What is an audit trail?
An audit trail is a chronological history of all transactions and possibilities that have appeared in an accounting system or other financial elements. Verifying the accuracy and probity of financial data and preventing and detecting fraud requires an audit trail. It is a crucial tool for these tasks.
An audit trail helps to trace the origin of any transaction or event and to recognize all of the parties concerned. With this information, the authorities can validate the accuracy of financial records, investigate variations, and identify potential fraud.
Audit Trail Explained
Audit trails are utilized in many different areas of finance, including mortgage lending, securities regulation, and market surveillance.
In mortgage lending, for example, audit trails are used to verify the source of reserves for a down payment. This is important to control money laundering and other financial offenses. Mortgage lenders may ask for bank statements, pay stubs, and other documentation to sustain the borrower's claims about the source of their funds.
The Securities and Exchange Board of India (SEBI) and National Stock Exchange (NSE) use audit trails to revamp trades when there are questions about their validity or accuracy. This is important to ensure that the markets are adequate and tidied. For example, if there is a fishy projection in the price of a stock, the SEBI can use audit trails to identify the parties involved in the trading and investigate possible market manipulation.
Audit trails are also quite common to be used in tracking inappropriate market activity, such as insider trading or front-running. Authorities can use audit trails to identify practices of trading that may be expressive of illegal activity. Hence, if authorities detect that a particular trader is consistently purchasing stocks quite soon before it is revealed that the company is going to be acquired, authorities may investigate the trader for insider trading