One of my first questions when assessing new software or SaaS solutions is whether or not they maintain a high-quality audit trail. Audit trails can make the difference between the successful operation of internal controls and control deficiencies.
What is an audit trail? An audit trail is a detailed, chronological record whereby accounting records, project details, transactions, user activity, or other financial data are tracked and traced. An audit trail is often a regulatory requirement for many compliance activities, and even when not mandated are a business, data security, and privacy best practice. Audit trails are used to verify and track all kinds of transactions, work processes, accounting details, trades in brokerage accounts, and more.
To learn more about using audit trails, best practices, types of audit trails, and how they fit into regulatory compliance, read on!
What Is an Audit Trail?
An audit trail is a date and time-stamped record of the history and details around a transaction, work event, product development step, control execution, or financial ledger entry. Almost any type of work activity or process can be captured in an audit trail, whether automated or manual. Different fields will have audit trails that exist in a variety of 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. In today’s fast-paced IT and risk environment, viewing an audit trail or audit log in or as close to real-time as possible may be part of an organization’s day-to-day operations.
Specific to the healthcare and medical devices, an audit trail would track access and authentication to a patient’s medical record (typically in an Electronic Health Record or EHR), any updates made, and when that sensitive data was accessed. 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, legality, or validity of trade data. Most information technology systems will also have a detailed audit trail for user activity, and some IT systems are built to aggregate inputs from other systems and create audit trail data from that.
What Are Audit Trails Used For?
Audit trails provide a record of events that are time-stamped and provide data to varying degrees. Some audit trails may only capture errors, and a few simple details, like in the anti-virus example above. Other audit trails are deeply complex, and require some technical expertise to read and process.
A simple example of an audit trail covering a transaction is a grocery store receipt. You enter the store to buy a lemon and walk out with a receipt recording the transaction. It will include 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 the suspicious market activity.
Audit trails are valuable evidence used to support audits, access controls, financial statements, investigations, security, and many other functions in an organization. They provide a way to prove the integrity of a transaction or activity, validate an activity, and ensure that key transactions, controls, and actions are being performed.
What Is the Purpose of an Audit Trail?
It’s important for businesses to maintain a comprehensive and complete audit trail so 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 using 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. An audit trail is also required for companies to be in compliance in many capacities, and all publicly-traded companies require active audit trails because of the Sarbanes-Oxley Act, which requires an annual audit by independent external auditors. 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. Likewise, with internal transactions and processes covered through an automated audit trail, root cause analysis and investigations become much easier.
How Are Audit Trails Used?
Audit trails are most commonly used for audits, as the name suggests. These can be audits of any sort — audits of financial information, IT processes, HR records, operational audits — in any of these scenarios, an audit log provides a necessary piece of evidence for inspection and to validate the assertions of management.
Audit trails can be used to determine if only appropriate individuals had access to patients’ protected EHR data as dictated by HIPAA. They can also be used to investigate IT incidents, like DDoS attacks and anomalous user activity. Trails can be used to understand the volume and types of API transactions users are performing; they can provide insight into why and when certain data was deleted; and they can even be used to combat cybersecurity threats.
However, the truth is that, despite the proliferation of cheap storage, it can be costly and difficult to maintain audit trails on all systems and all processes. For key systems involved in SOX audits, an organization should maintain at least a year’s worth (366 days) of audit logs, which can easily reach the Petabyte level. Like with most audit approaches, organizations should take a risk-based stance here also, maintaining detailed logs for key systems and identifying which audit trails are most critical to the organization’s operations. Be sure to take into account all types of regulatory compliance requirements, from financial to information security — failing to maintain audit trails intentionally or by accident can have a serious impact on the company’s security posture.
Different Types of Audit Trails
Nearly all industries use an audit trail in one form or another in order to establish compliance, improve information security and operate internal controls. 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. Key industries 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 many, many more.
Audit Trails for Compliance
Most industries — and all public companies — fall under regulatory requirements requiring compliance and some kind of audit or assessment. High-quality electronic records, ideally generated through automation, form strong audit trails to meet and support compliance mandates. Often IT services and solutions 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.
Audit Trails in Healthcare Organizations
As healthcare auditors know, healthcare organizations are mandated by the government to adhere to strict security and privacy measures with regard to protected health information (PHI), 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 dictating 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 if that access was appropriate. 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 the related date and time-stamped data.
Audit Trails in Financial Organizations
Regulatory requirements in the financial sector are enough reason to prioritize the standing up solid and secure audit trails for your business. Moreover, having audit logs displays the professionalism of a mature organization prioritizing 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 of 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. Streamlined Audits
Publicly-held companies are required to have an independent, third-party conduct an audit once a year. The stress of the 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 on audit projects overall. It’s better for 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 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
A comprehensive and accessible audit trail 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 fewer corrections required.
5. Meeting Compliance Requirements
Different industries have widely variant regulations in terms of compliance standards. Make sure you’re 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
In many ways — and especially in the case of an unexpected crisis or disaster — an audit trail is like insurance. You may not need them to run day-to-day operations, but when something terrible happens you’ll be very glad to have them. 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 your audit trail itself has been backed up somewhere safe and off-site so a fire, flood, or other unexpected event doesn’t damage or destroy your business operations and all of your records.
How to Build 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 have a time-stamp for the event, 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, the keys a computer user enabled and the computer’s response during the session are also captured.
Luckily, almost every IT system, software, solution, and/or service has built-in audit trails and audit logging (and if they don’t, you should ask why!), so most of the time, organizations don’t have to build their audit trails from scratch.
Some systems may have their audit logs designed to be configurable or not. A configurable audit trail would allow the administrator or other elevated user to configure what the system includes in its audit trail. Some logging mechanisms are unchangeable by design. For configurable audit trails, the teams responsible for those configurations should double-check to ensure that they’re capturing everything they need for a future audit or investigation activity. Since audit logs can also contain sensitive information, data access to these documents or logging technology should be controlled and limited to only appropriate users.
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 creates an audit trail.
How Do You Maintain an Audit Trail?
Starting from a comprehensive audit trail that collects all data entered and versioning provides a solid baseline. Daily inputs and activities performed by users flow into the audit logs, ideally through automation. On a periodic basis, audit trail owners or managers should validate that their audit logs are still capturing the right information, or update the logging mechanism to capture the correct information. When new policies or workflows are created, project teams should understand their auditing requirements and incorporate the right level of logging. Maintaining a hub of audit trail documentation in a knowledge base or repository can be a great way of establishing continuity for the future.
Challenges Associated with Managing at Audit Trail
The challenges to maintaining audit trails can include the location and volume needed for storage, access controls, and storage and deletion timelines. Logs can become difficult to navigate when they increase in size, which may bring 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 and regulatory requirements. 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?
W High-quality audit trails 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 for your business. If you are ready to improve your audit trail process, AuditBoard’s internal audit management software can streamline your workflows by simplifying documentation, eliminating version control issues, automating administrative tasks, and increasing visibility with custom, role-based dashboards for team members — get started today!
Frequently Asked Questions About Audit Trails
What is an Audit Trail?
An audit trail is a detailed, chronological record whereby accounting records, project details, transactions, user activity, or other financial data are tracked and traced.
What Is the purpose of an Audit Trail?
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 augment information security capabilities.
Who uses an Audit Trail?
Nearly all industries use an audit trail in one form or another in order to establish meet compliance, improve information security and operate internal controls. You’ll often see them used day-to-day in financial, accounting, IT, security, and healthcare industries.
Vice Vicente started their career at EY and has spent the past 10 years in the IT compliance, risk management, and cybersecurity space. Vice has served, audited, or consulted for over 120 clients, implementing security and compliance programs and technologies, performing engagements around SOX 404, SOC 1, SOC 2, PCI DSS, and HIPAA, and guiding companies through security and compliance readiness. Connect with Vice on LinkedIn.