Audit Trail: Everything You Need To Know
An audit trail helps your organization in many ways. They strengthen your internal processes, improve the tracking and safekeeping of your financial data, and even impact workplace culture.
Audit trails benefit your organization externally, too. For instance, they help you avoid nasty catastrophes like fraud or audit investigations, and they increase your investment opportunities.
But these benefits are just the tip of the iceberg. Let’s do a deeper dive into the what, why and how of audit trails.
What is an audit trail?
An audit trail, or an audit log, is an entire history of a purchase, including every document created during the transaction. In short, they allow you to trace every step of the purchasing process.
Whether your audit trail is useful or not depends on how comprehensive your record-keeping is. For example, if your organization pays for a product, your log should include things like:
The request for order form
The purchase order form
Any comments made during the purchase
While the concept of audit trails is straightforward, correct implementation will deliver quite a few benefits.
What are the benefits of keeping an audit trail?
Different organizations (depending on size, culture, and other considerations) value different benefits. But, there are some perks that positively impact all organizations. For example:
1. Audit trails prevent fraud
Proper record keeping makes inconsistencies easier to detect and examine. And if your team members know this, they are less likely to make fraudulent or malicious purchases.
If you own a small business and think that you’re less likely to be a target of fraud, think again. According to the Association of Certified Fraud Examiners, small organizations are the most common victims of fraud.
2. Audit trails allow for stress-free audits
Most organizations live in constant fear of a tax audit. But you can minimize the pain of an audit with proper record keeping.
If every transaction has an audit trail, auditors can quickly determine if the transaction is valid or not. As a consequence, auditors work faster, and your organization spends less money on audit fees.
The Journal of Accountancy advises businesses and accountants to always keep records of audit trails. Not only will this save money if you’re audited, it’ll also build trust that your internal spend controls are strong.
Lost transactions or a lack of audit trails will immediately raise suspicion, which is likely to mean an expanded, not to mention a very long, audit.
3. Better positioned to secure investments and loans
All investors do their due diligence when evaluating an organization. By showcasing accurate records, your organization demonstrates effective internal controls and builds trust. In turn, this increases value.
The same is true when an organization requires a loan or a nonprofit applies for a grant. Comprehensive audit logs demonstrate smart due diligence, which assures any investor.
4. Error correction and time-saving
Mistakes happen. However, finding and correcting them can take up a lot of precious time.
5. Avoiding regulation compliance infractions
No organization wants to fail regulatory compliance. If they do, it means substantial fines, contract losses, and much, much more.
Of course, compliance standards are different depending on your industry. Regardless, it’s important to check the regulations for your industry and keep a clear audit trail. Only then can you remain above board and avoid costly penalties.
How audit trails typically work
Before we give you an example, it’s important to note that audit trails must start with a source document. This could be an invoice, a receipt, a voucher, or a purchase request. Accountants will store this information in the general ledger.
Between this source document and the general ledger, though, there are several steps detailing the process of that transaction. Each transaction will look different, too, depending on how you make the purchase, and how many steps there are to complete it.
An audit trail may look something like this:
Organization A wants to buy a new computer. First, someone creates a purchase order to authorize the purchase. After the purchase of the computer, the supplier gives you a bill of sale detailing the transaction. Both of the documents, as well as any communication related to the purchase, are part of that transaction’s audit trail.
If there is a problem with the transaction – say, you suspect a team member of defrauding your organization – you can retrace your steps and check back over the order.
For example, common fraud attempts include modifying checks. If a team member first wrote a check and later added a payee, that’s a red alert. It can mean that the person printed a blank check, filled in the payee name by hand, and then later changed the computer records to show a different payee.
Thanks to audit trails, you can trace such changes.
How your audit trail should actually work
To make sure that you truly benefit from audit trails, you have to get a few things in order first.
For many finance teams, deploying a solution that automatically creates an audit trail is a top priority. Whether this is an accounting tool or a spend management tool is up to you, but without this in place, audit trails become a burdensome thing.
Many tools only track certain aspects of the purchasing process, too. This makes is more difficult to track all of the actions relating to a transaction. If you use a purchasing tool, for example, you might not be able to store all your accounting documents, and vice versa.
Our advice? Find a few best-in-class solutions that speak to one another. With this in place, you can design an end-to-end audit trail that captures every moment or a transaction.
With this in place, you’ll need to assign a few team members to conduct regular internal audits. Doing this minimizes your risk of fraud and ensures all accounts are in order before the real auditors come knocking.
Editor's note Original publish date: 15 Aug 2017 We've since updated and republished this blog post with new content.