Audit Trail feature in accounting software from 1st April, 2023

The Ministry of Company Affairs (MCA) vide its notification dated March 24, 2021 and subsequent notification dated April 1, 2022, has made it mandatory for every company to fulfill the requirement of an audit trail feature in their accounting software from 1^st April, 2023.

So it is to inform to every company that from 1^st April, 2023 onwards, the accounting software used by companies will have to comply with the provisions of the Companies (Accounts) Rules, 2014.

The objective of MCA for mandating the requirement of an audit trail feature in accounting software was to mitigate the chances of fraudulent transactions or manipulation in the books of accounts of the company and to bring in more transparency. With the help of audit trail, an auditor can trace every step of, the financial data of a particular transaction right from the general ledger.

1. What is Audit Trail? 

Audit Trail (also called audit log) is a security-relevant chronological record, set of records, and/or destination and source of records that provide documentary evidence of the sequence of activities that have affected at any time a specific operation, procedure, event, or device. An audit trail can further be described as a step-by-step sequential record that provides evidence of documented history of a transaction by which the accounting, trade details, or other financial data can be traced to their source. Audit trails are used to verify and track many types of transactions, including accounting transactions and trades in brokerage accounts.

In accounting terms, it refers to documentation of detailed transactions supporting summary ledger entries. This documentation may be on paper or on electronic records.

2. How does Audit trail works? 

A complete audit trail is the full record of events that occurred in the execution of a transaction. With every phase of a transaction receiving a timestamp revealing seller, purchaser, time of sale, and location of the sale, the audit trail records key details about transactions and processes for review in the future. They can be simple, or they can be complex.

The best example of a simple audit trail covering a transaction is a Haldiram’s Stores.

• You go to the store, select your item of purchase.
• The counter attendant will provide you a token for payment.
• You go to the cash counter, and give them the token and pay for the item through any mode available.
• In return you get a receipt having details of items purchase and payment made.
• You take this receipt to the delivery counter, to collect the item.
• The counter in-charge will tally the item with receipt and stamped the receipt as delivered.
• You walk out with a record of the transaction which contains details of- what you purchased, the exact time that it happened, and the location where the transaction took place.

In a more complex scenario, an audit trail is used to verify the source of funds for a down payment on a home by a mortgage lender. Financial regulators examine complex audit trails from brokerage firms when they want to investigate suspicious market activity.

3. Importance/ Takeaways of Audit Trail:

• Systematic approach for keeping records.
• Early detection of any irregularities.
• Find process breakdown.
• Identify internal fraud by keeping track.
• Provide evidence and information to regulators in cases of suspected fraud or illegal financial activity.
• Identify outside data breach issues.
• Required by companies to be in compliance with many statutory and regulatory provisions as well as accounting standards for best accounting practice.
• Sequential record detailing the history and events related to a specific transaction or ledger entry.

4. Statutory provisions of audit trail under Companies Act, 2013 and its effect on Companies:

As per Companies (Accounts) Second Amendment Rules, 2021 through MCA notification dated 24.03.2021, a new proviso has been added in Rules 3(1) of The Companies (Accounts) Rules, 2014, which states that-

“Provided that for the financial year commencing on or after the 1st day of April, 2021, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording an –

• • audit trail of each and every transaction;
  • creating an edit log of each change made in books of account along with the date when such changes were made; and
  • ensuring that the audit trail cannot be disabled.”

By MCA notification dated 01.04.2021, a substitution was made in proviso to sub-rule (1), for the figures, letters and words “1st day of April, 2021” the following has been substituted “1st day of April, 2022”.

Further by MCA notification dated 31.03.2022, another substitution was made in proviso to sub-rule (1), for the figures, letters and words “1st day of April, 2022” the following has been substituted “1st day of April, 2023”.

By this notification(s) it has being made mandatory from 1st April, 2023 for every company to add on the feature of audit trail in their accounting software in which it maintains its books of account. The feature of Audit trail should have an edit log which shall record each and every transaction along with modifications made at any point of time.

5. Will there be any change in the Auditor report? 

Through Companies (Audit and Auditors) Amendment Rules, 2021, effective from 01st April, 2021 and Companies (Audit and Auditors) Second Amendment Rules, 2021, effective from 01st April, 2021, following clause is inserted in Rule 11 of Companies (Audit and Auditors) Rules, 2014 on which Auditor of the Company will give their views and comments while preparing audit report:

“Whether the company, in respect of financial years commencing on or after the 1st April, 2023 has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention.”