How To Properly Conduct an Audit Trail

In the world of finance, it is crucial to track and document every transaction. Therefore, many accountants are familiar with audit trails. The purpose of an audit trail is to provide evidence that all transactions, financial activity or process aspects were correctly recorded. Audit trails help accounting firms offer maximum value to their clients from audits while maintaining competitive prices.  

Audit trails typically ensure the accuracy of financial information by going all the way back to the source to prove its validity. Audit trails can:

• Ensure transparency and accountability
• Detect errors and fraud
• Maintain compliance with legal requirements and improve processes 

With several key considerations to bear in mind when conducting an audit trail, it is important to take the proper approach. Here’s all you need to know about understanding and running an audit trail.

What is an audit trail in accounting?

In accounting, an audit trail refers to a chronological record that traces the whole journey of a financial transaction back to its source. 

It captures the details of financial events, such as:

• Transactions on financial statements  
• Trades in brokerage accounts
• Adjustments
• Reconciliations
• Changes to master data
• Financial ledger entries

Audit trail accounting serves as a trail of evidence that can be used by auditors to verify how accurate, complete or reliable financial information is. Audit trails should be dated and timestamped. 

Audit trail types

Finance professionals need to understand the differences between two types of audit trails: internal and external. Internal and external audits offer an independent evaluation of a company’s finances but differ in their objective, who carries them out and where. 

Internal audits

An internal audit is an independent assessment of a company’s performance. It identifies areas for improvement and provides valuable insights and recommendations to management. 

Internal auditors are employed directly by the company and report to management. Internal audits typically focus on one area of an organization. 

They may investigate various areas, like: 

• Financial reporting
• IT systems
• Operational processes
• Internal controls
• Risk management

Internal audit trails, therefore, document the audit procedures, findings, evidence and suggestions made during the internal audit process. They may evaluate audit planning, testing procedures, results, supporting documents and reports. 

External audits

An external audit is also an examination of an organization, usually conducted by an independent auditing agency. It aims to provide an objective assessment of the accuracy and reliability of financial statements. 

Rather than investigating a specific area, external audits evaluate all financial records, systems and processes. External auditors conduct external audits and are not employees of the organization. They tend to report directly to stakeholders rather than internal management. 

An external audit trail is a documented, sequential record of evidence created during an external audit. It captures the procedures, findings and evidence obtained by the auditor recording the audit process.

The right way to conduct an audit trail

Here are the typical steps in conducting an audit trail. 

1. Establish objectives: Define the scope, purpose and audit trail requirements, including which financial activities or processes you will audit.
2. Identify relevant data: Identify the relevant financial data and records to analyze, including source documents, transaction records and supporting documentation.
3. Document changes: Record all changes made to financial data, including additions, deletions, modifications and updates. Use specialized accounting software with built-in audit trail features to increase speed, reduce errors and boost accuracy.
4. Verify accuracy: Ensure the recorded changes are accurate by comparing them with source documents and other supporting evidence. 
5. Retain records: Log and protect the audit trail records securely and confidentially, following relevant record retention policies and data protection regulations.
6. Review the audit trail: Analyze the audit trail records to identify discrepancies, irregularities or potential issues that may require further action.
7. Document audit conclusions: Document the audit findings and recommendations based on the analysis of the audit trail records. This may include preparing audit reports, memos or other forms of documentation.
8. Follow up: Take appropriate actions to implement recommendations or resolve any irregularities found in the audit trail.

Tips for maintaining audit trail records

Use reliable audit trail software

Taking advantage of trustworthy audit trail software can save organizations money and time while ensuring accuracy and quality. Many accounting tools can also conduct audit trails, automatically generating an audit trail for each transaction. 

Implement access controls

Implement access controls so that only individuals with the proper authorization can see and edit audit trail records. Restrict access to certain roles or people and boost security by employing multi-factor authentication.

Set up monitoring and alerts

Set up monitoring and alert systems to see changes or occurrences requiring further inquiry. Setting up automated emails to record sending and receiving money, for example, will ensure you don’t miss any transactions. Quickly spot irregularities or questionable activity.

Regularly backup audit trail records

Create regular backups of your audit trail data to protect it from technical errors. To prevent data loss, securely store the backups offsite.

Why do audit trails matter?

There are many reasons why audit trails are beneficial. Providing this important log of audit activity and transactions has multiple advantages.

They can reduce compliance worries

Most companies must comply with industry standards, and show proof of this during audits or investigations. These could include financial regulations, data protection laws and healthcare regulatory requirements. In the case of accounting, these are typically Generally Accepted Accounting Principles and the Financial Accounting Standards Board. 

They create a more effective audit process 

Audit trails are an effective way to minimize mistakes in processing and recording transactions. Audit trails can track who performed a transaction and when and document approvals. Utilizing technology allows higher efficiency, faster spotting inefficiencies and more streamlined workflows. 

They can detect and prevent fraud

Through audits or the monitoring of audit trails, unusual or suspicious activity can be found, enabling businesses to act quickly to reduce risks.

Run smarter audits with Caseware

Caseware’s accounting software simplifies the audit process without compromising on quality. It has built-in audit trail features which automatically compile evidence and relevant documents in one easy-to-use visual platform. This means accountants can breathe easy, knowing everything is easily and accurately documented. 

Caseware is also a collaborative tool, meaning whether your team is in the office, working from home, or halfway around the world, users can collaborate in real time and receive up-to-date information. You can even tailor your dashboard for each audit and easily review work. Ultimately this will save time, reduce costs and minimize human error in your audits.