Another point to note is that tracing is usually used to detect the risk of an understatement which is due to the lack of completeness. On the other hand, vouching is usually used to detect whether there is an overstatement of transactions or items in the financial statements. Tracing Audit Overview Tracing is an audit procedure of inspecting source documents to the accounting records in order to ensure that the accounting records are complete. Tracing Example Audit For example, in an audit of revenue , auditors usually test completeness assertion by using tracing procedure as below: Select a sample of shipping documents Trace the selected shipping documents to sales invoice and sales journal in order to ensure that they have been recorded as sales revenue Of course, other procedures such as scanning the sequential number of sales invoices for missing numbers and ensuring that they are not unrecorded sales are usually also performed together with trancing to ensure the completeness of sales revenue.
Difference between tracing and vouching in audit Unlike tracing where auditors start the procedure from supporting documents to the accounting records, in vouching, auditors go the other way around by starting the process from the accounting records to the supporting documents.
Below is the summary of the difference between tracing and vouching in audit: Difference between tracing and vouching in audit Tracing Vouching Start from source documents to accounting records Start from accounting records to source documents To ensure the transactions or balances that should have been recorded have actually been recorded To ensure the transactions or balances that have been recorded are adequately supported To test the completeness assertion To test the occurrence or existence assertion To detect the risk of an understatement To detect the risk of an overstatement.
To ensure the transactions or balances that should have been recorded have actually been recorded. A company needs to consider the advantages and disadvantages of each type of capital before they make a decision.
These are considerations that a company would have to process before determining which financing option makes the most sense for their situation. The […]. The cost of debt for a company is basically the amount of interest expense paid to debtholders and creditors.
While there is a lot that goes into determining the interest rate that banks and creditors charge, the basic idea is that the interest rate covers the return and risk exposure that comes with lending money […]. The cost of preferred stock is also known as the dividends distributed to preferred shareholders.
For auditing purposes, tracing is the exact opposite of vouching. For a single sales transaction, for example, tracing begins when auditors select a sales order. From the sales order, they trace the related sales invoice.
It may also include tracing the related goods delivery note and dispatch notes. However, these notes generally relate to the testing of controls. Nonetheless, auditors can still cross-check the units dispatched with the sales order and sales invoice. From the sales invoice, auditors obtain the related voucher that the client used to enter the sale into the account.
Finally, they check the ledgers of the client for that specific voucher number. The above process is a simplified example of how tracing works. Practically, auditors must select a sample of source documents and trace them to the accounting system of the client.
It may require auditors to go from one department to another, several times, to obtain evidence. For any missing invoices, auditors can inquire the management about omissions.
Ideally, there should be no omissions from the source documents to the accounting systems. Likewise, the details in the source documents should also match with other source documents and details in the accounting system. The purpose of the tracing audit is to ascertain that the internal controls at the client are effective. Tracing a transaction from a source document to the accounting system and subsequently to the financial statements can expose any control deficiencies in the internal controls of the client.
For example, if a sale order contains a different number of units as compared to the respective sales invoice, there is a control deficiency in the process. Similarly, tracing can give auditors a general overview of what happens in a particular process at the client.
For example, when auditors trace a purchase invoice to the accounting system, they also go through the whole process. It acts as a walkthrough for them as it helps them understand which department is responsible for each stage of the purchase cycle. Similarly, it can help them obtain a better understanding of what goes into the purchase process of the client.
It can, therefore, further impact the audit procedures that auditors perform, and the overall quality of audit.
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