Final answer:
A walkthrough is an in-depth procedure used to assess the effectiveness and implementation of a company's control system, which is crucial for preventing material misstatements in financial statements. This practice involves observing end-to-end transaction processes and controls to identify any potential risks of error or fraud.
Step-by-step explanation:
Performing a walkthrough is an efficient way of identifying the controls that management has implemented to prevent or timely detect unauthorized acquisition, use, or disposition of company assets that could result in a material misstatement of the financial statements. A walkthrough is a procedure used by auditors and internal control specialists to gain an understanding of an entity's processes and controls. By observing and documenting the entire process, from initiation of a transaction through its completion, the auditors can assess whether the controls in place are designed appropriately and operating effectively.
A walkthrough typically involves following a transaction from start to finish, including the documentation and information systems involved, speaking with employees who are responsible for processing the transaction, observing controls in action, and inspecting relevant documents. This hands-on approach allows the inspector to see exactly where controls are applied and how they are performed. The understanding gained from this exercise is vital for planning further audit procedures and can help in identifying areas where there might be a risk of material misstatement in the financial statements due to fraud or error.
Therefore, walkthroughs serve the important function of checking the effectiveness of internal controls implemented by management, which are essential for safeguarding assets and ensuring the accuracy and completeness of the financial reporting process.