Efficient Tests of Balances Series—No. 7: Performing a Systems Walk-Through Procedure | AccountingWEB

Efficient Tests of Balances Series—No. 7: Performing a Systems Walk-Through Procedure

A common, effective risk assessment procedure is a systems walk-through procedure.  By tracing transactions from their inception to their termination in the general ledger, an auditor can confirm internal control documentation (such as flowcharts, internal control questionnaires and memos) obtained by inquiries of client personnel.  The results of a walk-through can be documented on a flowchart or accompanying memo. An auditor’s assessment of control risk will result from these and other procedures.

An illustrative walk-through checklist and flowchart are included below to guide the procedure for payroll.



This checklist is designed to facilitate understanding of an entity’s accounting and internal control systems.  The checklist contains basic procedures that can be commonly applied to small and medium-sized entities.  Additional and/or modified procedures may be necessary to accommodate the unique policies and procedures of each entity for which the checklist is used.  In circumstances where tests of an entity’s IT system are required, the procedures below may be used to guide the design such tests.

This checklist may be used for reference only or each procedure may be initialed and dated as it is completed, depending on firm policy.  Documentation of the walk-through procedure is required and should include identification of documents examined, an explanation of procedures performed, descriptions of the results of the procedures, documentation of additional procedures performed for exceptions and unusual matters, and written conclusions based on the results of the procedures..


1.  Interview appropriate client personnel and prepare a flowchart of the payroll accounting system.  Indicate the key controls performed at the entity and activity levels by tickmarks or other means on the flowchart or other accompanying documentation.

2.  Haphazardly select 5, 10 or 15 time cards or other records of time worked for a cross-section of employees to begin the walk-through procedure. The greater the number of units selected, the greater the substantive evidence generated from the walk-through procedure.  The auditor’s planning objective should be to gather sufficient substantive evidence from risk assessment procedures to reduce risk of misstatement to a level that is less than high or, in other words, to reduce the more costly tests of balances procedures.

3.  Record identifying numbers or descriptions of the documents selected that initiate transactions in the payroll cycle.  Make a similar record of identifying numbers or descriptions of all other data or documents inspected during the walk-through procedure.

4.  Following the accounting and internal control systems flowchart, trace each transaction selected from its initiation to its termination by performing the following procedures for each of the documents inspected:

    a.  Determine that the authorization and initiation procedures are performed and     evidenced as required by the entity’s policies.  Depending on nature of formal or     informal policies, such evidence may take the form of initials and dates of persons     performing key controls or, for smaller entities, responses to inquiries made     by management personnel.

    b.  Determine the clerical and mathematical accuracy of data on all documents     inspected.

    c.  Trace all initiating documents to recording in a source journal such as a payroll     register or payroll journal and compare the information on the documents to the     source journal recorded information..

    d.  If separate tests of the IT system have not been performed for systems that     permit user modification, test the mathematical accuracy of the source journal and     test trace totals to recording in the general ledger account activity.  If the entity     uses an out-of-the-box software system, tests of the IT system are not normally     required, nor are tests of mathematical accuracy.

    e. Obtain evidence, either by inspecting documents or making inquiries of     management, that formal or informal key controls have been performed.

    f.  Select a payroll account bank statement and the related reconciliation for at     least one month’s activity.  Make inquiries of management about the performance     of key controls and review the reconciliation for reasonableness.

    g.  Scan the general ledger payroll and related accounts for the reporting period     and obtain information from management about the propriety of unusual general     journal or other entries.

5.  Prepare a memorandum, or document on the flowcharts, a conclusion about the design and operation of the entity’s accounting and internal control systems.

    a.  If a limited number of transactions were selected for walk-through procedures     to verify that no significant changes were made from the prior year’s acceptable     design and operation of the internal control system, and no changes were found,     the conclusion would be that the prior year’s evaluation of control risk could be     used for the current year.

    b.  When the auditor determines during planning that it is likely internal control     systems are designed and operating properly (given the nature, size and     complexity of the entity), and a larger number of transactions are selected for the     walk-through procedures, the objective should be to gather substantive evidence     that the internal control systems are designed and operating properly.  A     conclusion that results are acceptable would result in an audit strategy that plans     for reductions in more costly related tests of balances procedures.  Unacceptable     results, of course, will require either more detailed tests of payroll activity or     more substantive tests of payroll and related account balances.

My live and on-demand webcasts include further discussions of the systems walk-through procedure as an essential part of a cost-efficient audit strategy.  You can download syllabuses and register by clicking the applicable box on the left side of my home page, www.cpafirmsuipport.com.



This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.