Vouching and tracing are terms used by auditors to ascertain the validity of a transaction, but there is one key difference between the two – and only one of them can be used when specific conditions are met in an audit.
So what exactly does it mean when an auditor says that something was vouching or traced? Is one method better than the other? What circumstances must be met in order to use each method?
Read on to find out more about tracing and vouching, including their definitions, differences, and circumstances where they can be used.
What Is Vouching?
Vouching is the process of verifying that an organization’s transactions are accurately recorded in their financial statements.
This is done by looking at supporting documentation, such as invoices, receipts, and bank statements. For example, a company may issue an invoice for $100 to a vendor on November 15th.
That transaction would be vouched for if there was a corresponding deposit made to the vendor’s account from the company on November 15th (typically through automated clearing house), or if there was another form of payment that can be traced back to this transaction.
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How Does It Work?
In auditing, vouching is the process of verifying that transactions recorded in the accounting records are valid and have actually occurred.
This is done by examining supporting documentation, such as invoices, receipts, and bank statements. Tracing is a similar process, but it involves tracing transactions from the supporting documentation back to the accounting records.
Vouching is more common than tracing paper and it is generally considered to be more reliable. There are four levels of traceability, with level 4 being the most comprehensive and difficult.
Other than vouching, auditors may also trace transactions from supporting documentation to accounting records. This process is called tracing, which can be done at four levels of increasing detail.
Traceability allows auditors to validate that a transaction has been recorded correctly. However, it does not prove that all related transactions have been recorded properly or accurately; additional evidence is required for that.
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What Are The Differences Between Tracing And Vouching?
vouching is the process of examining documentary evidence to support transactions recorded in the financial statements.
While Tracing, on the other hand, is the process of tracing transactions from one account to another. For example, if a company has $2 million in total revenue but only $1 million was shown as an expense, auditors would need to trace the source of the missing $1 million.
A common misconception about Auditing is that it’s simply a paper-pushing job. In order for audits to be successful, Auditors must exercise their knowledge and skills by critically assessing different types of evidence.
There are two types of proof which include direct and indirect. Direct evidence is information gathered directly from the business or person being audited while indirect evidence comes from documents prepared or records maintained by the person or entity being examined.
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Vouching In Audit?
Vouching is used in auditing to test the accuracy of records and transactions. This is usually done by comparing them to supporting documentation, such as invoices or receipts.
For example, if a sales invoice matches the total that was previously calculated from an Excel spreadsheet, we can be more confident that it is accurate.
If there are any discrepancies between the two amounts, then we may need to go back and trace where they diverge until we find the source of error. It’s important to note that tracing and vouching should only be performed when necessary.
It’s not something you would want to do every time you do your job because it takes up a lot of time and energy. You also have to make sure that your conclusions are based on enough evidence for validation.
For Instance, if someone reports their hours worked at 30 hours per week for a month but their bank statement says otherwise, then you might use tracing to figure out which one is right. That way, your conclusion will be grounded in fact rather than guesswork.
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What Is The Process Of Vouching?
Vouching is the process of examining supporting documentation to verify that recorded transactions actually occurred. This process is also sometimes referred to as audit evidence.
There are two main types of vouching: tracing and direct confirmation.
Tracing involves looking at the documentation for one transaction and then finding evidence of another related transaction.
Direct confirmation, on the other hand, involves going directly to the source (e.g., the vendor) to confirm that a transaction actually took place.
For example, if we had been using an automated system for recording all our sales receipts, but found out later that it wasn’t working properly, we would have to go back through all the records by hand.
That would be called direct confirmation because we went straight to the records from their point of origin instead of starting with some indirect information about them.
Some people might say that there’s not much difference between tracing and direct confirmation; both involve reviewing documents to ensure accuracy.
But this isn’t quite true because they differ in who does the verification – tracing verifies records internally while direct confirmation confirms records externally.
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What Are Types Of Vouchers?
A voucher is a document that serves as evidence of an accounting transaction. There are three types of vouchers:
- Credit vouchers
- Debit vouchers
- Journal vouchers
Credit voucher is created when there is an increase in assets or a decrease in liabilities.
Debit voucher is created when there is a decrease in assets or an increase in liabilities.
A journal voucher is created when there is no change in assets or liabilities.
For example, if a business spends $5 on supplies, they would need to create a debit voucher for $5 because they would be decreasing their asset balance by $5.
If the business sold $10 worth of items, they would need to create a credit voucher for $10 because they would be increasing their asset balance by $10. The same principles apply to journals.
Also, if the company spent $1,000 on office supplies but didn’t have any office expenses, they would need to create a journal voucher with no expense.
On the other hand, if they spent more than what was earned from selling merchandise ($8,000), then they would also need to create a journal voucher with an expense equal to the amount owed.
That way, the company’s income statement would stay balanced.
Purchasing goods at a retail store like Walmart can generate different types of vouchers depending on how much is purchased.
Purchases made with cash will require less paperwork because all you’ll need to do is sign your name and show your ID at checkout.
When purchasing goods through a card (like Visa) you’ll still use your signature at checkout but this time you’ll swipe your card first and enter in the PIN number too.
How Do You Write A Voucher?
A voucher is a document that verifies a transaction. To write a voucher, you’ll need to include the date of the transaction, the name of the payee, the amount of the transaction, and a brief description of what the voucher is for.
You’ll also need to sign and date the voucher. If you’re writing a voucher on behalf of your company, then the signature should be from someone who has the authority to make decisions about payments (e.g., treasurer).
If it’s for your personal use, then it can be signed by yourself. However, if the vouchers are meant for payment to an outside party, then they will have to be signed by someone with the authority over payments.
Keep copies of all vouchers that are used when completing audits as well. And remember that tracing and vouching are two different things.
With tracing, you trace each expenditure back to its source so that you know where the money went. With vouching, someone else vouches for your expenditures without having any knowledge of how the money was spent.
Conclusion
After learning the definition of vouching and the difference between tracing and vouching, it’s important to understand how this technique is used in auditing.
Vouching is a key element in an auditor’s toolkit, as it helps to ensure that transactions are properly recorded and that financial statements are free of material misstatement.
When done correctly, vouching can help provide assurance that an organization’s financial statements are accurate.
However, if vouching isn’t done well or if it is overdone, there could be possible inaccuracies. For example, too much vouching might lead to unverifiable data and biases in the audit process.
It is also difficult for auditors to trace when there is excessive use of vouching. In order to balance the level of risk and protect against fraud, vouching should only be used when necessary and with caution.
Tracing And Vouching FAQs
What Is The Procedure For Vouching In Auditing?
This evidence can take many forms, but most often includes documents such as invoices, contracts, and canceled checks. If the auditor has enough evidence to trace the transaction back to a credible source that is independent of the company being audited, then they do not need to vouch for it.
What Is The Importance Of Vouching In Audit?
Vouching is important because it helps to ensure the accuracy of financial statements. In order for a company’s balance sheet and income statement to be accurate, there must be a flow of funds from each account to another account or from one type of asset to another type of asset (e.g., cash on hand).
What Are The Features Of A Voucher?
Voucher’s features typically include the date, payee, amount, and purpose of the transaction. Some vouchers may also include supporting documentation, such as receipts or invoices.
