Should You Perform Audit Walkthroughs Annually?

By Charles Hall | Auditing

Mar 29

Today, we’ll look at whether audit walkthroughs should be performed annually.

Audit walkthroughs, sometimes referred to as “cradle to grave” reviews of transaction cycles, are performed for significant transaction cycles and should be performed early in the audit process. The auditor starts at the beginning of a transaction cycle and walks a transaction completely through the accounting system while observing controls. Why? To see if controls exist and are in use–and ultimately, to identify risks.

audit walkthroughs annually

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Are Internal Control Walkthroughs Required?

How often is the auditor required to perform a walkthrough?

Answer: Once per year, if this is how you corroborate your understanding of the cycle. Walkthroughs are not required, but you do need to verify your understanding of the accounting system and related controls–and I can think of no better way.

Recently, I was asked, “If a walkthrough is not used, what else can I do?” While questionnaires can be used, there is a risk that key internal controls will be missed. What if the questionnaire doesn’t address a critical piece of the control structure? Walking a transaction through the accounting system and reviewing related controls ensures a full understanding.

AICPA Guidance Concerning Annual Walkthroughs

TIS Section 8200.12, as issued by the AICPA, states the following:

Inquiry—AU section 314 (now AU-C 315) requires the auditor to obtain an understanding of internal control. An auditor might perform walkthroughs to confirm his or her understanding of internal control. If the auditor decides to use walkthroughs to confirm his or her understanding of internal control, how often do walkthroughs need to occur?

Reply—In accordance with AU Section 314 (now AU-C 315), the auditor is required to obtain an understanding of internal control to evaluate the design of controls and to determine whether they have been implemented. To do that, performing a walkthrough would be a good practice. Accordingly, auditors might perform a walkthrough of significant accounting cycles every year [emphasis added].

Controls Documented in Prior Period

In some situations, AU-C section 315 allows the auditor to rely on audit evidence obtained in prior periods. In those situations, the auditor is required to perform audit procedures to establish the continued relevance of the audit evidence obtained in prior periods (for example, by performing a walkthrough). So, an auditor might perform walkthroughs every year to update his or her understanding. (I know the TIS says “might,” but it does appear the AICPA encourages annual walkthroughs.)

Here’s what AU-C 315.A20 says about prior year audit information used in the current year:

Paragraph .10 requires the auditor to determine whether information obtained in prior periods remains relevant if the auditor intends to use that information for the purposes of the current audit. For example, changes in the control environment may affect the relevance of information obtained in the prior year. To determine whether changes have occurred that may affect the relevance of such information, the auditor may make inquiries and perform other appropriate audit procedures, such as walk-throughs of relevant systems.

Summary Thoughts

Remember, a walkthrough is a risk assessment procedure. As such, it should be performed early in the audit–not as we finalize the work paper file. We should identify risks and then create audit steps.

Many auditors see walkthroughs as a waste of time rather than a useful tool. That’s why some auditors document walkthroughs at the end of the audit. 

Audits should be performed in the following order:

  1. Identify risk
  2. Assess risk
  3. Create an audit plan
  4. Execute the audit plan
  5. If necessary, revise the risk assessment and audit plan (if new risks are identified during step 4.)

Walkthroughs should be performed in step 1., not after step 4.

See my prior walkthrough posts:

Post 1 – Why Should Auditors Perform Audit Walkthroughs?

Post 2 – How to Identify Risks of Material Misstatements with Audit Walkthroughs

Post 3 – How to Document Audit Walkthroughs

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About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses.He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events.Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.

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(6) comments

Tom Noce November 15, 2016

Charles
Great article. One of the reasons for the walkthrough is that the ASB wanted us deeper into client internal controls. They wanted get us away from merely relying on verbal evidence, hence the “observation” provided by the walkthrough.

Reply
Charles Hall November 15, 2016

Thanks, Tom. Yes, indeed. The verbal evidence is useful but not as much as observations.

Reply
Eddie March 31, 2017

Is this not what an audit trail is all about?

Reply
Charles Hall March 31, 2017

Eddie, yes. And the beauty of controls is they are useful in every country–even in Poland!

Reply
Eddie March 31, 2017

Indeed Charles, I would say especially in Poland as we are a bit weak in that area over here.

Reply
Charles Hall March 31, 2017

Here in the U.S. as well. Most organizations would do well to review and tighten their controls. No one seems to care about controls until something goes wrong. Then everyone asks, “why didn’t someone pay more attention to internal controls?”

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