An audit trail is a record-keeping system that ensures that all steps of a financial transaction are recorded digitally and physically. Audit trails typically include physical source documentation such as:
- Sales receipt
- Official receipt
- Checks issued and received
- Bank deposit slip
- Bank withdrawal slip
Other internal documents are used to record and execute financial transactions.
What is the Audit Trail In The United Arab Emirates?
Generally, a well-managed audit trail is a crucial indicator of good internal business controls. However, in recent decades, audit trails have shifted from manual to computerized electronic records, making this historical information more accurate, accessible, and usable. Here we will provide an overview of the audit trail, its contents, the importance of tracking this information, and how it is best to manage audit trail data.
What is an audit log?
Audit logs are records of events or procedures that provide evidence for verification and verification of operating procedures. Many industries use versions of different audit trails to record progress based on a series of events. These records show that you follow the rules and regulations.
Audit logs can also help identify areas of non-compliance by providing audit information. Whether you track design changes for a new product, document financial transactions, or communicate with customers, an audit trail records actions and results. These records almost always include details such as date, time, and information about the transaction.
There are different types of audit log activity.
Audit trail logs provide essential information to trace the source of events. This may include user activity, data access, login, administrator activity, or automated system activity. The audit log contains items identified by the company, including:
- What is an event
- The user, system, or application that initiated the event (this information may include IP address and device type).
- The date and time the event occurred.
- A clear, well-defined audit trail provides the evidence to find answers and resolve issues.
Why is an audit trail important?
Audit trails can provide the basis for trend analysis or audits if you want to start an investigation. Depending on the organization, the purpose or meaning of an audit trail can take many forms. For example, companies can use audit trails to create historical reports, plan future budgets, or manage risk. Audit trails are an essential part of auditing for several reasons.
The first reason audit trails are essential for bookkeeping is that they help ensure the accuracy of financial transaction records. Financial statements and reports require accurate information to:
- Give owners and managers an accurate view of their business’s financial health and performance.
- Help owners and managers make informed decisions that positively impact their business.
- Provide necessary information to external stakeholders such as lenders, potential investors, and regulators when transacting a business
- With a good audit trail, the accuracy of financial information is maintained. Accordingly, the accuracy of the financial statements may also be affected.
Audit trails can also help reduce or even prevent fraudulent financial transactions. What to do? Source files form an audit trail. These provide evidence that financial transactions took place and were used for the intended purpose of the business. Therefore, the audit trail verifies the financial transactions of the company.
On the other hand, the absence of a clear and accurate audit trail means that financial transactions are shady at best. In the worst case, this could mean that the financial transaction never happened and there was a fraud. Due to the stringent documentation requirements of financial transactions, those with malicious intent can find it difficult or impossible to commit fraud. Even if they tried, auditors would still spot these actions through the audit trail.
Finally, a good audit trail is essential for bookkeeping because it helps auditors verify or cancel questionable financial transactions they find during audits. For example, external auditors encounter a large number of procurement items that are not related to this particular business. This may or may not be a legitimate transaction of the company. With a good audit trail established through supporting documentation, such as a purchase order signed by the owner, auditors can determine whether the transaction is legitimate. With it, auditors could flag them as valid or fraudulent non-compliance.
Practical Tips for Maintaining a Clear and Accurate Audit Trail
Separate personal and business accounts
Merging corporate accounts and transactions with those of their owners is a surefire way to trigger a weak audit trail. Accountants and internal auditors may be billed when business owners teach personal payments through corporate accounts or vice versa.
It can be challenging for accountants to prepare financial statements that accurately show the company’s actual state. Furthermore, if promiscuity is rampant, it becomes nearly impossible to separate the owner’s finances from their business.
For auditors, promiscuity can get in the way of doing their job well. For example, they may have to provide qualified opinions or reports, which could adversely affect the company’s foreign transactions.
For example, reservations citing internal control issues, such as owners’ use of company funds for personal transactions. When applying for a business loan, banks may turn down businesses for fear that the business owner will use the loan proceeds for personal purchases.
On the other hand, a complete report states that there are no abnormalities or does not hide important details, which allows the audit of the financial statements to be fairly and correctly documented.
Always ask for receipts and invoices for all payments.
Many people mistakenly believe that account statements are sufficient to verify payment transactions. No, they are not. Account or invoice statements only confirm the company’s financial obligations to suppliers, credit institutions, utility companies, etc. It does not verify payments made by companies to settle these financial obligations.
Without an official receipt or invoice, there is no proof of payment. Without a supporting receipt or invoice, no one can verify the finance recorded in the company’s books. Always order and save receipts and invoices to avoid audit issues regardless of the transaction amount. Having these systems in place will prevent any future problems.
Use journals instead of receipts and invoices
Hands of businessman calculating bills at the workplace | Why is the audit trail important in accounting? | The Importance of Auditing, Unfortunately, receipts or invoices back not all transactions. Take parking meters, for example. For such transactions, journals are maintained, and related documents are filed to support a proper audit trail.
Use numbered files
These refer to source documents such as checks, receipts, and invoices. Moreover, consuming or releasing them sequentially rather than randomly is essential. Why? Having these systems in place can make it easier to find specific source files during an audit.
Log miles for business travel
One area of operation in which any business is vulnerable to fraud is expenses related to business travel, especially gas expenses. Scammers can use company funds to buy personal gas and get away with it because an official receipt backs it. With mileage log files, administrators, accountants, and auditors can identify fraudulent or suspicious gas or reimbursement charges—mileage log files record company vehicle activity or mileage based on odometer readings. With odometer readings in mileage logs, companies can have an objective basis for reconciling business-related gas expenses.
Such red flags are easy to spot with the information in the mileage activity log. But without these registry keys, it would be impossible to detect such red flags. Audit trails are crucial to ensuring the accuracy of accounting entries and financial statements. It can also help reduce or prevent fraud by making would-be scammers think twice before getting caught.
For these reasons, account holders must ensure that all financial transactions have a proper audit trail. In addition, because they are the “custodians” of the company’s record, they ensure that the transactions they record are audited.
The audit trail can serve as a “baseline” against which the situation can be analyzed or audited before an investigation begins. The purpose and importance of audit trails vary from company to company. For example, a company in Dubai, like VVAS, can use it for historical reporting, reconciliation, or budget planning. It can also be used for risk management audits, tax compliance, or tax audit compliance.