Everything You Need to Know About an Audit Trail
How easy is it to go back and find information about your business? If a customer calls you and asks about their payment, can you see the date it was received and deposited?
If not, it may be time to rework your current accounting policies to implement audit trails.
Despite what many business owners believe, audit trails aren’t reserved only for companies that receive an audit. Every business can benefit from transparency throughout operations and the ability to pinpoint the time and date information was sent, received, or entered.
Understanding the basics, benefits, and importance of an audit trail will help your business prepare, maintain, and overcome challenges in your company.
What is an Audit Trail?
An audit trail is a date and time that a transaction, event, project, or entry was made. The purpose of an audit trail is to show supporting information on the accuracy and completeness of an item. Audit trails are commonly used throughout the business realm, from both an auditor’s perspective and members of management.
An audit trail can track multiple documents or transactions related to a single project. For example, your business may establish a trail for accounts payable remittances from start to finish.
Think about your current processes. Are there areas in that you already have an audit trail established?
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How to Do an Audit Trail: What Should Be Included?
An audit trail should include the necessary information to backtrack what occurred and who was involved. You may see different audit trails based on the application area. This information should be collected and documented chronologically to outline what transpired. Other standard information that should be documented includes:
The What – The specifics of the item, transaction, or document being tracked should be known throughout the process.
The Who – Each individual involved in the process should be identifiable. There are often multiple people involved in a single audit trail.
The When – Documentation of when each action occurred is vital. This is your timestamp to see when items were completed or sent out.
The Where – Technology has made it simple to pinpoint where each action occurred. Maybe a team member submitted a document at home or sent an email within the office. Each location should be captured in the audit trail.
The How – The channels the item went through should also be identifiable. This could be an email, in-person exchange, or the mail.
Keystroke monitoring is another important component of how to do an audit trail.
This involves an extensive review of the characters typed during a session and is primarily used for security purposes. Audit logging should have controls in place to prevent and document unauthorized access to certain functions of your business.
Your business should consider the external privacy laws associated with online monitoring. Nevertheless, keystroke monitoring is vital to your internal controls and audit trail.
What is an Example of an Audit Trail?
Audit trails can range from simple to complex. Odds are your business will have a combination of both.
Let’s say your company is looking to hire an additional employee that will primarily be remote. The audit trail for a laptop purchase would include the following steps:
- The hiring manager requests a laptop purchase from the finance department.
- The finance department submits the purchase order to the laptop company and records the cost, shipping time, product purchased, location, and date purchased.
- Once the laptop arrives at the business, the mail department will log the item received and send it to the hiring manager.
- The hiring manager will then contact the employee to deliver the laptop.
Each step will include key details, including the person involved, the date, the communication method, and the timestamp. If the laptop never arrives, the finance department has an order confirmation, including all relevant information, to send to the laptop company. In addition, when there is clear documentation in each step, team members will stay on the same page and have less confusion.
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Why are Audit Trails Important?
Audit trails are vital for both small, growing, and large businesses.
The first advantage that business owners realize with audit trails is fraud prevention. Creating an inclusive audit trail is a component of your business’s internal controls. By documenting each person that works on the project and the actions taken, employees will be less likely to commit fraud as the likelihood of being caught is heightened.
Additionally, audit trails lead to smoother outside review services, such as a review and audit. When a third party can see the path of transactions and documents, they will have fewer questions for management and will be more likely to issue you a clean opinion. Fewer questions translate to reduced costs since the professionals won’t need to spend as much time tracing the document to the different stages.
Disaster recovery is another significant benefit of audit trials. A comprehensive and accessible audit trail can help your business deal with an unexpected crisis or disaster. If a weather event takes down your office and records, your audit trail is a backup to recreate your accounting system with accurate numbers. Companies with audit trails can bounce back quicker and prevent a total loss.
Certain industries are subject to broader compliance regulations. For example, if your business works on government contracts, you will be frequently asked to provide detailed information before your business is paid. An audit trail is critical to compliance with government contracts and regulatory agencies.
How to Prepare for an Audit Trail as a Controller?
Whether your business is planning on having an independent audit in the upcoming months or looking to revisit current procedures, the burden falls on you as the controller to prepare properly.
First, you want to clearly understand where you need audit trails. Think of where your business needs more documentation. Is it accounts payable or accounts receivable? How about human resources?
After you uncover the areas you want to improve, you can create an actionable plan to revamp your procedures. You must ensure your employees clearly understand the processes they will need to go through. This might include training on proper procedures or creating a manual for employees.
If you have an auditor requesting an audit trail for a specific business component, they will generally outline all the information you need to provide. Having the necessary procedures already in place is critical to receive a clean audit opinion and having transparency throughout your operations.
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How Do You Maintain an Audit Trail?
Implementing a compelling audit trail requires consistent oversight and adjustments. If your business is trying out different audit trail procedures for the first time, it will most likely take trial and error before you find the procedures that work best for your company.
At first, you may need to review the audit trails weekly to ensure employees are going through the correct procedures.
After operations run smoothly, you can shift to monthly or quarterly audit trail maintenance. Each discrepancy in your audit should be immediately followed up on to determine weaknesses.
For example, suppose you uncover that a payable skipped management authorization. In that case, you will need to look into how that mistake occurred and implement additional safeguards to prevent the issue from happening again.
What are the Challenges Associated with Managing an Audit Trail?
Despite the growing list of benefits that audit trails provide businesses, there are some challenges you may need help with.
First, your business may run into storage issues due to the high amount of data needed to keep an accurate audit trail. Your business may need to upgrade servers to store all of the necessary information.
Furthermore, businesses may experience lag time in opening files depending on the audit trail size. The difficulty of navigation can be improved with strong servers and speed optimization.
Another challenge is determining how long to keep audit trails. At a minimum, your business should store audit trails until the project is complete. For example, an accounts payable audit trail should be kept until the invoice is paid. However, many businesses keep the documentation for as long as possible if storage is not an issue. Issues may arise months after the initial invoice is paid, making it essential to have the information accessible.
Investing in a cloud-based storage solution can help mitigate some of the challenges storage presents.
Summary
As mundane as an audit trail may seem, they are vital to the long-term success of your business. This component of your business should be a priority from increased efficiency to reliability in disasters. Understanding the best way to implement this piece of internal control into your business can take time and effort. This is why the team at Nanonets is here to help.
Reach out to our automation experts today to learn more and discuss the next best steps for your business.
Read more Accounting Articles:
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- How to automate Reconciliation processes with Reconciliation Software?
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- What is an Expense Report & Why do you need one?
- Everything You Need to Know About an Audit Trail
- Credit Card Reconciliation: What It is and How to Do It?
- The Ultimate Guide to Accounts Receivable
- What is bookkeeping & how to automate it?
- What is Payroll Accounting & How to automate it?
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