Audit Testing Procedures: Vouching vs Tracing

Summary

In this video, Larry explains the differences between two essential auditing techniques: vouching and tracing. Vouching involves verifying the existence of financial data by tracing down from the financial statements to the source documentation, focusing on detecting overstatements of assets or revenues. Tracing, on the other hand, works in the opposite direction, ensuring completeness by tracing up from source documents to the financial statements, addressing concerns of understated liabilities or expenses. This distinction helps auditors accurately assess financial data and ensures both accuracy and completeness in financial reporting.

Takeaways

• 😀 Vouching and tracing are two distinct audit procedures that are often confused but test different things.
• 😀 Vouching is used to test for the existence of assets or revenues in the financial statements.
• 😀 Tracing is used to test for the completeness of liabilities or expenses in the financial statements.
• 😀 Source documents, like sales invoices and vendor invoices, serve as evidence that auditors use to verify financial statement balances.
• 😀 The flow of information goes from source documentation up through the accounting system and is reflected in the financial statements.
• 😀 Auditors worry about overstatement of assets or revenues, which is why vouching tests for existence.
• 😀 Vouching involves checking the financial statements against supporting documentation to ensure the existence of reported assets and revenues.
• 😀 Auditors also concern themselves with the understatement of liabilities or expenses, which is why tracing tests for completeness.
• 😀 Tracing involves starting from supporting documentation and ensuring that all liabilities and expenses are reflected in the financial statements.
• 😀 The visual model uses arrows where vouching is represented as 'V' (vouch down for existence), and tracing is represented as 'T' (trace up for completeness).
• 😀 Although financial statements are not physically 'above' or 'below' source documents, using a model with this hierarchy helps auditors visualize and understand the process.

Q & A

What is the primary focus of vouching in auditing?

Vouching in auditing primarily focuses on testing for the 'existence' of assets or revenues. Auditors vouch down from the financial statements to the source documents to ensure that the amounts reported in the financials are supported by actual documentation.

How does vouching differ from tracing in auditing?

Vouching and tracing differ in their focus. Vouching tests for the existence of assets or revenues by tracing down from financial statements to supporting documents. Tracing, on the other hand, tests for completeness by tracing from the source documents up to the financial statements to ensure that all liabilities and expenses are properly recorded.

What is the concern of auditors when performing vouching?

When performing vouching, auditors are concerned that the client may have overstated the assets or revenues in the financial statements. The goal is to verify that the reported values are supported by actual documentation and reflect reality.

What is the main focus of tracing in auditing?

Tracing focuses on testing for completeness. It ensures that all liabilities and expenses recorded in the supporting documentation are properly reflected in the financial statements, confirming that no significant items have been omitted.

Why is tracing referred to as 'tracing up'?

Tracing is referred to as 'tracing up' because auditors trace from the source documents (such as invoices or reports) upward to the financial statements to check that all relevant information has been included in the final reporting.

What does an auditor test for when they vouch down from the financial statements?

When an auditor vouches down from the financial statements, they are testing for the 'existence' of the reported assets or revenues. This is to ensure that the values in the financial statements are supported by valid source documents.

What is the concern of auditors when performing tracing?

When performing tracing, auditors are concerned that the client may have understated liabilities or expenses in the financial statements. The goal is to confirm that all liabilities and expenses in the supporting documentation are reflected in the financial statements.

Why are the terms 'vouching down' and 'tracing up' used in auditing?

The terms 'vouching down' and 'tracing up' are used to describe the direction in which auditors move through the documentation. 'Vouching down' refers to checking the financial statements against source documents, while 'tracing up' refers to checking the supporting documents to ensure they are included in the financial statements.

What types of documents are typically used for vouching and tracing?

Documents such as sales invoices, vendor invoices, receiving reports, and other source or supporting documentation are typically used for both vouching and tracing in auditing. These documents are crucial in verifying the accuracy and completeness of financial statement information.

How does the model presented in the transcript help in understanding the concepts of vouching and tracing?

The model presented in the transcript uses a visual representation with a flow from source documents at the bottom to financial statements at the top. This model helps illustrate the difference between vouching (testing for existence) and tracing (testing for completeness) by visually showing the direction in which auditors move through the documentation process.