Which sequence demonstrates testing for understatement (tracing) in an audit?

Which sequence demonstrates testing for understatement (tracing) in an audit?

• A. Ledger > Journal > Source Document
• B. Source Document > Journal > Ledger
• C. Journal > Ledger > Source Document
• D. Source Document > Ledger > Journal

Answer: (B)

Tracing tests completeness by following a transaction from its source documents forward through the recording chain. When auditing for understatement, you look for items that exist but have not been recorded. Start with the source documents (invoices, receipts, shipping notes), confirm they have been entered in the journal, and then verify those journal entries have been posted to the ledger. This forward flow ensures every valid transaction is captured in the financial statements, so any omission is revealed. If a document exists but isn’t recorded, tracing will show that the material has not made it into the ledger, signaling potential understatement. By contrast, vouching works in the opposite direction—from the ledger back to source documents—to support the recorded amounts and test existence/occurrence rather than completeness.

Tracing tests completeness by following a transaction from its source documents forward through the recording chain. When auditing for understatement, you look for items that exist but have not been recorded. Start with the source documents (invoices, receipts, shipping notes), confirm they have been entered in the journal, and then verify those journal entries have been posted to the ledger. This forward flow ensures every valid transaction is captured in the financial statements, so any omission is revealed. If a document exists but isn’t recorded, tracing will show that the material has not made it into the ledger, signaling potential understatement. By contrast, vouching works in the opposite direction—from the ledger back to source documents—to support the recorded amounts and test existence/occurrence rather than completeness.