A Top-Down Approach to Identification and Documentation of Critical Accounting Application Controls

SUMMARY: PCAOB Auditing Standard No. 5 prescribes assessing internal controls over financial reporting using a “top-down” approach. This paper describes a method for documenting internal controls that aligns the documentation for application controls to the overall top-down audit approach. This method identifies critical data flow paths by beginning with the general ledger and tracing data backward (down) through the system to its origin, effectively focusing on the critical data repositories in the financial reporting process. It also directs attention to the processes that affect critical financial data and to where controls related to those processes should exist based on management assertions about financial statement account balances. The approach is both more efficient and effective than traditional bottom-up documentation approaches.