Your team has been assigned the duty to diagram the audit trail for your company. In your diagram, show several transactions and how they would be tracked from the journal entry to the financial statement and back to the journal entry
To diagram the audit trail for your company, you need to show the flow of transactions from the journal entry to the financial statement, and then back to the journal entry.
Here's a step-by-step guide on how to create such a diagram:
1. Identify the Journal Entry:
- Start by choosing a specific transaction that affects the financial statements. For example, let's consider a sale of goods made to a customer.
- Write down the journal entry for this transaction, which typically includes the date, the accounts affected, and the corresponding debit and credit amounts. For our example, the journal entry might include a debit to "Accounts Receivable" and a credit to "Sales Revenue."
2. Track the Journal Entry to the General Ledger:
- Identify the accounts mentioned in the journal entry, such as "Accounts Receivable" and "Sales Revenue."
- Draw arrows leading from the journal entry to the respective accounts in the general ledger. This step represents the flow of information from the journal entry to the Ledger accounts.
3. Connect the General Ledger to Financial Statements:
- Identify the financial statements impacted by the transaction, such as the income statement or balance sheet.
- Draw arrows from the respective Ledger accounts to the applicable financial statement(s). For our example, you would draw an arrow from "Sales Revenue" to the income statement.
4. Trace Back to the Journal Entry:
- Now, trace the impact of the financial statement back to the journal entry to complete the audit trail.
- Draw arrows from the financial statement(s) impacted by the transaction back to the specific journal entry. For example, you would draw an arrow from the income statement to the "Sales Revenue" account in the general ledger and then back to the journal entry.
By following these steps, you can create a diagram that illustrates the audit trail, showing the flow of transactions from the journal entry to the financial statement, and then back to the journal entry. Repeat this process for multiple transactions to include several examples in your diagram.