Audit Walkthrough: Purpose, Benefits, and Implementation Steps

Implementation of walkthrough audit allows auditors to directly observe the revenue recognition process and understand the actual flow of transactions. This article will further explain the purpose of walkthrough audit, benefits, procedures, and examples of case studies in companies.

What is Walkthrough Audit?

Walkthrough audit is a systematic examination of an organization's internal procedures and controls. This audit process involves tracing transactions directly from start to finish to understand how the organization operates internally.

Walkthrough audit enables auditors to obtain evidence and assess the effectiveness of internal control, so that the direction of the next audit can be determined systematically.

What is the Difference between a Search and a Verification Audit?

Objectives and benefits Walkthrough Audit

In carrying out walkthrough audit, auditors do not only look at 'what should happen,' but ensure 'what actually happens.' Here are a number of objectives for carrying out this walkthrough audit.

• Understand the actual transaction flow, not just based on written policies.
• Identifying control points (control points).
• Assess whether internal controls are well designed or not.
• Testing whether the controls in the organization are actually implemented well or not.
• Understand the client's internal controls and evaluate their effectiveness in preventing errors, fraud, and financial irregularities.

Walkthrough audit provides a number of strategic benefits that contribute to improving the overall quality of the audit process. Here are some of these benefits.

• Verifying the accuracy of financial statements and identifying control deficiencies or weaknesses that could impact the client's financial reporting.
• Provides auditors with in-depth insights into processes and data flows, allowing auditors to design more specific and relevant audit responses.
• It is a foundation for auditors to determine the right testing strategy, so that audit risks can be reduced and planning can be more structured.
• Strengthening the quality of working relationships and professional interactions between auditors and audited parties.
• Helps detect potential fraud or override earlier.
• Improving the quality of professional decisions (professional judgement) auditor. 

When Walkthrough Audit Need to be done?

Walkthrough audit is the planning stage which is an important foundation for auditors to carry out the audit direction. Here are the times when you need to do this: walkthrough audit.

• At the audit planning stage – to understand how the systems and controls actually work in the field.
• When identifying significant risks – when the auditor needs to confirm areas prone to material misstatement.
• When a system or process change occurs—such as an organization implementing a new system or changing a business procedure—the goal is to ensure the new controls are implemented correctly.
• When conducting a compliance audit – the auditor needs to directly observe the production flow or material handling to ensure physical controls are functioning according to regulations.

Procedures or Steps to Perform Walkthrough Audit

In carrying out walkthrough audit, The audit team is divided into five sections: the lead auditor, audit team members, process managers, QA personnel, and operational staff. Each section has different responsibilities for each audit procedure, as follows.

1. Plan Your Search and Prepare Documents

The first step is to plan the search so that it's focused, efficient, and doesn't miss any important risks. Start by clarifying the objectives from the outset so everyone understands why the activity is being undertaken. 

Then, compile a list of critical areas that require review. In this case, the auditor still needs to adapt to the process being audited to be more specific and not miss important steps. Involve cross-functional teams, such as operations, finance, IT, and other relevant units, to gain a comprehensive understanding of the process.

2. Review Documents

Before the auditor reviews existing documents or compares them to actual practices, the auditor must first understand how the process actually works or should work. This insight can help the auditor design better organizational controls. 

Once the auditor has an understanding of how the business process should operate, the auditor then reviews the documentation. This review involves thoroughly reading process narratives, flowcharts, and policies. The goal is to understand the flow and controls intended by the organization.

3. Observation and Interviews

The third stage involves directly observing how business or organizational activities are conducted. At this stage, auditors focus on observing actual practices in the field, listening to explanations from process implementers, and testing whether control designs are actually implemented.

To ensure a smooth observation process, the audit team can first explain the purpose of their presence to build trust with the auditee. Ask open questions if any process seems to differ from what is outlined in the documentation.

So, this stage aims to test operational reality to ensure that controls exist not only on paper but are actually implemented.

4. Control Testing and Compliance Verification

After knowing whether the control design is actually implemented, it is now time for the auditor to confirm whether the control is present and working effectively. 

At this stage, the auditor must carefully record the testing steps, findings, and supporting evidence. The goal is to support conclusions and compliance.

To make all audit processes run efficiently and in accordance with control testing procedures, use specific technology and tools that are relevant and easy to apply.

5. Follow-up Report

Once the audit is complete and the audit findings are documented in a report, the organization enters the follow-up phase. This phase ensures that findings are addressed and any identified weaknesses are resolved.

At this stage, the follow-up process can focus on areas with high-impact risks and weaknesses. The goal is to maximize risk mitigation to minimize negative impacts. Auditors can also track corrective actions to ensure that deficiencies or weaknesses are effectively addressed by the organization.

Example of Walkthrough Audit in the Company

The following is an example of a case study using the method walkthrough audit at PT ABC carried out by KAP XYZ.

1. Background

In this example, the company being audited is PT ABC, a company engaged in interior design and decoration services. This company carries out walkthrough audit to understand and assess the company's revenue receipt and recognition process.

Previously, weaknesses were found, such as the recognition of VAT as part of revenue and inconsistencies in determining project payment terms. 

So to evaluate this, the auditor first conducts a review of the main transaction documents. For example, quotation (offer to customers), invoice, and Minutes of Handover (BAST).

2. Implementation Walkthrough

After reviewing the documents, the auditor conducts walkthrough or detailed search. In this context, KAP XYZ:

• Check the bidding process and ensure that each quotation provided complies with procedures.
• Tracing the publishing process invoice and ensure that invoice supported by complete and appropriate documents, for example proposal documents and official signatures.
• Confirm that revenue is recognized only after the work is completed and in accordance with the BAST document indicating that the work has been handed over and accepted by the customer.

3. Auditor Actions

After conducting the investigation, the auditor conducts a further inspection.

• Checking installment payment transactions.
• Ensure that any new revenue is recognized when the related work has been completed according to terms.
• Check that VAT is not included in revenue recording, according to applicable accounting standards.

4. Results and Findings

Through walkthrough audit, Auditors can see and prove directly whether the revenue recognition process at PT ABC follows internal procedures and accounting standards or not. 

XYZ Public Accounting Firm found that the documents were complete and the recognition process was carried out in a timely manner, but there were weaknesses, for example the recording of VAT as part of the income that had to be corrected.

5. Conclusion 

Seamless and Improved walkthrough This procedure helps auditors understand PT ABC's business processes comprehensively and assess whether the internal control system supports accurate and timely revenue recognition. Furthermore, this procedure serves as a basis for identifying potential errors or weaknesses and providing recommendations for improvements related to internal control and transaction recording.

Conclusion

Walkthrough audit is a tracking process that includes several important stages. Each process must be carried out consistently in accordance with applicable accounting standards and internal control systems.

When walkthrough audit If not executed properly, this will disrupt all stages and impact audit quality. Therefore, auditors cannot rely solely on their technical skills. They also require supporting technology to ensure the entire process runs effectively and efficiently.

In this context, Audithink is here as an audit application solution designed to support the needs of the auditor and auditee teams. Supported by features risk assessment, planning, and automated reports that enable auditors to work more easily and systematically. Try our app demo now and contact Audithink to subscribe.