Definition
In tracing, the auditor starts with source documents outside the ledger, such as shipping documents, receiving reports, signed time sheets or a bank statement, and checks that each item was recorded in the right account, amount and period. Because the starting point is outside the ledger, tracing can find items that never reached it.
Why it matters in an audit or review
It is the main directional test for completeness. Revenue shipped but not billed, liabilities received but not recorded, and deposits never posted all escape a test that begins in the ledger. Tracing also supports cutoff when the source documents are selected from either side of year end.
Example
The auditor takes 40 receiving reports dated in the last week of December (illustrative) and traces each to the purchase journal and accounts payable detail. Two receipts of $11,200 and $4,750 have no corresponding liability. They are treated as unrecorded liabilities and added to the proposed adjustments.
Common mistakes
- Selecting the sample from the ledger and calling it tracing.
- Using documents that the client has filtered or sorted before the auditor picks.
- Not checking that the source population is itself complete, for example that the receiving report sequence has no gaps.
FAQ
Is a walkthrough the same as tracing?
Related, but not the same. A walkthrough follows one transaction through the whole process to understand it; tracing tests many items against the records.
Sources
- AICPA, AU-C Section 500, Audit Evidence
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error