Leaving Good Audit Trails in a Bookkeeping System

Good bookkeeping systems leave good audit trails. An audit trail is a clear-cut path of the sequence of events leading up to an entry in the accounts. An accountant starts with the source documents and follows through the bookkeeping steps in recording transactions to reconstruct this path.

Even if a business doesn’t have an outside CPA do an annual audit, the accountant has frequent occasion to go back to the source documents and either verify certain information in the accounts or reconstruct the information in a different manner.

Suppose that a salesperson is claiming some suspicious-looking travel expenses; the accountant would probably want to go through all this person’s travel and entertainment reimbursements for the past year.

If the IRS comes in for a field audit of your business, you’d better have good audit trails to substantiate all your expense deductions and sales revenue for the year. The IRS has rules about saving source documents for a reasonable period of time and having a well-defined process for making bookkeeping entries and keeping accounts.

Think twice before throwing away source documents too soon. Also, ask your accountant to demonstrate and lay out for your inspection the audit trails for key transactions, such as the following:

  • Cash collections

  • Sales

  • Cash disbursements

  • Inventory purchases

Even computer-based accounting systems recognize the importance of audit trails. Well-designed computer programs provide the ability to backtrack through the sequence of steps in the recording of specific transactions.

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