SOX

What Is an Audit Trail? Everything You Need to Know

What Is an Audit Trail? Everything You Need to Know

What is an audit trail, and why do you need one? An audit trail is a detailed, chronological record whereby accounting records, project details, or other financial data are tracked and traced. An audit trail is often a regulatory requirement in many financial areas, and even when not mandated are a business best practice for a thorough and organized accounting department. Audit trails are used to verify and track all kinds of transactions, work processes, accounting details, trades in brokerage accounts, and more. Learn the benefits of an audit trail, see examples in top industries, find out how to do an audit trail, and more!

What Is an Audit Trail?

An audit trail is a date and time-stamped, sequential record of the history and details around a financial transaction, work event, product development phase, or financial ledger entry. Different fields will have audit trails that exist in different forms to capture their unique areas of focus, but the overarching theme and purpose of the audit trail is to track a sequence of events and actions in chronological order. Specific to the healthcare industry, an audit trail is an electronic record that tracks access to a patient’s medical information and updates made therein. In the financial sector, institutions like the SEC and NYSE will use an audit trail to uncover and review detailed information on trades when there are any questions about the accuracy or validity of trade data.

How Does an Audit Trail Work?

A complete audit trail is the full record of events that occurred in the execution of a transaction. With every phase of a financial transaction receiving a timestamp revealing seller, purchaser, time of sale, and location of the sale, the audit trail records key details about transactions and processes for review in the future. They can be simple, or they can be complex. The best example of a simple audit trail covering a transaction is a grocery store receipt. You dash in to buy that lemon you forgot, and walk out with a record of the transaction: What you purchased, the exact time that it happened, and the location where the transaction took place. In a more complex scenario, an audit trail is used to verify the source of funds for a down payment on a home by a mortgage lender. Financial regulators examine complex audit trails from brokerage firms when they want to investigate suspicious market activity.

What Is the Purpose and Importance of an Audit Trail? 

It’s important for businesses to maintain a comprehensive and complete audit trail so that they can track back any irregularities and find process breakdowns if and when they happen. An airtight audit trail helps companies identify internal fraud by keeping track of the different users and the actions they take with regard to a company’s data and information. Audit trail records can also help identify outside data breach issues. Malware and ransomware crimes are on the rise, and tracking an audit trail can help identify and flag moments where outsiders are looking to do harm, while simultaneously improving your company’s information security capabilities. If those reasons aren’t compelling enough, remember that an audit trail is required for companies to be in compliance in many industries, and all publicly-traded companies require active audit trails, because — by law — they must be audited once a year at minimum by independent, third-party companies.

Who Uses an Audit Trail? 

Audit trails are most commonly managed by the staff of an IT department. Any and all users that touch the electronic record — employees, managers, legal team members, accountants, or others — are then part of that audit trail. Computer systems themselves can also become a part of the audit trail, for example the tracking of a system restart or an automated program that makes updates and changes. Any human user or system that makes an update to the record or accesses the records then becomes a part of the complete audit trail. 

What Types of Industries Rely on Audit Trails? 

Nearly all industries use an audit trail in one form or another in order to meet compliance, improve information security and maintain operational control. As mentioned, an audit trail is key in defending against security breaches and protecting against internal fraud, and critical to maintaining compliance in financial reporting for passing both internal and external audits. Any industry handling sensitive information needs to maintain solid audit trails for their data. Some examples of industries and areas that use audit trails are: financial and accounting; manufacturing and product design; health and medical information; clinical research data; IT tracking and data; digital content management systems; e-commerce sales records, and more.

The Importance of Audit Trails for Compliance 

Most industries — and all public companies — fall under regulatory requirements that require compliance for auditing. Strong electronic records work to maintain an accurate audit trail to meet compliance mandates. IT services are used to maintain the electronic records needed to manage record keeping, to control and protect user access and versioning, and to maintain privacy settings that can be tracked and adjusted as needed. Information security and keeping customer data privacy controls in place are also key to compliance, and an audit trail functions as a way to meet those standards.

The Importance of Audit Trails in Healthcare Organizations

As healthcare auditors know, healthcare organizations are mandated by the government to adhere to strict security measures with regard to protected health information, per the HIPAA guidelines. HIPAA is the Health Insurance Portability and Accountability Act of 1996 — a federal law that sets the standards for protecting patient health information and when and how it can be disclosed, outlawing disclosure without patient knowledge. Audit trails and patient logs are needed to track who has access to a patient’s medical information, when that secure data was accessed, who accessed it, and why. HIPAA also mandates that healthcare organizations regularly review and manage how their information is stored and accessed. An audit trail provides visibility into this information and captures related date and time-stamped data. 

The Importance of Audit Trails in Financial Organizations

Regulatory requirements in the financial sector are enough reason to prioritize the importance of standing up solid and secure audit trails for your business. Beyond that, having audit logs displays the professionalism of a mature organization that prioritizes compliance, control, and a streamlined audit process. For financial organizations — subject to regulatory audit and outside reviews — having a solid and secure audit trail is critical to maintaining a successful business. 

What Are the Benefits of an Audit Trail? 

Compliance and security are often the top benefits cited from maintaining an audit trail. Ongoing benefits are:

1. Fraud Prevention

Audit trails help businesses have better control on what is happening inside of the company. The record keeping of an audit trail easily flags any financial inconsistencies within a business. Simply having an audit trail itself deters internal fraud, as employees know it would be quickly uncovered. Additionally, the threat of external fraud can be reduced by maintaining tight controls and a solid defensive barrier to help prevent cybersecurity breaches.

2. Stress-Free Audits

Publicly-held companies are required to have an independent, third-party conduct an audit once a year. The stress of that audit can be significantly minimized by keeping proper records. If all transactions have an audit trail, an auditor can quickly determine if transactions are valid. Auditors being able to do their work faster means less money spent on audit fees and less time spent overall. It’s better for everyone — auditors and those being audited — to have a comprehensive and easily accessible audit trail. Remember: good audit trails make for good audits. It’s also a smart practice for companies to regularly conduct internal audits, and a step-by-step audit checklist can help to create a streamlined approach.

3. Investment and Loan Positioning

A savvy investor does proper due diligence when evaluating whether or not to put money into a company. A loan officer will make sure that a company looks financially secure before moving forward with a loan. If you want to position your business for loans or investors — or both — presenting individuals with accurate financials that can be easily checked via an audit trail builds trust in your business and its integrity.

4. Increased Efficiency

An audit trail that is comprehensive and accessible can be examined easily, saving a business time and increasing efficiency. The historical record can help you find business information that’s buried in your books. For example, if you need to find a certain transaction but only have some of the information — the exact price or the date — using audit trail information can uncover all of the data surrounding the transaction. Audit trails also track everything surrounding a transaction, so all corrections will be captured and save a business time in that way, with less corrections and versioning required.

5. Meeting Compliance Requirements

Different industries have widely variant regulations in terms of compliance standards. Make sure that you are aware of the requirements in your area so you are not hit with an infraction or fee due to missed mandated requirements. You can avoid potential loss of business, lost contracts, and incurred fines by staying ahead of audit trail requirements.

6. Disaster Recovery

What is an audit trail? In many ways — and especially in the case of an unexpected crisis or disaster — an audit trail is like insurance. You may not need it to run day-to-day operations, but when something terrible happens you’ll be very glad to have it. If a weather event or something else catastrophic was to happen to your business, your audit trail would be a reliable record of your business activities, costs, expenses, and income. Having a reliable audit trail can help you recover from what might otherwise be a company-killing disaster. To that end, make sure that your audit trail itself has been backed up somewhere safe and off-site, so that a fire or flood doesn’t take out your business operations and all of your records.

How to Do an Audit Trail: What Should Be Included? 

An audit trail should include the information needed to establish what events occurred and what person or system caused them. That event record would then specify when it happened, the user ID associated with it, the program or command that initiated the event, and the result. All of these items are date and time-stamped. The trail then collects the information in chronological order. If an audit trail includes keystroke monitoring, that means the keys a computer user enabled and the computer’s response during the session are also captured. Keystroke monitoring can include email and other, more extensive viewing of characters as they are typed by users during a session. Keystroke monitoring is often used in intensely secure areas to avoid external access. Note that audit logging can have privacy implications, and users should be aware of applicable privacy laws and policies that might apply. At its foundation, how to do an audit trail includes all actions taken and commands initiated by each user, the files and resources accessed, and the date and time information for these actions.

Example of an Audit Trail 

As previously mentioned, an audit trail can be simple or complex. A common procedure in a company would be purchasing supplies for an employee. In an example of an audit trail in that scenario, imagine that a company wants to buy a new laptop to enable an employee to work from home. The audit trail for this would include the request from the relevant manager to the finance team with the purpose cited, a purchase order generated by the finance team, and the store with the relevant details for the purchase with information about the cost, date of sale, location, and item purchased. All of that data together is an audit trail. 

How Do You Maintain an Audit Trail?

A comprehensive audit trail that collects all data entered and versioning provides a solid framework. On top of that, ongoing inputs and data management work to maintain the audit trail. Whether your business is creating a new policy or workflow or adapting existing ones, the inputs and actions should be managed and recorded for future reference. Creating an audit trail for those workflows and also building, maintaining and managing a hub for documentation of those systems is important for audit trail maintenance and health.

Challenges Associated with Managing at Audit Trail 

The challenges to maintaining audit trails can include the location used for storage, their size, overall access, and storage timelines. Logs can become difficult to navigate when they increase in size, which may bring with it storage cost issues. If access is too broad amongst team members, data integrity can be compromised. There can also be concerns on how long to keep the records and store the data. It’s best to base audit trail storage timelines on the cycles of your business, but if there are no storage cost concerns it’s recommended that you keep records for as long as possible. Again, audit trails are like an insurance policy — and when you need their information, you really need it.

Ready to Improve Your Audit Trail Process?

What is an audit trail to your business, beyond just meeting regulatory requirements? It can mean finding new efficiencies, guarding against fraud, and protecting your business from painful, protracted auditing processes. You need an audit trail to capture the right information and be able to access it easily when needed as a standard operating procedure for your business. If you are ready to improve your audit trail process, AuditBoard’s SOX compliance software can streamline your workflow by simplifying documentation, eliminating version control issues, automating administrative tasks, and increasing visibility with custom, role-based dashboards for team members — get started today!

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