What is an Audit Trail?

An audit trail is the documented flow of a transaction. It is used to investigate how a source document was translated into an accounting entry, and from there was inserted into the financial statements of an entity. The audit trail can be used in reverse, to track backwards from a financial statement line item to the originating source document. A well-run accounting system should have a clear audit trail for all transactions.

How Audit Trails are Used

An audit trail is used by both external auditors and internal auditors to trace transactions through an accounting system, as well as by the accounting staff to track down errors and the causes of variances in the financial statements. In particular, an external auditor would need audit trails to verify that the reported revenues and expenses of a client are correct. For example, an auditor verifying a reported revenue amount would track back through the audit trail to verify that there are customer orders and shipping documentation associated with each sale transaction.

When someone is applying for a loan, the lender will follow an audit trail to determine where the person obtained the cash for his or her down payment; this may include an examination of the person’s bank statement to see when cash was deposited and where it came from.

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Advantages of Audit Trails

There are several advantages associated with the use of audit trails, which are as follows:

Easier verification. The most essential advantage of audit trails is that they make the work of external auditors more efficient, so that they can more easily verify transactions.
Lower audit costs. Otherwise, the prices they charge for audits would be much higher. In some cases, the absence of audit trails might make it prohibitively expensive to audit a client’s books at all.
Reduced fraud losses. A certain amount of infrastructure is needed to maintain audit trails, involving detailed controls and recordkeeping. The presence of this infrastructure makes it more difficult for someone to commit fraud within a business. Thus, audit trails can reduce fraud losses.

Disadvantages of Audit Trails

There are several disadvantages associated with the use of audit trails, which are as follows:

Extra work. The main disadvantage of audit trails is the extra work required to maintain them. This investment may be difficult to support in the case of a smaller and less-profitable business.
Risk of fraudulent modification. A further concern is when computerized audit logs are used that automatically record all transactions; if anyone is given access to the logs, then transactions can be modified or deleted, obscuring what actually happened and making it much easier to commit fraud.