Does Your Small Business Have Good Audit Trails?

Are your small business books supported by good audit trails? If you haven't heard of this term, the answer is probably not. So, what is an audit trail? Why do you need them? And how can you create a workable system for ensuring them? Here's what every business owner needs to know.

What Is an Audit Trail?

Audit trails are simply a chain of documentation that can be followed backward through a bookkeeping transaction to reveal its source. For instance, consider a payment of $100 for delivered supplies. The audit trail could be as simple as the bank statement and a copy of the check written and deposited by the vendor. However, that doesn't identify exactly what was bought, when, and by whom. The shipping document shows what was delivered and who received it. Then, the vendor invoice details what was charged and who approved it. 

Why Are Audit Trails Important?

Making audit trails on a regular basis requires more effort and may feel unnecessary. So why go to the trouble? First, it's important to be able to verify that transactions are valid and legitimate. If you can't source transactions, you don't know when someone is fudging numbers or defrauding you outright. You also can't identify what money was really spent on what—and where you can improve financial management. 

Audit trails have that name because they're vital if you are ever audited by an inside or outside source. Without accurate and thorough documentation, you may be fined, denied credit, or sanctioned. 

How Can You Make Yours?

So, how do you make audit trails? In general, the best place to start is to keep receipts, invoices, bills of lading, and other outside documents from other businesses. These are independent sources of information and therefore valuable as proof of transactions. In many cases, digital copies are acceptable, including bank statements and copies of checks. 

You'll also need to create your own paper trail for some things. Maintain mileage logs as you or your employees travel. Write notes on original documentation to help clarify things that may not be clear, such as what the item was for. If no receipt or invoice is available, make your own document to record the information you have. And use detailed ledgers to track transactions like petty cash or credit card use. 

Where Can You Get Help? 

A proper audit trail helps you manage your money better and protects you against problems. Need help designing yours or increasing employee buy-in? Contact a local bookkeeping service, such as Peggy's Tax & Accounting, LLC, to learn more.