What is an Audit trail?
Audit trail can also be referred to as management trail. The reason being that audit trail allows management to determine the priority of processing and to follow up on errors. Audit trail is the facility by which individual transactions can be traced through the accounting records, eg files, indexes, reports, references etc.
An audit trail can be either paper based or electronically based. A paper based audit trail usually puts the auditors mind at ease because it cannot be easily manipulated once the authorized signatories append their signatures and it is stored away. An electronically based audit trail on the other hand can be easily manipulated either at the point of entry into the system or later on. This does not mean that the paper based audit trail is without risks too, as some of the audit evidence may get missing either deliberately or due to lack of proper storage. Also, the signatories might connive to deceive the auditor by manipulating figures and appending their signatures on it. An audit trail might also be mixed, i.e. being both a paper based and electronically based audit trail depending on the nature of the transaction.
In normal accounting, great emphasis is placed on testing transactions right through the system from source to completion and vice versa. Obviously, this cannot be done if the audit trail cannot be followed. Hence, if there is lack of audit trail, it implies that the auditor will be unable to trace individual transactions from source to completion or from completion back to source and would therefore not be able to perform conventional audit tests.
Importance of audit trail
Audit trail is important for the following reasons:
- It enables the company’s accountants and auditors to verify the accuracy and validity of processing
- It acts as a method of detecting fraudulent practices and as a deterrent to perpetrators of fraud.
- It enables the auditors to trace and correct possible errors in inputs and programs.
The causes of loss of audit trail
- Minimum Print- outs
- Inputs for which there are no matching source documents: Some processes may be computerized and there is no physical evidence of the transaction the computerized system purports to represent. Computerized accounting information can be easily manipulated, whereas physical proof of such transactions may not be as easily manipulated.
- Non-retention of files for long periods of time
- Use of magnetic files: files stored on magnetic media cannot be inspected. The auditor has nothing to build on as he cannot know the exact time the files were stored on the magnetic disk and if they have been manipulated, except some measures have been put in place to mitigate this.
- Depletion of data: A complete file of data may be obliterated to save space in magnetic storage
- Sorting: Source documents are often not sorted, and along the line, some key papers or documents may get missing.
Techniques for overcoming Audit trails’ loss or solution to loss of Audit trails
- Arranging for special print-outs of additional information for the auditor’s use at the design and development stage. This may require an additional set of programs which are activated at the auditor’s request.
- Clerical recreation of individual items of data for comparison with computer generated totals. This method is only visible however where the volume of transaction is low.
- Closer co-ordination between internal and external auditors.
- Use of test packs to test the correct processing of data.
- Posting on total basis, ignoring individual items
- Use of computer audit programme to directly interrogate the magnetic files and print-out information specifically selected by the auditor.
O. Ray Whitting.,Wiley CPAexcel Exam Review: Auditing and Attesting