Understand the significance of audit trails in accounting software. Explore the benefits, challenges, and importance of maintaining audit trails for compliance, user accountability, security, and process improvement. Get insights into the amendments made by the MCA, the extension of the implementation, and the impact on businesses. Stay informed about the what, who, when, where, and how of maintaining an audit trail and address challenges to enhance efficiency.
The MCA vide its notification dated 24th March, 2021 had introduced the concept of audit trails by inserting proviso to rule 3(1) of the Companies (Accounts) Rules, 2014 wherein it was provided that “for the F.Y. commencing on or after 1st 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 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.”
However, the MCA has vide notification dated 31.03.2022 extends Implementation of Audit Trail software to financial year commencing on or after the April 1, 2023.
In this article, we’ll explore what audit trails are, why they are important and how they can be used to protect the businesses.
What is Audit Trail
An audit trail is a step-by-step sequential record of all the events that occur in a computer system or application. This includes any actions taken by users, such as creating, modifying, or deleting files or data, as well as any system events, such as backups or updates. The purpose of an audit trail is to provide a complete and accurate record of all activity in the system, which can be used to trace the source of any errors or problems that may arise.
The audit trail provides a “baseline” for analysis or an audit when initiating an investigation. The purpose or importance of an audit trail takes many forms depending on the organization: A company may use the audit trail for reconciliation, historical reports, future budget planning, tax or other audit compliance, crime investigation, and/or risk management.
Benefits of Audit Trail
1. Compliance: Different industries have different laws and regulations surrounding how businesses would perform and what laws they would have to comply with. The regulations require businesses to maintain a strong and accurate audit log and trail system. An audit trail provides a verifiable record of compliance with these regulations, which can be essential in the event of an audit or legal dispute.
2. User Accountability: A user is anyone who has access to the system. Implementing audit trails promotes appropriate user behavior, which can prevent the introduction of viruses, improper use of information, and unauthorized use or modifications. In addition, the user knows that their actions are automatically recorded and tied to their unique identity.
3. Reconstruction of Events: When an investigation is warranted or triggered, the first step to remediate a problem is knowing the “when,” the “how,” and the “what” of the event. Visibility into this information can aid in problem detection and prevent future occurrences of things such as hacking, system failures, outages, or corruption of information.
4. Security: Audit trails can help identify security breaches or attempts at unauthorized access to data. By monitoring activity within a system, businesses can quickly detect and respond to any suspicious behavior, preventing potential data breaches.
5. Improvement: By analyzing audit trails, businesses can identify areas where processes can be improved or automated, leading to increased efficiency and productivity.
6. Intrusion Detection: Intrusion detection is detecting attempts to break into an area and gain access. Numerous regulations have made it compulsory to ensure the privacy of data. It covers the protection of personal data and financial records, intellectual property and various other financial records.
7. Disadvantage of Audit Trail
The main disadvantage of audit trails is the extra work required to maintain them. This investment may be difficult to support in the case of a smaller and less-profitable business. A further concern is when computerized audit logs are used that automatically record all transactions; if anyone is given access to the logs, then transactions can be modified or deleted, obscuring what actually happened and making it much easier to commit fraud.
What should be Included
An audit trail should include the necessary information to understand what occurred and who was involved. The information should be collected and documented chronologically to outline what transpired. Other standard information that should be documented includes:
The What – The specifics of the item, transaction, or document being tracked should be known throughout the process.
The Who – Each individual involved in the process should be identifiable. There are often multiple people involved in a single audit trail.
The When – Documentation of when each action occurred is vital. This is your timestamp to see when items were completed or sent out.
The Where – Technology has made it simple to pinpoint where each action occurred. Maybe a team member submitted a document at home or sent an email within the office. Each location should be captured in the audit trail.
The How – The channels the item went through should also be identifiable. This could be an email, in-person exchange, or the mail.
How to Maintain an Audit Trail
Implementing a compelling audit trail requires consistent oversight and adjustments. If your business is trying out different audit trail procedures for the first time, it will most likely take trial and error before you find the procedures that work best for your company.
At first, you may need to review the audit trails weekly to ensure employees are going through the correct procedures.
After operations run smoothly, you can shift to monthly or quarterly audit trail maintenance. Each discrepancy in your audit should be immediately followed up on to determine weaknesses.
Challenges Associated with Audit Trail
Being a beneficial to the accounting software, it come with certain challenges. Some of them are:
1. The business may run into storage issues due to the high amount of data needed to keep an accurate audit trail. The business may need to upgrade servers to store all of the necessary information.
2. Businesses may experience lag time in opening files depending on the audit trail size. The difficulty of navigation can be improved with strong servers and speed optimization.
3. Determining how long to keep audit trails. Normally, the business should store audit trails until the project is complete. For example, an accounts payable audit trail should be kept until the invoice is paid. However, many businesses keep the documentation for as long as possible if storage is not an issue. Issues may arise months after the initial invoice is paid, making it essential to have the information accessible.
(The author can be reached at cashubhikhandelwal@gmail.com)
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