Whether or not your company is ever audited, maintaining a clean audit trail makes good business sense. A clear and supportable record of your firm’s routine and not-so-routine transactions can be used to manage operations, detect fraud, ensure compliance with government regulations, even speed up the audit process itself.
What is an audit trail? Simply put, it’s a chronological record of a business transaction from start to finish. For example, let’s say you display travel expense as a line item on the company’s profit and loss statement. A strong audit trail will enable someone who’s not familiar with the transaction to trace that number from the general ledger to other accounting records.
Accounting entries should be supported by source documents. As the name suggests, a source document is the basis or source of an entry in the company books. In the travel expense example, source documents might include travel authorizations signed by the company president; hotel, airline, and rental car receipts submitted by the traveler; approved expense reports that summarize the costs to be reimbursed; or cancelled checks showing payments to the employee or company credit card issuer. All such documents provide evidence that the transaction actually occurred, that the amounts put into the accounting system are accurate, and that expenses were authorized in accordance with company policy. Supporting documents for other types of transactions might include payroll records, inventory logs, sales receipts, invoices, contracts, depreciation schedules, purchase orders, computerized listings, and many other types of records. Anything that can be used to verify an entry in the accounting records may be considered a source document.
Why maintain an accurate audit trail? Besides the obvious benefit of making an audit run more smoothly, an audit trail can be used to help managers keep tabs on operations. If, for example, employees know that every significant transaction will be recorded in the accounting system — including evidence about when transactions were initiated and by whom — they may think twice before misappropriating assets or falsifying records. If a lender requires your company to support its financial statement numbers, a clear audit trail will enable management to pull together source documents more readily. Well-supported financial records are also a great help when a company becomes embroiled in litigation or needs to reconstruct accounting systems in the aftermath of a disaster.
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