Audit Trail - Definition, What is Audit Trail, Advantages of Audit Trail, and Latest News - ClearTax (2024)

Introduction

An audit trail is defined as a step-by-step sequential record which provides evidence of the documented history of financial transactions to its source. An auditor can trace the financial data of a particular transaction right from the general ledger to its source document with the help of the audit trail.

Understanding Audit Trail

Audit trails are crucial when it comes to validating and verifying the source of a particular transaction.

Auditors can make the use of audit trails for various purposes such as validating the earnings per share, verifying net earnings, and revenue of the company. In case an audit trail learns about missing documents during the process, it means that the company does not adhere to the established accounting procedures.

Depending on the company, the type of the given transaction and the number of steps involved, the audit trail can vary from simple to a much-complicated process.

Factors to Consider

An audit trail generally starts with an invoice receipt. To verify the invoice receipt, the auditor backtracks the transaction from account payable to the source of the operation. Also, the mode of payment for a particular transaction, i.e. a digital payment or cheque is validated during the process.

Most businesses and organisations use audit trails as a useful management tool for monitoring finances along with other various resources. Audit trails are considered one of the best tools for validating transactions, verifying, and discovering missing information in a company's financial data.

Audit trails are used in various sectors. In the telecommunication sector, audit trails can be used to backtrack the entire sequence of transactions involved in a service. In the case of accounting, audit trails are used in documenting the transactions related to a particular ledger. These records can also be electronically stored.

Thanks to technological advancements, electronic audit trails have become automatic over the years. Users can validate their financial data at a faster rate and stay on top of their transactions.