The All Important Audit Trail: What Is It and Why You Need It

Whether you own a large or small business, every business generates documents that record your company’s daily transactions. These records are important because they provide you with documentation to support your bookkeeping entries. Whether or not your small business is ever audited, it’s a must that you maintain a complete and accurate audit trail to manage your operations, detect fraud, and ensure compliance with government regulations.

What Is an Audit Trail?

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An audit trail chronologically and clearly records every transaction your small business makes from start to finish. An audit trail enables someone who’s not familiar with a transaction to trace it through your company’s accounting records. Every business transaction is based on an event or activity of your business. Additionally, an audit trail includes source documents that provide evidence that these events have occurred as well as entries in your company’s accounting system. Source documents may include:

  • invoices,
  • receipts,
  • purchase orders,
  • expense reports,
  • cancelled checks, and
  • correspondence confirming an event or activity.

Other types of supporting documents might include:

  • payroll records,
  • inventory logs,
  • bank statements, and
  • computerized listings.

In short, anything that can verify an accounting entry may be considered a source document. Therefore, an audit trail can include electronic records, paper records, or a combination of the two.

Why Do You Need an Audit Trail?

There are several reasons why your small business needs to maintain an accurate audit trail.

  • Internal Controls. When a company is missing documentation for an audit trail, it could indicate the company is not following proper accounting Additionally, an audit trail helps you establish processes within your business. For example, you may require a process for receiving and accounting for cash until it’s deposited, or a process for invoice approval and payment, or a process for reimbursing business expenses.
  • Fraud Prevention. An audit trail can help detect and prevent fraud. By requiring source documents that validate an event or activity, your employees will be less likely to commit fraud since they know you’ll be monitoring their business transactions. Additionally, an audit trail can help prevent tax fraud since you’ll need a receipt for every deduction on your tax return.
  • Peace of Mind. A complete and accurate audit trail ensures a stress-free audit process should federal, state or local government entities audit your business. It also ensures your small business is following IRS record-keeping requirements.

Professional accounting practices, including an audit trail, are essential for your small business. However, as a small business owner, you likely don’t possess the expertise or time to maintain accurate and up-to-date bookkeeping records. This is when you need to rely on a trusted business partner, like The Payroll Department, to help you execute this area of your business. The Payroll Department is not just a payroll service. By outsourcing your bookkeeping to us, you can ensure your company maintains an organized accounting system as well as an easy-to-follow audit trail with complete and accurate source documentation. Contact The Payroll Department today to learn more about our bookkeeping solutions.

– Ariane of The Payroll Department Blog Team

Posted in: Bookkeeping and Accounting

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