What are audit trails?

An audit trail is a detailed record of a financial transaction, and does more than just help your company pass an audit.

Audits can strike fear into accountants, but they don't have to. When you take the time to understand audits and what is needed to stay compliant, they become less of a daunting task and more of a regular part of business. Every company should make it their goal to keep accurate and up-to-date audit trails at all times. This continual data tracking can be assisted through software such as automation tools or manually tracked by your team. Regardless of how it is handled, the first step is truly understanding how audit trails work and how your team can keep theirs ready for an audit.

What is an audit trail?

Audit trails are detailed records that show all of the steps and history of a financial transaction or log. These are commonly used by auditors and regulators to ensure that a company is keeping an accurate audit log and staying within compliance. There are many ways your accounting transactions may be recorded, like through software or information systems, ensuring data integrity within the audit trail logs. Through detailed tracking of the sequence of events within your financial records, you ensure that you will have a complete audit trail if ever needed due to an audit or fraudulent activity.

The term "audit trail" can be confusing because it can refer to different sets of data being collected in different contexts. For example, HIPAA requires healthcare employees to follow strict guidelines when tracking health information through things like clinical research to ensure patient's records' privacy and security. A great example of this is the personal information that is closely tracked within clinical trial management systems. Alternatively, information security uses this term to talk about the tracking of system activities to protect data, revert any harmful data changes or deletions, and secure critical data.

An example of audit trails

Audit trails in the accounting department take on many different roles, as they keep track of any transaction that the company is involved in. A simple example would be when an employee requests resources and makes a purchase. First, your company would go through the process of approval, and probably create a purchase order. Then, the employee would make their purchase and provide a receipt and other necessary financial data such as additional descriptions of the supplies purchased. Keeping a clear audit trail is essential to ensure regulatory compliance and track any inconsistencies to prevent fraud.

Why audit trails are needed

There are many reasons that audit trails are vital to your company, such as giving you protection in case of breaches or fraud. On top of that, it helps your company ensure accurately collected data for investors and easy audit trail reviews for auditors.

Prevent fraud

By keeping close track of your transactions and their entire workflow, you protect your company against fraud. If you track this information clearly and correctly, it should be easy to prove that a transaction was not authorized and is suspicious among your typical workflow. Seeing one out of many transactions that doesn't have legitimate invoices or purchase orders, you can easily spot and prove fraudulent transactions.

Give auditors the data they need

It is a natural part of the business world that you will most likely eventually get audited. For example, the IRS may audit your company, and there is a long list of items they may request from your company that can be found here. Other agencies and federal departments may audit your company that all will have their own requirements and questions. Because of this, it is crucial to keep detailed audit trails so that you can provide all of this information if requested. The penalty for failing audits can be hefty fees, civil fraud penalties, or potential fraud accusations. They are not to be taken lightly, and you should do everything in your power to produce accurate and detailed audit trails for auditors.

Improve financial accuracy

An added benefit of close data tracking is finding more errors and manual mistakes within your data. By increasing the visibility of such accidents, you are more likely to notice and resolve any discrepancies. With better financial accuracy, your company will be able to rely on their analytics and reports to make essential future decisions. If this data is inaccurate, it can lead to incorrect future planning and decision-making that is highly detrimental to the company.

Find lost transactions

Lost transactions happen. Sometimes manual data entry leads to an incorrect date on a purchase, or it isn't entered correctly into your system. By keeping a detailed audit trail, you will see these errors much more quickly so that you can find and resolve the lost entry. This data is fundamental when submitting an audit - lost transactions reflect very poorly on the company and can cause serious issues down the line.

Help with disaster recovery

Every company should have a detailed disaster recovery plan. Whether a huge technological breach or an environmental force of nature, your firm should have steps in place to recover from a sudden event. Luckily, one of the benefits of keeping a detailed audit trail is that you are already beginning to safeguard your financial data. It is essential to consider things like cloud storage and backups to ensure that this meticulous data tracking is kept safe regardless of the disaster. As long as you can ensure that, you can keep your financial logs and be in a much better place to recover.

Prove your financial status for loan and investor documents

Many different financial transactions require audit logging outside of audits, such as loans and investor documents. Lenders often want to see that you are financially stable, reliable, and low risk. By having an audit log, you can prove to lenders or investors your financial status and your ability to fulfill what they are asking. Whether proving that you have scaling potential into the future or that you reliably pay back your debts, this will save you a lot of time and money in establishing your stability to outside parties.

How audit trails are used in accounting software

Audit trails can be tracked and produced through some accounting software. This software can give you the ability to track your transaction data from start to finish, showing every step of the way in detail. Software can allow you a big picture view of these transactions and also let you drill down to see the nitty-gritty details when needed. This data tracking is multifunctional, allowing for intricate analysis and tracking from month to month for your company, giving you insight into your trends and financial health.

Of course, this data can be pulled in the case of an audit. Any program that allows for this extensive data tracking can help you reach your requirements for any federal or state audit. Just ensure that the program's functionality meets any special tracking needs of your company or industry to pass these tests. Some programs like Routable have other accounting tools in their suite as well, such as automation. These tools can significantly improve a team's efficiency while also keeping a complete audit trail for every transaction and reducing your vendor tax compliance risk.

It is essential to consider automating the audit trail data collection process at least to some extent. This data is necessary to your company's compliance and can be very hard and arduous to track manually. Luckily, there is so much software out there that can help your company keep not only accurate audit trails, but also empower your team. Take time to talk with your team about their needs and what can help them keep better audit trails. From AI to automation, there are many ways to help make the process smoother and more accurate.