A general rule is that effectively managed audit trails are important telltale signs of effective internal business controls. With the transition from manual to automated electronic logs, audit trails have improved the accuracy, usability, and accessibility of this historical data. For audit trails to be successful, upper management, the affected departments, and IT staff must all work together. The quicker an abnormal addition or change to information is “red-flagged,” the better the response to counteract harmful factors like cyberthreats, security breaches, corrupted data, or information misuse.
What Is An Audit Trail and Why Is It Important?
Types of audit trails
The kinds of records that make up audit trails include the following, as examples:
Receipts
Receipts for purchases, both paper and digital, are helpful for audit trails because they allow you to keep track of where your money goes for a budget. They can offer evidence that you are using the funds, leaving a business account for legitimate business needs.
You can set up a system where you routinely send business purchase receipts to the accounting team along with the department code and a description of the purchase to add an additional layer of security to an audit trail with receipts. So that auditors can easily match the transaction with the purchase, the team can align the receipt with the company card.
Emails
An audit trail can also include emails and other written communications about transactions and contracts. Team members can keep track of their communications via email or chat channels when discussing how they intend to spend or transfer company funds in case an accounting audit is required. Emails may not be required if you have more formal records, like contracts and invoices, but they can be helpful supplemental materials if you have few other sources of evidence.
Invoices
Another type of audit trail document to save for your files are invoices for customers and vendors. In the event that there are any discrepancies in accounts receivable or payable, it is crucial to have documentation regarding the amount owed by each client account. Invoices are particularly crucial for an audit trail because you can use invoice files to track additional charges like late fees or recurring charges that you might not have included in the initial documentation in the company ledger.
Bank statements
In order to verify information in your company’s records, you can also ask the bank for records. One of the best ways to verify business transactions and confirm the accuracy of your books is to demonstrate the amount of money that was transferred between accounts.
Reviewing bank policies on transfer periods is crucial when using bank statements as part of your audit trail because some banks take several days to process transactions. This means that when reviewing the audit trail, auditors must take into account the possibility that the precise transaction date in your ledger may not coincide perfectly with the posted date for funds in the bank.
What is an audit trail in accounting?
In accounting, an audit trail is made up of all the records and papers that demonstrate how a business managed its finances and attest to the accuracy of the data in the ledger. Even though a business may have a monthly financial summary outlining costs and revenues, the audit trail is made up of all the receipts, bank statements, and other types of documentation that serve as proof of the data in the financial summary. Audit trails record when a transaction took place, who carried out the transaction, and how much money was changed.
Audit trail vs. audit log
The documents and records you use to verify your accounting information are referred to as the audit trail. A database or list that outlines how to access this information is called an audit log. It’s crucial to understand how to access documents from an audit trail so you can quickly comply with any auditing requirements. You can establish internal procedures for routinely adding digital copies of audit trail documents to the audit log or designating a file for actual accounting trail documents.
Who uses audit trails?
For their auditing procedures to maintain financial compliance, all industries depend on audit trails. However, experts in many other fields also use auditing trails to record information for various types of industry compliance and security purposes outside of accounting departments. Audit trails are used by some industries to uphold and safeguard the accuracy of their data in the following areas:
Audit trails can be used by any organization that uses databases to store sensitive data to make sure that they maintain the accuracy and integrity of their data. Data trails may be used in some capacity by every professional who interacts with those databases, from data entry specialists to CEOs.
Pros and cons of audit trails
Although audit trails are a crucial part of accounting, there are advantages and disadvantages to take into account:
Benefits of audit trails
The following are some benefits of implementing audit trail procedures at work:
Disadvantages of audit trails
There are a few risks to using audit trails that you should be aware of:
Working with department leaders on each team, prepare everyone for these challenges by training them on documentation, storage, and security procedures for auditing trails. To ensure the greatest benefits and the fewest problems, proper training can prevent upcoming problems.
FAQ
What is audit trail example?
An audit trail is a chronological, date- and time-stamped record of the circumstances surrounding a financial transaction, work activity, stage of product development, or financial ledger entry.
What does the term audit trail mean?
If your company doesn’t use a purchase order system, you could request a written estimate from the auto dealer as an example of an audit trail. A bill of sale detailing the type of vehicle, the price paid, and other details is provided to you by the car dealership after the bakery buys the vehicle.
