When you hear “audit”, you may instantly think of the dreaded IRS audit.
But the process of auditing is used in nearly every department of a company, in every industry, sometimes performed internally or by external CPA firms. The ultimate goal is to reduce errors, fraud, and unauthorized user activities and enhance internal controls.
What is an Audit Trail?
An audit trail is a sequence of recorded computer events that involves any activity around the operating system, applications or user actions. One computer can have several audit trails that each serve a different purpose.
While audit trails are used in finance and software, they are ultimately tools for analyzing and reporting on managerial and operational processes.
The National Institute of Standards and Technology (NIST) defines a security audit as:
“A set of records that collectively provide documentary evidence of processing used to aid in tracing from original transactions forward to related records and reports, and/or backwards from records and reports to their component source transactions.”
What are Types of Audit Trails?
There are three main types of audit trails used for different industries or purposes.
External Audits
External audits are typically performed by CPA firms, hired by a business to help the business paint a clearer and more credible picture of its finances. The final audit report includes the outside auditor’s opinion of the business’s financial standing.
Internal Audits
Different types of internal audits include compliance, operational, financial and information technology audits. Employees in different departments can be cross-trained to objectively audit different departments to ensure processes, protocols, and managerial tasks are being completed properly.
Internal Revenue Service (IRS) Audits
An IRS audit is a type of external audit that is fairly common (and not desired!). It’s typically performed when there are signs that an individual or business may not be paying the appropriate amount in taxes. The IRS performs the audit to ensure that financial documents match the amounts recorded on their tax documents.
Two Examples of Audit Trails
- A recent SEC rule has established the need for broker-dealers to report information to the consolidated audit trail (CAT) to regulate securities transactions, including cross-market transactions, on more than one exchange.
- HIPAA medical recordkeeping requirements for protecting health information privacy include audit logs to provide an audit trail in healthcare.
What is the Purpose of an Audit Trail and Logging?
Audit trails (or audit logs) act as record-keepers that document evidence of certain events, procedures or operations, so their purpose is to reduce fraud, material errors, and unauthorized use. Even your grocery store receipt is an example of a logged audit trail. Ultimately, audit trails help enhance internal controls and data security.
Internal controls are financial controls, information security, data security, IT, computer system, software, cybersecurity, and business process controls, described in the Sarbanes-Oxley Act of 2002 (SOX) and COSO Internal Control-Integrated Framework.
Why is an Audit Trail Important?
An audit trail is important because it’s used to verify and validate financial, software, and business transactions by tracking selected user activities or accounting financial statement amounts back to the transaction, event source, and data access used to create or modify a record. An audit trail helps businesses detect unauthorized use, errors, and fraud.
How Do You Maintain the Audit Trail?
In software, an audit trail documents each user’s activity, including changes and approvals, timestamp of dates and times, IP addresses, and user logins. Record retention periods for audit trail logs will depend on government and industry regulations applicable to your business activities. Establish a company policy that’s approved by the Board of Directors.
What is the Audit Trail in QuickBooks?
A popular use of the audit trail is the “Audit History” or “Audit Trail” reports available in both QuickBooks Online and QuickBooks Desktop Enterprise.
QuickBooks provides these reports in its accounting software to help companies manage internal audits. The QuickBooks audit trail is an audit log, showing transactions, who made them, when they were made, and a sequential record of changes.
Only QuickBooks users with full authorization rights can view the audit trail history.
The audit log shows the perspectives of the client and accountant(s) in this linked example of audit trail records from QuickBooks Online Accountant support. You can see whether a client or accounting firm made the accounting transaction changes from the audit log.
How is Audit Trail Used in AP Automation Software?
Tipalti software uses audit trail best practices and 27,000+ rules, OFAC and sanctions screening to reduce fraudulent payments and payees. In Tipalti, audit trails log the activity of users and suppliers. Tipalti provides enterprise-grade financial controls, including an audit trail, to customers ranging in size from small businesses to mid-size to large companies.
AP automation software speeds workflow processing time by up to 80% and reduces fraud and erroneous payments with automated tools, including software audit trails. Tipalti add-on software works seamlessly with your accounting software or ERP system, using flat-file or API integration.
In Summary
In accounting, an audit trail is used to trace back to source records or transactions (like accounting entries creating financial information) in the sequence of events. In software and data security, real-time audit logs record real-time sequential user and system activities with a timestamp as events and changes to system records occur.
The purpose of an audit trail is to reduce errors, fraudulent activities, and unauthorized system access, improve internal controls, and verify the accuracy of underlying accounting transactions flowing to financial statements.
About the Author
Barbara Cook
Barbara is a financial writer for Tipalti and other successful B2B businesses, including SaaS and financial companies. She is a former CFO for fast-growing tech companies with Deloitte audit experience. Barbara has an MBA from The University of Texas and an active CPA license. When she’s not writing, Barbara likes to research public companies and play Pickleball, Texas Hold ‘em poker, bridge, and Mah Jongg.
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