An audit trail allows an individual to track a transaction from the journal entry to the general ledger through to the financial statements. The audit trail can also find all the transactions that comprise the dollar amount for each account listed on the income statement and balance sheet. 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 can follow these steps:
Step 1: Identify the Journal Entries
Review the journal entries that have been recorded for various transactions in your company. These entries represent the initial point of recording financial transactions.
Step 2: Document the General Ledger
Next, document the general ledger accounts that are impacted by each journal entry. The general ledger tracks all the transactions for each account.
Step 3: Trace the Impact on Financial Statements
Analyze how each journal entry affects the financial statements. For example, if a journal entry records revenue, it will impact the income statement. If a journal entry records an asset purchase, it will impact the balance sheet.
Step 4: Follow the Path to Financial Statements
Starting from the journal entry, draw arrows to the impacted general ledger accounts. Then, from the general ledger accounts, draw arrows to the relevant financial statement(s) (income statement and balance sheet). This visually shows the path of how each transaction flows through to the financial statements.
Step 5: Complete the Loop
To demonstrate the completeness of the audit trail, return from the financial statement(s) back to the journal entry. This shows that each transaction can be traced from the journal entry to the financial statements, and then back to the journal entry.
Step 6: Repeat for Multiple Transactions
Repeat the above steps for several transactions, ensuring that you include a variety of transaction types (revenue, expenses, assets, liabilities, etc.). This will provide a comprehensive representation of the audit trail for your company.
Remember to label each step and provide relevant details such as transaction dates, account names, amounts, and financial statement impacts to make your diagram clear and informative.
Incorporating all these steps will help you create a detailed diagram that shows the traceability of transactions from the journal entry to the financial statements and back.