What is an Audit Trail?
An Audit Trail is a detailed, chronological record where accounting, and other financial data are tracked and traced. It is advisable to have an Audit trail as it would verify and track all kinds of transactions, work processes, accounting details, trades, accounts etc, especially now that the MCA has made it mandatory.
The Law – Companies (Accounts) Rules 2014 – Applicable to Companies
Rule 3(1) of Companies (Accounts) Rules 2014 requires that with effect from 1st April 2023 every company which uses any accounting software for maintaining books of accounts shall use such accounting software which has:
1. the feature of recording audit trail of each, and every transaction;
2. creating an edit log of each change made in books of accounts along with date when such change was made and
3. ensure that the audit trail cannot be disabled.
Companies (Accounts) Rules, 2014 also require that:
1. the books of accounts shall remain accessible in India at all times;
2. that the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a daily basis.
The Law – Companies (Audit and Auditors) Rules 2014 – Responsibilities of Auditors
Section 143(3) of the Companies Act, 2013 prescribes various matters on which auditors are required to report in their auditor’s report. Section 143(3)(j) states that auditor’s report shall also state such other matters as may be prescribed. Rule 11 of the Companies (Audit and Auditors) Rules, 2014 specifies such other matters that are to be reported by auditors.
Companies (Audit and Auditors) Rules, 2014 was amended on 24th March 2021 whereby an additional reporting point must be incorporated in the Auditors report, i.e., “Whether the company has used such accounting software for maintaining its books of accounts which
1. has a feature of recording audit trail (edit log) facility and
2. the same has been operated throughout the year for all transactions recorded in the software and
3. the audit trail feature has not been tampered with and
4. the audit trail has been preserved by the company as per statutory record for record retention.”
This additional clause was initially made applicable from 1st April 2021, then postponed to 1st April 2022. However, it is now finally applicable from 1st April 2023.
This clause puts an additional responsibility on statutory auditors of all companies to ensure that the company records entries in their electronic books of accounts (from 1st April 2023) in such a way that details of transactions along with
1. who recorded the entry and
2. when (date and time) is implemented and preserved.
3. If the transactions undergo modification or deletion, such details along with date and time of such action needs to be preserved chronologically.
| Text of Proviso to Rule 3(1) of Companies (Accounts) Rules,2014 | Text of Rule 11(g) of Companies (Audit and Auditors) Rules, 2014 |
| Applicable to Companies | Applicable to Auditors |
| Provided that for the financial year commencing on or after the 1st day of April 2023, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled. | Whether the company, in respect of financial years commencing on or after the 1st April, 2022, 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. |
Applicability
Audit trail is applicable to all companies irrespective of its size, nature of business etc. Even small companies and section 8 companies should comply with it.
Effect on accounting system
Once the ‘audit trail’, ‘edit log’ feature is installed or enabled all backdated entries will get recorded, including any alteration made to any entry in the Books of Account.
For example, if the accountant passes an entry in the month of October 2023 pertains to the month of May 2023, then a record will be maintained in the accounting system regarding the month the entry was passed (i.e., October 2023) and the actual period that it pertains to (i.e., May 2023). This is akin to a self-installed monitoring system within the company’s accounting system in order to enhance transparency and accountability.
Reasons why Audit Trail is crucial for an organization
Areas of concern for management
The auditor based on the nature of default shall report the following:
1. Audit trail feature was disabled for one of the books of account/records or for an accounting software – (e.g., fixed asset software did not have audit trail)
2. Audit Trail feature is not operating effectively during the reporting period
3. Accounting software is maintained by third party and auditor is unable to assess whether audit trail feature can be disabled during the reporting period
4. The audit trail has not been preserved by the company as per the statutory requirements for record retention.
5. Migration from one software to the other happened during the year or higher version of software installed and auditor is unable to obtain sufficient and appropriate evidence
Further the auditor might state the following:
| Instances of accounting software for maintaining its books of account which did not had a feature of recording audit trail (edit log) facility and the same was not operated throughout the year for all relevant transactions recorded in the software | No of instances |
| Instances of audit trail feature being tampered with | |
| Instances of non-preservation of the audit trail |
The management should follow the compliances as mentioned related to audit trail and ensure no modified reports as mentioned above are reported by the auditor by complying to it.
Exercise cation and due diligence
Going forward, accountants should record every entry in the electronic books of account very carefully, accurately, and timely. Any subsequent modification/deletion will leave an audit trail scar for the accountant to answer.
How to manage audit trail in Tally Prime?
Managing the audit trail in Tally Prime is simple. All you need to do is download and install the Tally Prime Edit Log Release 2.1 (if you are a company under MCA’s purview or wish to manage log all the time by default) and load your company data. That’s it. Any edits or changes will be captured automatically and tracked from the logs.
Click here to download T ally Prime Edit Log 2.1: https://tallysolutions.com/download/#gref
Illustrative reporting by Auditors in case of Standalone Financial Statements
Based on our examination which included test checks, the company has used an accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has operated throughout the year for all relevant transactions recorded in the software. Further, during the course of our audit we did not come across any instance of audit trail feature being tampered with. [Additionally, the audit trail has been preserved by the company as per the statutory requirements for record retention.
FAQs
| S. No. | FAQ | Answers |
| 1 | When is Audit Trail Applicable from? | Transactions entered from 1st April 2023 i.e. FY2023-24 onwards |
| 2 | I have not passed any entry for a particular day, should I take the backup? | No |
| 3 | it is not mandatory for public charitable trusts or for societies registered under the Act of 1860 | No |
| 4 | It is not mandatory for Limited liability Partnership (LLP) Firms? | No |
| 5 | I am using Tally Software for accounting, can I maintain ‘Audit Trail’ and ‘edit log’ feature | this feature in available in Tally Prime but not in Tally ERP9 (follow the process given to activate) |
| 6 | I am maintaining my accounts annually without any software, how do I maintain Audit Trail. | Audit Trail is not applicable If you maintain your accounts manually. |
| 7 | Do I have to maintain the audit trail for previous year figures (FY2022-23) reported in the Financial Statement of Current Year (FY2023-24) | No, the audit trail is applicable for 1st April 2023 |
| 8 | I am using separate software for sales and payroll, do I have to maintain audit trail for those software’s? | Yes, for example if sales are recorded in a standalone software and only consolidated
entries are recorded monthly into the software used to maintain the general ledger, the sales software should also have the audit trail feature since sales invoices would be covered under Books of Account as defined under section 2(13) of the Act. |
| 9 | Is audit trail to be maintained only for purchase and sales? Or Receipts and payments? | Audit Trail to be maintained for all books of accounts and it includes records maintained in respect of— (i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place; (ii) all sales and purchases of goods and services by the company; (iii) the assets and liabilities of the company; and (iv) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section |
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GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS
Notification
New Delhi, the 24March, 2021
G.S.R….. (E).- In exercise of the powers conferred by sections 139, 143, 147 and 148 read with sub-sections (1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules further to amend the Companies (Audit and Auditors) Rules, 2014, namely:—
1. Short title and commencement.- (1) These rules may be called the Companies (Audit and Auditors) Amendment Rules, 2021.
(2) They shall come into force with effect from the 1st day of April, 2021.
2. In the Companies (Audit and Auditors) Rules, 2014, in rule 11,‑
(1) clause (d) shall be omitted.
(2) after clause (d), the following clauses shall be inserted, namely:‑
“(e) (i) Whether the management has represented that, to the best of it’s knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the company to or in any other person(s) or entity(ies), including foreign entities (“Intermediaries”), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the company (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;
(ii) Whether the management has represented, that, to the best of it’s knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been received by the company from any person(s) or entity(ies), including foreign entities (“Funding Parties”), with the understanding, whether recorded in writing or otherwise, that the company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
(iii) Based on such audit procedures that the auditor has considered reasonable and appropriate in the circumstances, nothing has come to their notice that has caused them to believe that the representations under sub-clause (i) and (ii) contain any material mis-statement.
(f) Whether the dividend declared or paid during the year by the company is in compliance with section 123 of the Companies Act, 2013.
(g) Whether the company 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.”.
[F. No.1/33/203.CL-V (Part)]
K. V. Murty,
Joint Secretary to the Government of India
Note: The principal rules were published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i) vide number G.S.R. 246(E), dated the 31st March, 2014 and subsequently amended as follows:‑
1. S.R. 722 (E) dated the 14th October, 2014;
2. S.R. 972 (E) dated the 14th December, 2015;
3. S.R. 307(E) dated the 30th March, 2017;
4. S.R. 621(E) dated the 22nd June, 2017;
5. S.R. 174(E) dated the 16th February, 2018;
6. S.R. 432(E) dated the 7th May, 2018; and
7. G.S.R. 461(E) dated the 17th May, 2018.
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Disclaimer : The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. No one should act on such information without appropriate professional advice, but only after a thorough examination of the particular situation.
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