What it means
Auditability is a property of your systems and working habits rather than of the audit itself. It depends on whether transactions are recorded promptly, supported by evidence, approved by someone identifiable and traceable from the general ledger all the way back to an original document.
The practical test is the audit trail. Pick any figure in the accounts and count how many steps it takes to reach the invoice, contract or timesheet behind it, and if the journey passes through a spreadsheet that only one person understands, auditability is weak whatever the numbers happen to say.
Cost is the immediate business consequence. Auditors price their work in hours, so every item they cannot trace without asking someone adds time, meaning poorly documented companies pay more for the same opinion and receive more findings for their money.
Auditability also shapes transactions and financing. Buyers running due diligence, lenders testing covenants and funders checking eligible grant costs all face the same problem the auditor does, and a business that cannot answer quickly loses negotiating ground or occasionally the deal itself.
The nuance worth understanding is that automation cuts both ways. Well designed systems create timestamped, tamper-evident logs that improve auditability enormously, while poorly controlled automation can bury decisions inside code and configuration that nobody has documented or reviewed.
In practice
Real-world examples.
Example
A construction firm bills clients from site diaries kept on paper by individual foremen. When the auditor asks to verify three months of labour charges, half the diaries cannot be located, and the firm ends up crediting $40,000 of disputed billing rather than defending it.
Example
A subscription business migrates from spreadsheets to a billing system that logs every price change with a user name and timestamp. The following year's audit of revenue takes eleven days instead of nineteen, because the auditor can select any invoice and see its full history without asking anyone.
Example
A charity applying for a large multi-year grant is asked to demonstrate how it allocates shared overheads between programmes. Its allocation is defensible but exists only as an undocumented formula in one finance officer's workbook, so the funder requires an independent verification before releasing funds.
Formula
Calculation
Auditability rate = fully traceable items / items sampled
Extra audit cost = untraceable items x extra hours per item x hourly rate
A finance team runs its own internal review before the year-end audit, sampling 500 transactions across purchases, payroll and revenue.
460 items are traced to complete supporting documents with visible evidence of approval.
40 items cannot be traced without contacting the person who originally prepared them.
Auditability rate = 460 / 500 = 92%.
Each untraceable item costs the auditor an extra 1.5 hours of enquiry and follow-up.
40 x 1.5 = 60 additional hours.
At a blended rate of $180 an hour, 60 x $180 = $10,800 added to the audit fee.
The team then improves document filing and approval evidence, lifting the auditability rate to 98% the following year.
500 x 2% = 10 untraceable items.
10 x 1.5 = 15 additional hours.
15 x $180 = $2,700 of extra cost, a saving of $10,800 - $2,700 = $8,100 on the fee alone, before counting the management time no longer spent answering queries.Case study
Seen in the real world.
Tuloma Bakeries is a fictional wholesale bakery used purely to illustrate this idea. It grew from four vans to sixty in six years, and its finance processes grew by accretion: purchase invoices approved by text message, delivery credits agreed verbally by drivers, and a master spreadsheet reconciling everything at month end. Nothing was dishonest, but almost nothing was traceable.
When the founders started a sale process, the buyer's due diligence team asked a simple question about the gross margin on one customer account. Answering it took eleven days and involved three people reconstructing records from bank statements and driver notes. The buyer did not conclude that the numbers were false; it concluded that they could not be relied on without a verification exercise, and it reduced its offer to cover that risk.
Tuloma spent the following nine months rebuilding for auditability rather than for elegance: an approval workflow with a recorded approver for every purchase, credit notes raised in the system at the point of agreement, and a monthly close pack with the supporting evidence attached. The eventual sale completed at a materially better price. The illustrative lesson is that auditability is not paperwork for the auditor's benefit; it is what makes your own claims about the business believable to anyone who has to pay for them.
Watch out
Common mistakes.
- Thinking auditability only matters during audit season. The same trail is needed for due diligence, tax enquiries, grant claims and insurance claims, none of which arrive at a convenient time.
- Relying on one person's knowledge as the audit trail. If a figure can only be explained by the individual who prepared it, the process is not auditable, it is merely remembered.
- Assuming a bigger accounting system automatically fixes it. A system without enforced approvals, retained documents and locked periods can be just as opaque as a spreadsheet, only more expensive.
Questions
People also ask.
Does poor auditability mean the accounts are wrong?
Not necessarily, but it means nobody can demonstrate they are right, which in a negotiation or an audit tends to be treated as the same thing.
How can a small business improve auditability cheaply?
Attach the supporting document to every transaction at the point of entry, record who approved what, and never let a manual journal go in without a written explanation.
How does auditability relate to internal control?
Internal controls are the checks that stop things going wrong, while auditability is the evidence that those checks were actually applied, so one is close to useless without the other.
From the founder's library
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