What is Tracing in Auditing?

Tracing is the process of following a transaction in the accounting records back to the source document. This typically involves locating an item in the general ledger, tracing it back to a subsidiary ledger (if necessary) to look for the unique identifying document number, and then going to the accounting files to locate the source document. Tracing is used to track down transactional errors, and also by auditors to verify that transactions were recorded properly. Auditors use tracing on a sampling basis, where the results obtained are assumed to apply to the entire population of transactions.

Example of Tracing

An auditor for Grumpy & Sons is reviewing the purchases made by a client. She makes a random selection of the purchases recorded by the client, and reviews the purchase order authorization for each one, as well as the associated receiving record and supplier invoice. Her intent is to trace the purchased amount stated in the client’s general ledger back to the amount billed by the supplier. She uses the purchase order review to determine whether the purchase was authorized, and examines the receiving record to verify that the associated goods were received.