Understanding the Accounting Record that Is the Audit Trail

Audits are dreaded, but very important. All individuals and organizations must be prepared to go through an audit every once in a while, which is why they must properly manage financial records and understand the answer to the question “what is an audit trail” as well. Essentially, an audit trail is an accounting record filled with step by step data from the source to the present moment. The New York Stock Exchange (NYSE) and the Securities and Exchange Commission (SEC), for instance, both use audit trails in order to reconstruct trades if they wonder whether the accounting figure produced is perhaps less than accurate.

Understanding the Audit Trail

In layman’s terms, an audit trail is necessary to make sure there is no financial misconduct. By making sure all data is documented and properly analyzed, it can be identified who is at the heart of a misconduct, if it is happening at all. This is why it is vital that proper accounting records are maintained.

What Are Accounting Records?

Accounting records are kept to ensure all books and documents used to create a financial statement are still available. These are the records that are needed when a financial review or an audit has to be conducted. Furthermore, accounting records have details about liabilities and assets, ledgers, monetary transactions, journals, invoices, checks, and any other financial supporting documentation.

There are numerous laws and rules in place to ensure accounting records are maintained properly and so that an audit trail can be completed. For example, the SEC mandates that all accounting firms keep their records for a seven year time period, so that, should there be any doubt about the legitimacy of a transaction, an audit trail is maintained.

The Internal Audit

Last but not least, there is the dreaded internal audit. Here, a business’ operational activities are analyzed, monitored, and examined. This includes employee behavior, business structure, and information systems. Numerous rules and regulations cover internal audits, including the Sarbanes-Oxley Act of 2002. These types of rules now mean that businesses have to meet stringent requirements if an internal audit is performed. Companies, therefore, must see them as part of their risk management strategies so that they can always take action should there be some sort of security breach.

Internal audits can be conducted every day, week, month, or year. Whenever they are conducted, they point out how effective the internal control system of a company is. Furthermore, it will bring abuse, waste, or fraud to light. It is common for certain departments to have more frequent audits depending on what performance is expected of them. Manufacturing departments, for instance, often have daily audits, whereas HR departments often only have them once a year.

It is important to make sure that your organization has tools and processes in place to leave an audit trail and that these can be picked up during an internal audit, or an external audit. In so doing, you will make sure that any fraud is always spotted before it causes too much damage, but also that you always meet the necessary regulations.