What Is An Audit Trail In Finance? (Definition And Example)

Updated 25 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Part of handling an organisation's financial transactions responsibly is creating a record of income and expenses. A trail of financial interactions makes it easy to complete an audit and ensure that everyone adheres to financial regulations and budgetary expectations. Understanding what an audit trail is and the ways to create one can help you be a responsible professional in the financial and accounting sectors. In this article, we answer the question, 'What is an audit trail?', explore its benefits and challenges, compare it to an audit log, list some records that can make up audit trails and provide an example.

What Is An Audit Trail In Finance?

The answer to the question, 'What is an audit trail in finance?' is that it is all the records and documents that explain how an organisation handled its money, and it can confirm the information in the organisation's accounting ledger. While a company may have a monthly financial summary explaining expenses and income, its audit trail is all of the receipts, bank statements and other forms of proof that support the information in the financial summary.

Audit trails contain information about when a transaction occurred, who completed the transaction and how much money they exchanged. Businesses can use an audit trail to monitor and validate different types of financial transactions, including transactions in brokerage accounts and accounting transactions.

Audit Trail Vs Audit Log

The term audit trail refers to the documents and records that you use to validate your accounting information. An audit log is a database or list that describes where you can access this information. Knowing where you can access documents in an audit trail is important so you can quickly comply with any auditing activities. You can develop internal practices for regularly updating the audit log with digital copies of audit trail documents or having a designated file for physical accounting trail documents.

Types Of Records That Make Up Audit Trails

There are a variety of records that you may use as audit trails. Here are some of the most common types of records that make up audit trails:

Emails

Emails and other written conversations about transactions and contracts can also be part of an audit trail. When people on the team talk about their plans for spending or transferring company money using email or chat channels, they can save these interactions as proof for part of an accounting audit if necessary. If you have more official forms of documentation, such as contracts and invoices, emails may not be necessary, but they can be useful supporting documents if you have limited forms of other proof.

Receipts

Paper and digital receipts for purchases are useful items for audit trails because they help you track where you spend money for a budget. They can provide proof that you are using the money leaving a business account for official company purposes.

To add an extra element of security to an audit trail with receipts, you can set up a system where you regularly submit receipts for business purchases to the accounting team, along with the code for your department and a description of the purchase. This way, the team can align the receipt with the company card and make it easy for auditors to match the transaction with the purchase.

Bank statements

You can also request records from the bank to confirm the information in the company's records. Proving how much money moves between accounts is one of the ways to validate business transactions and confirm the accuracy of the company's books.

When using bank statements as part of your audit trail, it is important to review bank policies on transfer periods, as some banks take a few days to process transactions. This means that the exact transaction date in your ledger may not perfectly align with the posted date for funds in the bank, so it is important that auditors factor in this information when reviewing the audit trail.

Invoices

Invoices for clients and vendors are another type of audit trail document to save for your files. It is important to have documentation regarding how much each client account owed in case there are any discrepancies in accounts receivable or accounts payable. You can also use invoice files to track additional charges, such as late fees or recurring charges, that you may not have included in the initial documentation in the company ledger, making invoices especially important for an audit trail.

Benefits And Challenges Of Audit Trails

Audit trails are an important part of the accounting process, but they have benefits and challenges to consider:

Challenges of audit trails

Using audit trails can have some of the following challenges:

Time investment: Preparing an audit trail requires an initial investment in time for saving and submitting receipts, purchase orders and other documents.
Storage issues: Having an audit trail requires you to store your documents for a significant amount of time.
Security challenges: When saving documents for an audit trail, it is important to be mindful about keeping the information in these records safe and storing the information securely to protect the details of clients and the company.

To protect against these challenges, consider collaborating with department leaders to train everyone on documentation, storage and security practices for auditing trails. Proper training can prevent future issues to ensure maximum benefits and minimum issues.

Benefits of audit trails

Here are some of the advantages of using an audit trail:

Encouraging compliance: Having an audit trail in place makes it easier to uphold financial reporting and compliance regulations.
Improving efficiency: If you have a regular auditing schedule, the auditors can use an audit trail to complete their work quickly and efficiently, saving both time and money.
Resolving errors: You can use an audit trail to correct errors in the company's books or find missing information for clients.
Recovering information: If your main system crashes and loses information, your audit trail can help you repopulate the company's ledger with accurate financial details to restore the records.
Limiting fraud: When you keep detailed audit trails, it discourages people from misusing company funds.

Who Uses Audit Trails?

All industries rely on audit trails for financial compliance in their auditing practices. Outside of accounting departments, professionals in many other fields also use auditing trails to record information for different types of industry compliance and security purposes. Some of the fields that use audit trails to maintain and protect the quality of their data include:

Cybersecurity and IT
E-commerce
Health care
Insurance
Manufacturing
Government records
Legal research

Any organisation that uses databases to store important information may use audit trails to ensure they uphold the integrity and quality of their data. Every professional who interacts with those databases, from data-entry specialists to CEOs, may work with data trails in some way.

Example Of An Audit Trail

Below is an example of an audit trail that highlights the different records that make up the audit trail for this particular instance:

PahwaCo. is a management consulting company located in Chembur, Mumbai. The company purchases supplies for its employees when necessary. It now wants to buy a new laptop to enable a newly hired employee to work from home. The audit trail for this process includes the request from the relevant manager to the finance team with the purpose cited, a purchase order from the finance team and the receipt from the store with the relevant details for the purchase with information about the cost, date of sale, location and item purchased.