Your firm's accounting system can't do its job if employees don't do the paperwork properly. An audit walk-through traces how your company authorizes, records, processes and reports a sample transaction to confirm that it's handled correctly. The walk-through starts with the initial transaction and tracks every step in your financial-reporting system until the transaction shows up in the cash-flow statement and other key financial documents.
Technically, audits are not mandatory for accountants. However, a thorough firm will conduct these tests because of the purpose they can serve. When an auditor makes a walk-through, her goal is to spot the problems in your financial reporting system: whether the information is recorded properly, how well your fraud-prevention controls work and whether the system catches errors effectively.
By studying how your company handles a single transaction, the auditor gets a sense of how other transactions are managed. After the walk-through is done, she can tell you the weak points where mistakes are most likely. Then, your firm can fix the weak spots and become better for it. In the long run, this can save you hours and lots of struggle trying to fix a problem.
An audit walk-through involves several steps. The auditor watches how you or your staff operate when writing down a transaction in your accounts. He asks questions of everyone who handles it from the start of the transaction through recording it in your financial statements. Whenever someone documents what's happening, the auditor reviews the documents. If your company has controls to reduce errors and fraud, the auditor may test the controls to see if they work.
Asking your employees questions is the simplest way to make a walk-through, but it's also the least effective. Having employees describe how the system's controls work isn't evidence of what happens in practice. Watching employees processing a transaction provides better evidence; going over the paperwork and confirming its accuracy is better still. The ultimate test is when the auditor repeats the control method herself.
Some controls don't involve paperwork. The Public Company Accounting Oversight Board notes that management philosophy qualifies as a control -- for example, all employees should be honest -- but it's not easy to document. Small companies often do things more informally, without the detailed documentation a big corporation requires. This doesn't mean they're doing it wrong: Auditors can carry out a walk-through using non-paperwork evidence -- inquiry, observation, repeating controls -- and still get a feel for whether the system works.
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