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
-
The invoice
-
The receipt
-
Transaction details
-
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.
Audit
trails save this time. With correct documentation, accountants
can quickly
find what they need, when they need it, correcting
any errors before they become disasters.
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.
