written by | May 3, 2022

What is an Audit Trail and Why Do We Need it?

×

Table of Content


An audit trail is a pertinent record of events in chronological order or a collection of files that record consecutive events or actions within an operational context or procedure.

This step-by-step record of the events carried out, or other documents/decisions can be important in audits, lawsuits, complaints and the uncovering of internal and external frauds.

By formalising the decisive actions, we can view every event from the time that an activity or event occurs, initiated or revised, until final archiving or delivery when needed.

Now, let's check the audit trail definition, objectives, benefits, etc.

Did you know?

Audit trails' objectives are to reduce the risk of fraud, stop non-authorised users from accessing the company's resources, prevent material errors in the financial statements, help companies detect attacks on their assets and determine what security incidents took place.

Also Read: What is Trial Balance - Meaning, Features and Purpose

What are the Types of Audit Trails?

For various sectors or objectives, there are three primary forms of audit trails.

  • External Audits:

External audits are usually undertaken by CPA companies who are contracted by a company to help them create a clearer and more trustworthy image of their finances. The final audit report contains the outside auditor's assessment of the company's financial position.

  • Internal Audits:

Internal audits are divided into four categories: compliance, operational, financial, and information technology. Employees from several departments can be cross-trained to objectively audit various departments to ensure that processes, protocols, and managerial tasks are executed correctly.

  • Audits by the Internal Revenue Service (IRS):

An IRS audit is a popular sort of external audit (and one that you don't want!). It's usually done when there are indications that a person or company isn't paying the correct amount of taxes. The IRS conducts the audit to check that the financial documents match the amounts on their tax returns.

What is an Audit Trail?

Have you struggled to calculate the exact transaction amount to close out a month?

Perhaps your team struggled to find out the flaws in the reporting cycle, or you tried to figure out why you had higher sales in the last quarter.

Solutions to workflow issues, budget reviews and major accounting mistakes can all be addressed with an easy audit trail. An audit trail can be described as a logical record that traces the source of financial data. It provides the evidence in a sequential and documented manner of a sequence of events. You can use it to trace the transactions and confirm data accuracy.

The auditor can access information about the operation of computers through an audit trail, and audit trails restore the integrity of computers. Many industries use forms of an audit trail to create a history of progress in the context of a series of events. These audit trails provide reliability and proof of conformity.

Audit trails also help identify areas of non-compliance and provide evidence for audits. The latest notification makes it mandatory for companies to implement audit trails in accounting software to preserve every transaction's audit trail.

Benefits and Objectives of Audit Trail

These are some of the benefits and objectives of audit trial:

Security

Companies should not use audit trails only to prepare for the worst-case scenario but rather as additional protection for their organisation or business. Monitoring users' activities, specifically concerning sensitive data, means that they cannot misuse the information. They know that any misuse or breach can be traced back to them, and that's why they are more vigilant when dealing with this data. Nowadays, QR code scams are also arising, so be sure to read and avoid them.

Accountability

It imposes individual accountability for businesses concerning the actions of their users. It stops the introduction of inaccurate information or access that is not approved.

Furthermore, users are less likely to attempt to defy security rules, and they know that their actions will be recorded and linked to their identity.

Reconstruction of Events

You can evaluate the damage more easily by examining audit trail records of activities of an organisation to discover the time, date and why normal operations were at a halt.

Access to this information could assist in preventing future incidents of system failures, outages, corruption of data, hacking and detecting these issues in advance.

Intrusion Detection

Intrusion detection is detecting attempts to break into an area and gain access. Numerous regulations have made it compulsory to ensure the privacy of data.

It covers the protection of personal data and financial records, intellectual property and various other financial records.

Transparency

The automated monitoring of user activity ensures that your management team and board are transparent. For instance, different types of files require different security levels, so access controls are necessary. But it is just a thing to state that only specific people have access to confidential data and documents, while another to prove it.

If you keep a record of access controls and who has access to and modified documents, it is possible to demonstrate that only authorised individuals have access to sensitive information. The ability to guarantee accountability by recording actions is applicable to document modifications or resolutions and meetings. 

Keeping track of who was responsible for what and when isn't just helpful for security reasons, and it is also a good practice to ensure accountability and openness. Additionally, these documents allow for complete accountability of the individual and the whole board by providing a trace of any wrongdoings.

Trust Means More investment

Investors will investigate the business finances and performance before offering to fund. If, for instance, you're planning to support a construction project to construct a new branch for your business and you have evidence of your solid financials with an audit trail, it can impress a potential investor.

If you have documentation to show the accuracy of your accounting records, clear and precise, your company's valuation will rise. This will increase your chances of receiving loans in times of need, allowing you to get more capital.

Also Read: Trial Balance: Rules Explained With Examples

Compliance

A legally compliant business is a reliable business. Audit trails provide peace of mind for business owners due to the ability to trace to the source and have the supporting documents and trail of transactions set up. So, if an auditor shows up at your doorstep, you will be able to allow them to access your business books without having any anxiety.

Some experts advise having audit trail software as well. The reason is that an automated accounting software monitors for modifications and updates to laws and regulations of the government. In this way, if the standards of industry or laws are altered without your understanding, the accounting software can remind you to update it at the earliest opportunity.

Other Problem Identification

Audit trails can be used as online tools to identify issues that are not invasions when they occur. It is often known as immediate auditing or checking. Suppose a system or program is considered essential to the organisation's business and mission. In that case, quick auditing can aid in monitoring the state regarding operational concerns, rare or unusual activities or system errors with real-time monitoring.

How Do You Keep an Audit Trail?

After knowing the audit trail definition, now is the time to understand how you can keep it. Audit trails start by examining the source document, which could be an invoice or receipt of purchase orders. If you're planning to keep an audit trail through an account ledger, you'll require the original documents as evidence.

Instead of going with the method by hand, using a software program to take care of the task can simplify the process as each change is automatically recorded whenever you make an account. The information will be safe for you to review whenever you want, allowing you to identify any discrepancies and their sources. It will enable you to consider different solutions.

For example, if you decide to purchase bags from seller ABC. They will first make a purchase order to approve the transaction. After that, you'll get an invoice for the identical. These documents and any other communication related to them will be added to your audit trail.

Maintaining an audit log is a good investment. It comes with numerous advantages. Individuals may face one issue. They have to modify transactions for various reasons, even when there is an error in entry, price change, or price. It can make it difficult to sort through the records. But, many modern-day accounting softwares are good enough to handle this issue.

For How Long Should You Keep the Audit Trails?

You must maintain the complete audit logs during the entire period of the record and based on the specific requirements of the business and the demands of the authorities regulating it. Keeping backlogs of data was once a challenging and burdensome issue for many businesses. The advent of Cloud computing makes it much easier for companies to keep their information in a format accessible for auditing for a lengthy period.

It could be very beneficial in the past process or in problem-solving for the future. Audit committees typically define an interval for reviewing, like annually or bi-annually, and this is sensible considering the business cycle and the regulatory requirements.

Conclusion

In many ways, audit trails can be useful tools to monitor a business or organisation's finances and other resources. Audit trails can be a trusted way to verify that you carry out the transactions smoothly and honestly while following the minimum steps.

When discrepancies are discovered in the company's financial information, an audit trail is usually the most reliable method of determining what information is missing or the source of the error. Another best tip from our side for handling your transactions' debit and credit score is to use a platform like Khatabook.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: What can be a good audit trail example?

Ans:

When you buy a vehicle, the auto dealership hands you a bill of sale with details such as the vehicle type, terms of the purchase, purchase amount, etc. This document becomes a part of the vehicle's audit trail, and you can record the same in your business books.

Q: What are the various types of audit trails?

Ans:

External Audits, Internal Audits, and Internal Revenue Service (IRS) audits are the three types of audit trails.

Q: What kinds of data does an audit trail include?

Ans:

Audit trails are every detail relevant to a transaction, ranging from the date, time and information about the user doing the transaction to the more precise financial data and report details the auditor might require.

You must maintain the records for all automatised events scheduled in an organisation's system. This includes keeping records specifically to identify abnormal or unusual usage, app malfunctions, false access and various other events that cause problems for reporting and resolution.

Q: What is an audit trail?

Ans:

Understanding audit trail meaning is very simple.

You can track their source effortlessly by making an audit trail that is a stepwise record by trade details, accounting or other financial data. We can use audit trails to verify and track various transactions, such as accounting transactions.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
×

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.