Lessons · Accounting · which direction you test in, and what it proves

Which direction you test in decides what you prove

Vouching starts in the records and goes back to the supporting document: it asks whether what was recorded really happened, so it catches overstatement and tests existence. Tracing starts at the source document and goes forward into the records: it asks whether what happened was recorded, so it catches understatement and tests completeness.

Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.

In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.

What it is for

This is the single most invertible fact in auditing and getting it backwards means every procedure tests the opposite of what was intended. Somebody worried about invented revenue who traces from delivery notes will never find it, because invented revenue has no delivery note to start from.

How to think about it

Decide which way the balance is likely to be wrong first. If you fear it is too high, start in the records and work back. If you fear it is too low, start outside the records and work in.

Worked example

Worried revenue is overstated: vouch

Start from recorded sales, find the order and the delivery note.

Worried liabilities are understated: trace

Start from supplier statements and unpaid invoices, find them in the ledger.

Invented revenue has no source document to start from

Which is why direction matters more than effort here.

An unrecorded liability is not in the records to be selected

Same reason, mirrored.

Your turn

Name the direction that tests completeness.

Starting at the source document and working into the records is

The trap

Selecting your sample from the ledger when testing completeness. Anything omitted from the ledger cannot be selected from it, so the test is incapable of finding the very thing it was designed to find, however large the sample.

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