What is an 'Audit Trail'

An audit trail is a step-by-step record by which accounting or trade data can be traced to its source. Audit trails are used to verify and track many types of transactions from accounting transactions to trades in brokerage accounts. An audit trail is most often utilized when the accuracy of an item needs to be verified. Audit trails can be useful tools when determining the validity of an accounting entry, source of funds or trade.

BREAKING DOWN 'Audit Trail'

Audit trails can be used in accounting when an examiner needs to verify figures such as revenue, net earnings or earnings per share. Transactions that are involved in computing a company's revenue, net earnings or earnings per share are examined. For example, cost of goods sold is an expense subtracted from gross revenue in computing net earnings. The cost of goods sold figure would be double-checked by verifying the transactions and data sources that went into calculating cost of goods sold. All elements of the final numbers are double-checked along the audit trail to verify the final figure.

Using an Audit Trail

When buying a home, a mortgage lender may utilize an audit trail to determine the source of funds for a down payment. They may ask to see a bank statement showing the deposit of funds into the account and ask for additional verification regarding the source of the deposit.

The SEC and NYSE will use audit trails for the explicit reconstruction of trades when there are questions as to the validity or accuracy of trade data.

Audit trails can also be used to track improper market activity. For example, if it is believed that a particular entity is trading large volumes of a thinly traded stock for the purpose of manipulating the share price, a regulator can utilize an audit trail to help identify the culprit. A regulator might document and analyze all houses and brokers involved in specific trades for the offending security to determine whose activity is abnormal and who might be the manipulator.

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