An audit trail can help your company in many ways. They strengthen your internal structure, improve the tracking and safekeeping of your financial data and records, and can even have a direct impact on your company culture.
And not only can they do some pretty good things for your company; they can also help you avoid nasty catastrophes like internal fraud, painful audit investigations, rejection of funding and compliance infractions.
To understand its benefits better, 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 transaction. It includes every document — be it paper or electronic audit trails— that was involved in the transaction. In other words, an audit trail allows you to trace every step of the transaction.
The degree of usefulness of an audit trail depends on how comprehensive the transaction’s record-keeping is. For example, if your company paid x sum of dollars for a product, its audit trail ought to include every step of the purchasing process, including the very first step — the Request for Order issued by the employee who actually needed the product, as well as detailed transaction records and financial statements.
If these records are properly, your audit trail can help your company steer clear of some of the most common mistakes that plague businesses of all sizes.
Such audit trail examples showcase proper internal controls.
While in the past, paper was the primary method of keeping records, many companies are moving towards completely electronic records. This saves time when looking up information as well as space that would otherwise be needed for the mountains of paper.
Yes, the idea of audit trails is pretty straightforward and nothing new. However, its rigorous implementation has quite a few benefits that you don’t want to miss out on.
What are the benefits of keeping an audit trail?
Different businesses — depending on size, culture and other considerations — would value different benefits. But, every business would find that having audit trails is absolutely necessary.
1. Audit trails prevent fraud
The first is simple: better control of what is going on inside your company. Are you worried about fraud? With proper record keeping, inconsistencies are easily detected and examined. And since your employees know that any fraud will quickly be discovered, they are less likely to attempt such activities.
If you own a small business and think that you’re less likely to be a target of fraud, think again. A report from the Association of Certified Fraud Examiners in 2008 tells us that 38 percent of small businesses (companies with less than 100 employees) were victims of fraud, losing — on average — $200,000 in a year.
2. Audit trails allow for stress-free audits
Most businesses live in constant fear of a tax audit. The pain of an audit can be minimized by keeping proper records.
If every transaction has a proper audit trail, an auditor can quickly determine if the transaction is valid or not. The auditors can do their work faster, which means less money spent on audit fees and less time spent in the field, which is better for all parties involved.
The Journal of Accountancy advises businesses and accountants always keep records of audit trails, because they do not want the investigators to perceive their internal controls as weak. Lost transactions or lack of audit trails will immediately raise the audit agent’s suspicion, which is likely to mean an expanded, not to mention a very long and painful audit.
3. Better positioned to secure investment and/or loan
All investors will want to do their due diligence when evaluating a company. By presenting them with accurate records that they can quickly and easily check, you are demonstrating effective internal controls and building their trust in your project, which increases its value in their eyes.
The same is true when a company needs a loan, or when a non-profit applies for a grant: good audit logs demonstrate that the company is doing its due diligence and assures investors of the integrity of the company’s financial records.
4. Error correction and time-saving
Mistakes happen. However, finding and correcting them can take up a lot of precious time.
An audit trail that is both comprehensive and readily accessible can be examined very easily, saving precious time. This cannot be underestimated — just imagine spending hundreds of nerve-racking hours searching for all the documents associated with a transaction.
And since an audit trail tracks everything, including the slightest correction or change made with regard to a transaction, there is no danger of multiple people fixing the same mistake multiple times.
5. Avoiding regulation compliance infractions
No business wants to be hit with an infraction of compliance standards. That can mean a substantial loss of money, contracts and fines.
The exact regulations depend on the industry you are in, but you may be surprised where such requirements may pop up.
Make sure to check the regulations for your industry — clear audit trails can make passing them a relatively simple process.
How audit trails typically work
An audit trail starts with a source document (an invoice, a receipt, a voucher, etc.) and includes all the documentation relevant to that purchase. It is stored in the general ledger, which is the central storage for all accounting information.
In between, there are several steps detailing the process of that transaction. An audit trail can be very simple or very complex, depending on the type of transaction, or how rigorous the company’s internal controls are.
A common audit trail could look something like this:
Company A wants to buy a new computer. First, someone would give a purchase order to authorize the purchase. Then, after the computer is purchased, the store would give you a bill of sale detailing the transaction. Both of the documents, as well as any communication related to the purchase, would be part of that transaction’s audit trail.
If there was a problem with the transaction, the steps would be traced back and checked. If there is a suspicion of internal fraud, all records would be checked.
Here’s a good audit trail example:
A common fraud attempt is to modify checks. If a user first wrote a check and later added a payee, that is a red alert, as it can mean that the user printed a blank check, filled in the payee name by hand and later changed the computer records to show a different payee.
Such attempts can be quickly discovered if your audit trails are clear and complete.
How your audit trail should actually work
To make sure that you get all the benefits that audit trails offer and avoid all the undesirable things that can happen when you neglect them, you have to get a few things in order.
The first is to make sure that you have everything in place.
For most of you, that will mean some sort of electronic records as a part of accounting software. Unfortunately, most accounting software are awful at spend visibility, which means they lack the technical controls that enable the creation of audit trails — or at least the sort of audit trail that is comprehensive, and useful.
Most proprietary, or on-premise accounting software do not have the data storage to accommodate entire audit trials for every transaction. Plus, their functionalities, in so far as Purchasing goes, are severely limited.
For example, they will store records of a transaction — the purchase order, invoice, packing slip etc. But what they don’t do is actually track all of the actions preceding the point of sale, which means that questions like (a) Who requested the item, (b) Who approved it, (c) Who changed/edited the order, (d) What was changed/edited in the order? (e) Who received the order, and (f) When was it received?, will always go unanswered.
An audit trail is useless if you’re unable to answer these questions. That is why it makes sense to choose a Spend Management solution that you can easily integrate with your existing accounting software.
Lastly, you will want to appoint a person or a few to check audit trails on a regular basis as an “internal audit”. Doing so will minimize any chance of fraud and make sure your accounts are in order for the chance of a “real” audit.