of the audit, Jeffrey, who is the auditor, is interested in the company's internal controls and payment process. The auditor starts with a sample invoice of $9000 from a major supplier for an order of sugar.

In the first step, Jeffrey reviews the initial buy order issued by the company's purchasing department to the supplier, which includes testing the authorization of the buy order and proper signatures.

The second step involves the delivery and reception of goods. Jeffrey traces the transactions of the receipt of the goods and validates the delivery and undertaking of goods. He checks the segregated departments' duties and matches the goods with the purchasing order.

The third step involves testing invoice processing. Jeffrey checks on the approval of managers, stamps, and seals on the invoice, and other receipts.

Jeffrey moves on to the fourth step, which involves payment authorization. He checks whether it follows the company policies or not and whether it received the proper approvals across the department.

The fifth step is payment execution, Jeffrey checks on the record of payment and ensures that the right person responsible for making the payment has initiated it and confirms the payment execution of $9,000 to the supplier.

In the sixth step, Jeffrey interviews employees who are involved and aware of the transaction. He also speaks to Gerrard for his capacity and knowledge of the whole purchase order (PO) and its processing.

In the final step, Jeffrey, based on his observations, information and sample evaluation, reports the effectiveness of the internal controls. In case he identifies a weakness, he mentions it to Gerrard with suggestions for improvement. It is a simple step-by-step example of a walk-through test, but in reality, it is expensive, complex, detailed, and time-consuming.

Example #2

In another example, suppose a small toy company wants to run a walk-through test for the first time since their establishment in 2007. It's been more than a decade, but the company never thought of getting a proper audit. The auditor arrives, but since the firm is small, the auditor interviews employees along with the top-level management, checks on departments and evaluates that they have a very simple process and are operating efficiently.

The auditor finds out that some of the employees are producing fake documents and invoices to manipulate company accounts, which is why the company has not shown any growth in the last four years. The employees are directing the money in their accounts, technically committing corporate fraud.

The auditor indicated the issue to the top management, and soon, the right decisions were made to rectify the situation, and the company took strict action against the personnel involved. It is another theoretical example of a walkthrough test.

The advantages of a walk-through test are -

• The test examines and validates the accounting systems of a company.
• A structured walkthrough test helps in understanding a transaction's intent and in a detailed view of each step.
• The auditing procedure helps in detecting errors, deficiencies and material weaknesses in the financial control structure.
• In the case of contingencies, the outcome of the walkthrough test helps management make amendments and better-informed decisions.

The disadvantages of the walk-through test are -

• It is expensive and requires a proper set for implementation.
• The whole process is very time-consuming and may constantly require the skills of an auditor to assess the transactions.
• It is an extensive procedure with a lot of documentation at work.
• The test demands the presence of everyone involved in the test, which is not always possible.

The critical differences and distinguishing factors between walk-through tests, substantive testing and tests of controls are -

• A walk-through test is done to examine transactions at each stage. A substantive test is part of an audit where the auditor gathers samples of transactions to identify misstatements. In contrast, a test of controls assesses the overall control system and its effectiveness.
• A walk-through test is a step-by-step examination of financial transactions. Substantive testing deals with the validity, assurance, and correctness of financial reporting. In comparison, a test of controls checks on policy design, management structure and internal control system.
• A walk-through test is one single test with no subtypes, but substantive testing has three types of evaluation: analytical procedures, transaction detail testing and details of balances. On the other hand, a test of controls has two types: concurrent test and planned test of control.

This article has been a guide to what is Walk-through Test. We explain its examples, process steps, advantages, & comparison with substantive testing. You may also take a look at the useful articles below –

• Canary Testing
• Unit Root Tests
• Test Of Details