What is tracing in Auditing? (Definition, Explanation, and Example)

The audit process is a cumbersome process that comprises several different techniques that the auditors use to get a clear-cut idea regarding the company’s operations and the extent to which financial statements can be relied upon. Therefore, a plethora of steps are undertaken to gather as much evidence as possible, based on which auditors can get reasonable assurance regarding the viability of the financial statements.

Tracing is one of the most important ancillary steps in auditing financial statements. This is essential because of the reason that tracing helps to identify transactions right back to their source, from where they originated from in the first place.

Definition of Tracing

Tracing can be defined as the process of following a particular transaction in the accounting records right back to the source document. This traditional audit technique is used in order to locate a particular item to the source. These items are mostly located in the general ledger. From the general ledger, they are then traced back to the source of the document itself. The source document is mostly present in the subsidiary.

The process of tracing involves looking at the unique documents and then proceeding across different accounting books in lieu of sourcing the particular document. The main reason behind carrying out this process is to ensure that all transactional errors are pointed out. Furthermore, tracing also adds a layer of security in the sense that it helps auditors to find out if the transactions have been recorded in the financial statements in a complete manner. Therefore, using the process of tracing, auditors tend to test for the audit assertion of completeness.

The audit assertion of completeness implies that all transactions that occur in a financial year should be recorded in a complete and accurate manner. Within the different head of accounts in the balance sheet (for example, accounts payables, accounts receivables, etc.), there are several subcategories that are involved.

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For instance, electric utility expenses are all clubbed together as one and mentioned as an aggregated expense in the financial statements. However, companies have separate accounts in the subsidiary ledgers, which individually list down all the options. From the perspective of auditing, tracing helps to draw a trail from these aggregated balances to the individual account balances that exist within the head of accounts.

The importance of Tracing in Auditing

As mentioned earlier, tracing is considered to be one of the most important traditional steps in auditing. It is considered to be important because of a number of reasons. These reasons are as follows:

  • Double checking for transactional errors: Transactional errors are very common during normal course of data entry and bookkeeping. Tracing helps to double check and verify that all these transactions are recorded properly, and there are no posting errors resulting in an overinflated (or underinflated) amount for expenses.
  • Checking for auditing assertions: In addition to checking for the audit assertion of completeness, tracing also helps auditors to check for other auditing assertions like existence and full disclosure.
  • Creation of audit working papers: The auditing process spreads across various different dimensions, and hence, it requires various levels of testing at different stages. Tracing via the process of sampling help auditors plan for the audit process, and ensure that they cover substantial ground pertaining to different areas that they have to cover in the auditing process.

How is the process of tracing carried out?

The main premise of auditing involves verification of the transactions involved. There is no stringent process that is carried out when covering the tracing process. However, in this regard, it is important to ensure all the necessary paperwork so that no stones are left unturned in the auditing process. The general steps that auditors follow are as follows:

  • Identifying the entry in the general ledger that needs to be ‘traced’ – this means that auditors first need to decide on transaction(s) that need to be traced in order to confirm, or check for completeness and existence.
  • The items are located from the general ledger, all the way to the subsidiary ledgers – this means that they are traced from one ledger to the other, till the time that they are fully traced and reconciled by the auditors.
  • After identification in the subsidiary ledgers, auditors then check for all the receipts and vouchers on the different accounts.
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Tracing all the individual transactions might prove to be a cumbersome task since there are several different accounts that have aggregated balances.

Therefore, auditors normally use the process of sampling to draw observations, based on which they can extrapolate and subsequently generalize these transactions and gauge the need for a more refined tracing in the accounting process.

Tracing using the Audit Trails

The process of tracing is often undertaken using audit trails. Audit trails are defined as manual or electronic documents that record every transaction and financial event. This means that several different procedures are involved in order to support the evidence of the transaction that is being traced.

The main purpose of the creation and subsequent usage of audit trails is to create a layer of evidence that can support the financial transactions that the company reports. These audit trails serve the same purpose of providing historical records, making the overall process of tracing and audit much smooth and efficient.

Audit trails are also highly resourceful because they help identify areas of non-compliance by extending proof for compliance as well as the integrity of the employees.

Example of Tracing

The procedures adopted in tracing vary from situation to situation. For example, during the audit of revenue, the following steps might be used as tracing procedures:

  • Selecting a sample of shipping documents
  • Tracing the selected shipping documents to the respective sales invoice in order to ensure that they have been completely recorded as sales revenue.

Different between tracing and vouching

Tracing and vouching are often intermixed since they are fairly similar in nature. However, there are certain differences between vouching and tracing, which are summarized in the following table:

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Tracing Vouching 
Tracing normally begins from the source documents and goes all the way to the accounting records.Vouching begins from the accounting records and goes all the way to the source documents.
Tracing ensures transactions, as well as balances, are recorded in their completion status.Vouching ensures that the transactions that have been recorded have sufficient evidence, based on which they are recorded in the financial statements.
Tracing mainly tests the audit assertion of completeness – the fundamental goal behind tracing transactions is to ensure that transactions are recorded in their complete state.Vouching is carried out to test the audit assertion of existence, as well as occurrence.
Although tracing identifies both overstatements and an understatement, the main rationale of tracing is to ensure that the financial statements are not understated.Tracing mainly identifies the risk of overstatement of the financial statements.

Therefore, it can be seen that both auditings, as well as vouching, are carried out in order to execute and streamline the audit process. However, there are some fundamental differences between both these processes.

The primary difference, however, is the trajectory of the procedure in itself. Tracing involves auditors going from supporting documents to accounting records. On the other hand, vouching involves starting the process from accounting records all the way to the supporting documents.