What is a Walk-Through Test?

A walk-through test is used by an auditor to follow each step in a transaction. The examination starts with the triggering business transaction, and compares each subsequent step to the procedure for how the transaction is supposed to be processed. The intent behind this test is to determine the reliability of a system, and whether there are any issues that should be brought to the attention of management. A walk-through test will only work if the documented procedure in which it is based is up-to-date.

The following activities are normally included in a walk-through test:

Select a transaction for testing. Pick a transaction using your sampling methodology for the area targeted for testing. For example, you might pick a transaction in the areas of billing, payables, or payroll.
Follow the processing steps. Follow the processing steps for the transaction from beginning to end, noting such matters as the confirmation of receipt, data entry, review, and output to the next processing step.
Verify documentation. Verify that the documentation associated with the test has been properly completed, authorized, and recorded in the accounting system. For example, you might review a customer’s purchase order and the related internal sales order when reviewing the process of creating a customer invoice.
Discuss with employees. Talk to the people involved in the targeted process, to understand their assigned tasks and what they are responsible for completing. This step is needed to gain a better understanding of whether employees have a complete understanding of what they are doing, whether they can spot anomalies, and what they would do if they were to find such anomalies.
Review controls. Review the controls embedded within the targeted process, to see if they are functioning properly and are working as intended. This can involve checking to see if automated controls are functioning properly, or if employees have a clear understanding of how to conduct manual controls.
Evaluate the walk-through. Based on your walk-through, decide whether the underlying system is reliable, and whether there are any issues that should be brought to the attention of management. Your review will determine the extent to which further audit procedures can rely on this process.

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Example of a Walk-Through Test

An auditor plans to conduct a walk-through test as part of her audit of the revenue cycle of a retail company. Her objective is to confirm that sales transactions are accurately recorded and comply with internal controls. The steps she takes are as follows:

Select a transaction. Obtain a randomly selected sales invoice from the period being audited.
Trace the transaction through the process:
- Initiation:
  - Confirm how the transaction was initiated (e.g., customer order).
  - Review the customer's purchase order to ensure details match the sales invoice.
- Authorization:
  - Check if the sale was properly authorized (e.g., manager's approval if required for large orders).
- Recordation:
  - Verify that the sales invoice was recorded correctly in the sales journal.
  - Ensure the invoice amount matches the revenue recorded.
- Processing:
  - Confirm the product was shipped by reviewing the shipping document.
  - Check the shipping date to ensure timely delivery and proper revenue recognition (e.g., per the matching principle).
- Invoicing:
  - Verify that the customer was billed accurately by comparing the invoice to the purchase order and shipping document.
- Payment:
  - Trace the payment received back to the cash receipts journal and the bank deposit slip to ensure completeness.
Verify supporting documentation. Review all related documents, such as the customer order, shipping documents, sales invoice, and payment receipt. Also, ensure each document aligns with the company’s policies and procedures.
Interview staff. Speak with the employees responsible for each stage of the process to understand how controls operate in practice.
Assess internal controls. Identify any control gaps or deficiencies, such as lack of authorization or missing documentation.

If the auditor finds that all documentation is complete, properly authorized, and accurately recorded, she might conclude that the internal controls in the revenue cycle are functioning effectively. Conversely, if errors or control weaknesses are identified (e.g., missing authorizations or delayed recording), she will report these issues for management's attention and potential remediation.