When we analyze business financials, it's not uncommon for questions like this to pop up:
- Why are these two accounts not matching?
- Where did that revenue come from?
- Who made the ledger adjustment?
- When was the expense entered?
Answers to all of these questions and many more are to be found in the audit trail. That is if you’re keeping one.
In this article, we’re going to explain what audit trails are all about.
We’ll discuss what they are and what they’re used for, what kinds of audit trails exist, and how to build and maintain an audit trail to improve your ability to trace your financial steps.
What is an audit trail?
An audit trail, sometimes called an audit log, is a step-by-step record of changes in a given software system.
In the finance context, audit trails refer to the history of activities in a financial software platform, such as your accounts receivable automation platform or bookkeeping solution.
They include a log of user activities and transactions, creating a record of who made what change, timestamps, and user-added comments.
What are audit trails used for?
Audit trails are used to provide a time-stamped record of all activities that have been completed in a financial software system.
They allow business leaders, accountants, and auditors to understand who did what and when retracing the steps between points A and B.
A purchase receipt can be considered a form of audit trail.
It provides details about a given transaction, such as where the purchase was made, what was bought, what payment method was used, and the date and time of the transaction.
Audit trails in your financial operations software provide the same insight.
Say, for instance, you catch an error in your financial accounting. You can review the audit log of your general ledger to identify what caused the issue, such as an automation error or a typo during data entry.
Types of audit trails
Audit trails are found across a variety of industries and applications.
Nearly every software tool your business uses, from accounts payable automation tools to project management solutions, has an audit trail built in.
These provide a record of interactions between users and the software tool, as well as any actions performed using automation.
Certain industries that are subject to heavy regulations may be required to maintain specific types of detailed audit trails.
Public companies, for instance, must maintain a detailed audit trail of all transactions for tax reporting purposes as well as to allow investors to dig deeper into how the company operates.
Healthcare organizations are mandated to adhere to security and privacy measures per the HIPAA (Health Insurance Portability and Accountability Act) guidelines. An audit trail provides detailed visibility into how protected health information (PHI) is recorded, stored, and kept secure.
Many financial companies, such as stock brokerages and hedge funds, are subject to strict regulatory requirements and often undergo audits to ensure they maintain compliance.
Audit trails provide a record of all financial transactions and general ledger entries, facilitating these audits and ensuring that such organizations are compliant with the relevant regulations.
Benefits of audit trails
So, what’s the point of keeping an audit trail in the first place? How does it help you as a business?
Here are five important benefits that audit trails provide.
1. Prevent fraud
The main reason for audit trails existing in the first place is to prevent internal fraud.
Keeping a solid audit trail helps internal auditors flag any financial inconsistencies and highlight potential instances of fraud before performing any further investigations that may be necessary.
2. Make audits easier
Formal audits, whether as part of your internal processes or as a result of external requirements such as an IRS audit, are made much easier when you have an accurate audit log to refer to or provide to your external auditor.
3. Improve your ability to access financing
If you’re hunting down business financing from an investor, it’s quite possible that they’ll want to dig deeper into your company’s operations before agreeing to provide funding.
In this case, having an audit trail available makes it easier for them to perform their due diligence and verify actions against the official financial statements you provide them with.
4. Maintain compliance
Every industry differs with regard to the records they must maintain.
In some sectors, it's a requirement for businesses to maintain certain forms of audit trails in order to stay compliant with local and federal regulations.
5. Fix errors faster
Let’s face it: mistakes happen.
An accurate and easily accessible audit trail makes it easier to rectify human errors.
If you spot an issue in your company financials, you can dive into the audit trail, identify what and/or what caused the error, and take the corresponding actions to rectify the issue as well as prevent the mistake from being made again.
How to build an audit trail
Building an audit trail is not something that most organizations do completely manually. That’s because it will be prone to human error and, well, too time-consuming.
For the majority of companies, audit trails will be found in the software platforms you’re already using on a daily basis.
That said, there are a few steps you can take to ensure that your audit trail is being created and maintained correctly:
- Get clear on your requirements. Identify any specific needs your business has, such as industry-relevant data security regulations that you must retain compliance with.
- Select the right software. Choose a software solution that includes a built-in trail and that can automatically log the activities you need to in order to meet the requirements set out in the first step.
- Configure your audit trail settings. If your chosen software solution allows for it, you may wish to customize the settings to ensure it's capturing the necessary events, such as specific user actions or automation tasks.
- Implement data security measures. While you’re in the configuration phase, make sure you restrict access to audit trails to only authorized personnel, as they often include sensitive information.
- Conduct regular audits. Schedule regular internal audits – quarterly, say — to check for errors, discrepancies, and potential fraud.
How is an audit trail used in AP automation software?
Your accounts payable automation software provides an audit trail of user interactions and automated actions with the platform.
Think of the audit trail as an itemized list of every single action that takes place within the software, whether a human or automation receipt created the action.
Each logged item will include a date and time stamp, details of which user or automation rule created the action, and what changes were made to company financials.
How do you maintain an audit trail?
Audit trails are rarely built and maintained manually.
More commonly, audit trails are created and updated automatically in the software platforms you use to manage financials and other activities.
That said, it's a good practice that audit trail owners or managers validate on a regular basis that their audit logs are capturing the right information. You may need to update the logging mechanism if you notice that your audit trail is missing important information.
Keep an accurate AP audit trail
Looking for a financial operations software solution with an accurate audit trail that is maintained and updated automatically.
BILL offers a detailed audit trail containing the following information:
- When: The date stamp of when the change occurred
- Who: The user or action that caused the change
- Type: The kind of action
- What: The item that was updated
- Field: The actual field that was updated
- Old value: What was listed before the update
- New value: What the value was updated to
FAQ
What is shown in the audit trail?
The items you see in the audit trail depend on the software program in question and how you’ve set up the configurations.
In the case of most financial software solutions, here’s what is shown in the typical audit trail
- User actions: Details of who (including automation recipes) performed each action, such as creating or editing transactions.
- Timestamps: Date and time when each action occurred.
- Transaction details: Information on transactions, such as amounts, accounts involved, and any changes made.
- System changes: Any system or configuration updates.
- Comments or notes: Any user-added explanations or justifications for specific actions.
What is the difference between an audit log and an audit trail?
There is no difference between an audit log and an audit trail. They are synonyms that are both used to describe the record of activities completed in a given software system.
What is the purpose of an audit trail and logging?
The primary purpose of an audit trail is to prevent internal fraud.
A good audit trail keeps track of the different user actions within your financial software and those related to company data.
An audit trail can also be used to track down any mistakes made, although this is not its primary purpose.
