Vouching and tracing play a number of similar roles in auditing, but the key difference is the use of these auditing procedures to collect audit evidence.
Vouching helps to locate balance in the source documents from accounting record. For instance, you are auditing at ABC Company; you notice that in the GL (accounting system), there is a filing fee amounting to $240. To check the accuracy of $240, you will need to locate this number with the receipt from the filing department. So, this process of locating $240 to the source document is called vouching. It helps in evaluating accuracy of the account balance in the accounting system. Further, it helps to understand if the accounting system (books) and supporting evidence kept by the audit client are reasonable.
Detailed explanation for vouching
Vouching is considered a vital tool for affirming transactions as it inspects a transaction back from its source documents. It is the review of source documents by the auditor to ensure entries made in the books of accounts are correct and not misleading. The process of vouching starts by looking at general ledgers and then traced to the accounting documents/records. The big five audit firms usually vouch with the following perspectives.
- Authorization/approval – Auditors assess if the transaction was authorized appropriately. In other words, appropriate approval was taken.
- Support/evidence – Auditors assess if a transaction was properly supported by source documents. For instance, if the audit client has proper requisition, invoice, delivery notes, and payment supports etc.
- Date of recording – It’s about cut-off testing. It helps auditors to assess if accounting transactions are classified in the correct accounting period.
So, vouching is a complete audit procedure to evaluate that accounting transactions in the accounting record are appropriately classified.
However, vouching or the direct verification approach is an expensive technique and can take a lot of time. In the vouching approach, specified areas of financial statements are not focused on; instead, a large number of account balances and transactions are considered. However, a representative sample is selected from the population to vouch.
This approach is used to find the credibility of accounting records. The sampling method is also used in the vouching technique. The reason for using the sampling method is that it is technically impossible to track and look into every transaction individually.
Verification and authorization are two important components of the vouching procedure. After receiving financial statements, usually, the first step taken by auditors is to start vouching for the items of an income statement. Once vouching is done, receipts from customers, entries of cash sales, sales of fixed assets, and accounts receivable are taken into consideration.
This method makes it easy for the auditor to review all the entries and then look into the supporting documents to validate each transaction. Documents in reference to the recorded transactions in the books of accounts are found by the auditor such as receipts and capital expenses.
After vouching, the auditor certifies that the book of accounts kept by the business is in line with the law, and the company has not recorded entries against accounting concepts and provisions.
It enables an auditor to issue an audit report without qualification. However, before issuing audit report, auditors need to ensure they have covered the risk of material misstatement.
Types and sources of vouching
Generally, vouchers have two types i.e. primary and collateral. Availability of primary and authentic documents and bills is referred to as primary vouchers, for instance, cash memos, purchase bills, pay-in slips, etc. At the same time, identical copies of documents and bills are considered collateral vouchers, for example, a copy or duplicate of a sales invoice.
Sources of vouching are also divided into types, internal vouchers and external vouchers. Internal vouchers are prepared within the company, for example; a carbon copy of cash receipts and sales invoices. The vouchers prepared by any external source and not within the organization are called external vouchers for example bank statements, bank deposit slips, etc.
Tracing means going from accounting documents to accounting ledgers. For instance, you select an invoice and check how accounting was done. This is an example of the tracing.
Example of tracing
Tracing’s example includes the typical use of the tracing procedure by auditors in an audit of revenue to test completeness. The procedure includes the following steps (example),
- A specimen (sample) of the sales invoice is selected.
- The amount in the invoice is traced back to the sales journal. It helps ensure the accuracy of the invoice recorded.
While tracing, other procedures such as scanning the sequential number of the sales invoice and ensuring that there is no unrecorded sales help satisfy the completion.
Difference between vouching and tracing
Tracing is the opposite of vouching where the source document is evaluated first. During tracing, source documents like invoice is taken and evaluated in terms of classification and recording in the accounting ledgers. On the other hand, in vouching, ledgers are taken first and values/facts in the accounting ledgers are traced to the accounting record/documents.
Vouching is considered more productive as it figures out main financial statement assertions like accuracy (accounting for transaction), existence (accounting record), and classification (accounting) etc.
In tracing, it is the opposite case; it assists auditors while evaluating the reliability and completeness of accounting (ledgers). For instance, if there are 100 invoices and 100 purchase entries, the accounting (ledger) is complete. Hence, we have verified completeness assertion for the accounting ledgers.
The initial step of tracing is to evaluate transaction support (invoice and receipt etc). And, the auditors can cross-check the validity of an organization’s internal controls during tracing.
Tracing provides auditors the space to verify any false activity, error, or oversight at each step. So, if there is any suspicious support, it can be checked.
On the other hand, errors or oversights in vouchers result in mistakes in their linked journal entries. Therefore, vouching helps auditors to verify accounting treatment.
Intents of vouching and tracing
Vouching and tracing, both mainly have the same objective which is to verify the accounting of an institution and collect audit evidence. As stated earlier, tracing is a vital tool to verify the completeness assertion for the accounting ledgers, and it assists auditors in inspecting understatements of transactions recorded in the journals or ledger books.
Vouching provides the structure of any auditing work. It validates the difference between revenue and capital accounts of all the transactions. It ensures that all the transactions recorded are accurate and do not carry material misstatement. The main purpose of using vouching in auditing is to bring accuracy to financial statements by looking at the evidence and supporting documents.
Vouching and tracing are considered essential techniques in auditing. Despite both serving the same purpose, the slight difference between them is that vouching moves from accounting ledgers to accounting records/documents. And tracing moves back from accounting record to accounting ledgers.
As vouching is considered a base of an accounting system, tracing plays a critical role in inspecting the completeness of that accounting system. The results provided by vouching and tracing are often the same; distinct approaches are used to start these audit procedures.
Frequently asked questions
What assertions are ensured by vouching and tracing?
Vouching helps to ensure assertions like accuracy, existence, rights, obligations, occurrence, and cut-off. It’s because auditors comprehensively review the documents regarding approval, authorization, and classification.
On the other hand, tracing is reconciling a transaction from the source document. For instance, you are looking at sales invoice and want to locate sales invoice#0324 to the ledger.
This locating of balance from the source documents to accounting ledgers is called tracing. This procedure verifies the assertion of completeness for the accounting ledgers. For instance, you have selected 40 invoices as sample. And, transactions exist for all the 40 invoices in the ledger. So, the accounting record is complete and completeness assertions is verified.
Why is vouching an important procedure during an audit?
It’s because vouching helps to check/assess source documents by starting from accounting ledgers. And, these documents are more reliable and the basis of the accounting system. So, it helps to obtain audit evidence and considered important.
What is the difference between vouching and tracing?
Vouching is when you take accounting ledgers and trace to the source documents. On the other hand, tracing is when you look at the support and trace in the accounting ledger.