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Auditing is the process of conducting verification activity on-site, often involving a detailed examination of fiscal information related to an entity to identify instances of material fraud or misrepresentation.
The main purpose of an audit is to enable auditors to express an opinion on the fiscal statements, and whether they’re prepared in line with the reporting framework or not. To express an opinion, auditors often need to review the audit trail for financial data.
An audit trail is simply a sequence of records (often electronic), linking financial data all the way from its source to completion. This involves tracing the accounting information, transaction details, or specific data to its point of origin.
Audit trails help auditors, both internal or external, validate and verify the accuracy of various types of transactions. Think of it as a comprehensive, chronological record that tracks all financial data.
In many areas, maintaining audit trails is a statutory requirement. Even if it’s not required, it’s recommended that businesses prepare audit trails to ensure accurate reporting and to mitigate or identify instances of fraud throughout the organization.
Audit trails are often used by auditors when they want to verify the accuracy of material figures, such as net earnings or revenue. For instance, an auditor may pick a material balance in the accounts payable and verify its authenticity.
To do that, the auditor will trace the steps all the way back to when the purchase request or purchase order was issued. By verifying the timeline and authenticity of the steps followed by the company before posting the balance, the auditor knows that the amount is accurate.
The auditor double-checks and verifies all numbers and calculations along the way to ensure that the amount is accurate. Public companies are often scrutinized in more detail during their audits, as external audits are a reporting requirement for them.
Audit trails are incredibly important for businesses as they help them maintain a detailed record of all financial activity. In case any inconsistencies are uncovered, the auditors can simply review the audit trail to identify issues.
Moreover, a comprehensive audit trail with proper internal controls can help businesses identify and reduce internal fraud. This is often done by logging user information when they handle sensitive data or information related to the company.
Audit trails can also help businesses identify scams, especially business email compromise (BEC) scams, and for flagging issues with the company’s overall security protocols.
Many companies are now required to establish and maintain specific information security protocols, so audit trails can help determine their effectiveness.
There are several types of audit trails used in different industries. The most common ones include:
If an organization has an internal audit function, it is responsible for establishing controls and for creating audit trails to track all information related to information technology, financial, operational, and compliance data. From training employees to recording the flow of information, internal auditors must review the audit trail regularly to gauge its effectiveness.
External audits are performed by private firms. They’re hired by larger organizations to evaluate their financial statements and express an opinion. To do this, the auditors often review audit trails very carefully, with a focus on material figures. Materiality is often determined at the start of the audit.
Audit trails are often used by the SEC to reconstruct and identify trades, especially if there are doubts that a firm is trading in illegal market activity. They often bring on regulators to document and analyze brokerages that are involved in such activity, and use forensic accounting to identify the culprit.
Audit trails are often used as a vital management tool by accounting departments to record transactions and to determine the responsibility of individuals within the company when authorizing transactions, or for maintaining information flow.
Without proper audit trails, it would be difficult to verify the authenticity and legitimacy of a company’s fiscal reports. Audit trails also introduce accountability into the organization. Employees are generally more cautious when they know that sensitive information is being logged.
This ultimately helps reduce fraud as well and ensures appropriate access control.
However, implementing audit trails and introducing more accountability often comes at a cost. It requires a considerable amount of time and money to institute practices and train employees to maintain audit trails.
It does become easier when the audit trail is fully automated, but that also costs more money.
The SoftCo Compliant Archive offers secure storage, data capture, and full lifecycle management, helping businesses automate a range of different functions. It offers intelligent storage and search tools, while implementing strict access controls.
It uses Digital Fingerprint technology to maintain an authentic and detailed audit trail of all original documents, offering greater transparency over the who, how, and when of information capture. This helps significantly with regulatory compliance and with maintaining comprehensive audit trails.