The impact of auditors creating flowcharts on auditors’ understanding of the flow of transactions and internal control evaluation

Purpose - Motivated by the importance of gaining an understanding of the flow of transactions when assessing the effectiveness of internal controls for Sarbanes–Oxley Act (SOX) compliance, concerns raised by the Public Company Accounting Oversight Board (PCAOB) of audit firm deficiencies in these areas and auditors’ use of both narratives and flowcharts to document the flow of transactions, this article aims to examine the impact of auditors creating flowcharts versus narratives on auditors’ transaction flow understanding and internal control evaluation performance. Design/methodology/approach - This paper conducts a between-participants experiment examining auditor-created flowcharts versus narratives and different levels of documentation quality on auditors’ understanding of the flow of transactions and internal control evaluation performance. Findings - This paper finds that auditors who create flowcharts gain a better understanding of the clients’ transaction flow and perform better on internal control evaluations than auditors who create narratives. Process results from a moderated-mediation model also show a moderating effect of quality and mediating effect of understanding. Practical implications - These findings inform PCAOB policy decisions and inspection efforts and audit firms’ quality and process improvement efforts by providing initial support for having auditors create flowcharts to improve their understanding of the flow of transactions and internal control evaluation performance. Originality/value - To the best of the authors’ knowledge, this is the first study to examine the effect of auditor-created flowcharts compared to narratives on auditors’ understanding of the flow of transactions and internal control evaluation performance.