Every Company to Check whether Audit Trail feature activated in its accounting software or not as effective for financial year beginning on or after 01.04.2023
Introduction: As of April 1, 2023, the Companies Act, 2013, has incorporated the concept of Audit Trail in India. This mandates companies using accounting software to record a detailed audit trail for every transaction. The article delves into the significance of this amendment, the obligations placed on companies, and the role of auditors in ensuring compliance.
Audit Trail Under Companies Act, 2013
With effect from 01.04.2023
⇒ Introduction
The concept of Audit Trail was introduced for the first time in India in March 2021 wherein following amendments were done to Rule 3(1) of the Companies (Accounts) Rules, 2014 :
(1) The books of account and other relevant books and papers maintained in electronic mode shall remain 3[accessible in India, at all times] so as to be usable for subsequent reference.
1[Provided that for the financial year commencing on or after the 6[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 books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.]
1 Inserted by the Companies (Accounts) Amendment Rules, 2021. Effective from 01st April, 2021
6. Substituted by The Companies (Accounts) Second Amendment Rules ,2022
⇒ Significance
An onerous duty has been cast on every company, which uses accounting software for maintaining its books of account :
- For the financial year commencing on or after 01.04.2023
- To mandatorily 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.
This law was initially promulgated for applicability from the financial year commencing on or after the 1st Day of April 2021, but it was deferred twice and finally made applicable for financial year beginning on or after 1st Day of April 2023.
⇒ What is Audit Trail
An audit trail is a step-by-step sequential/ chronological 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.
Basically, an Audit trail is based on concept of 3W approach i.e. When, Who and What?
=> WHEN changes were made i.e. Date and Time (Time Stamp)
=> WHO made those changes i.e. User ID
=> WHAT data was changed i.e. transaction reference, success/ failure
⇒ Duty Also Cast on Auditor To Report on Compliance to Audit Trail Maintenance Corresponding changes were also made to Rule 11 of the Companies (Audit and Auditors) Rules, 2014 by issuance of the Companies (Audit and Auditors) Amendment Rules, 2021 vide notification ref G.S.R. 206(E) dated 24th March 2021 to provide as under :
11 Other Matters to be Included in Auditors Report
(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.”
This change in reporting requirement by Statutory Auditor was also initially promulgated for applicability from the financial year commencing on or after the 1st Day of April 2021, but it was deferred to be finally made applicable for financial year beginning on or after 1st Day of April 2023.
⇒ Responsibility on the Statutory Auditor
Rule 11(g) thus casts responsibility on the Statutory auditor of a company in terms of reporting on audit trail by making a specific assertion in the audit report to the effect that :
- whether the company has used an accounting software for maintaining its books of account, which has a feature of recording audit trail, i.e. edit log facility;
- whether the audit trail feature was enabled/ operated throughout the year?
- whether all transactions recorded in the software are covered in the audit trail feature?
- whether the audit trail feature is configurable (i.e. if it can be disabled or tampered with)?
- whether the audit trail has been preserved as per statutory requirements for record retention ?
⇒ Mutual Responsibility
Thus, the law has mandated a statutory responsibility on the management of Companies to implement the requirement of maintenance of Audit trail (i.e. edit log feature in the accounting software used for maintaining its books of account) and on the Statutory Auditor to check and verify its effective implementation, for books of accounts maintained for financial year commencing on or after the 1st day of April 2023.
⇒ Way Ahead
Most of the accounting softwares that any business entity use currently have this feature of audit trail or “edit log” already provided in their softwares. But it needs to be enabled to activate compulsory maintenance of audit trail as mandated by law for the COMPANIES, for books of accounts maintained for financial year commencing on or after the 1st day of April 2023, as informed by us on 06.04.2023. Hence, pl check if enabled or not or else get in touch with your vendor from whom such accounting software installed and get the same implemented at the earliest.
⇒ FAQs for Further Clarity
Q.1 Types of Companies to Which Audit Trail provisions applicable ?
Ans: The Provisions of Audit Trail applicable on all the Companies including Small Company, Section 8 Company, One Person Company, Listed Company, Nidhi Company, Producer Company, etc. All the Companies registered under Companies Act are required to comply with the provisions of the Audit Trail.
Q.2 Whether Audit Trail applicable on the LLP?
Ans: The provisions of Audit Trail applicable only on the Companies. It is not applicable to other entities like LLP, Partnership Firm, Sole proprietorships, etc.
Q.3 Whether Audit Trail applicable on the Foreign Company (Branch Office, Liaison Office)?
Ans: As per the Companies (Registration of Foreign Companies) Rules, 2014, the provisions of “Chapter X of the Act: Audit and Auditors” and Rules made there under apply, mutatis mutandis, to a foreign company as defined in the Act. Accordingly, the above reporting requirements would be applicable to the auditors of foreign companies as well.
Q.4 Whether Audit Trail applicable on the Consolidated Financial Statement ?
Ans: Audit Trail applicable on both in case of standalone financial statements and consolidated financial statements.
Note: However, while reporting on consolidated financial statements, the auditor may observe that certain components included in the consolidated financial statements are (a) either not companies under the Act, or (b) some components are incorporated outside India. The auditors of such components are not required to report on these matters since the provisions of the Act do not apply to them.
Q.5 Time Period for Which Records with Audit Trail to be maintained ?
Ans: Section 128(5) of the Act, which requires books of account to be preserved by companies for a minimum period of eight years. Therefore, the company would need to retain audit trail for a minimum period of eight years i.e. effective from the date of applicability of the Account Rules (i.e. currently 1st April 2023 onwards).
Q.6 Whether Audit Trail to be maintained for each and every transaction ?
Ans: It may be noted that companies are required to maintain audit trail (edit log) for each change made in the books of account. Accordingly, the term ‘all transactions recorded in the software’ would refer to all transactions that result in change to the books of account. For e.g. creation of a user in the accounting software may be construed as a transaction in the software. However, creating a user account in the accounting software would not change the records of books of account as defined in Section 2(13) of the Act, whereas adding a new journal entry or changing an existing journal entry will be construed as a change made in books of account.
Q.7 Where can we maintain accounting software having audit trail feature ?
Ans: The accounting software may be hosted and maintained in India or outside India (but shall be accessible in India, at all times) or may be on premise or on cloud or subscribed to as Software as a Service (SaaS) software. Further, a company may be using software which is maintained at a service organization. For e.g. the company may have outsourced its payroll processing with a shared service center and the shared service center may use its own software to process payroll for the company.
Q.8 Do we need to maintain Backup of such accounting software having audit trail feature ?
Ans: As per provisions of Rule 3 of the Companies (Accounts) Rules, 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. One can opine that, according to this amendment, Companies are required to take backup of the Books of Accounts and other relevant records, if maintained in electronic mode, on a DAILY BASIS.
Q.9 What are the different softwares on which audit trail feature applicable ?
Ans: It may be noted that any software used to maintain books of account will be covered within the ambit of this Rule. Any software that maintains records or transactions that fall under the definition of Books of Account u/s 2(13) of the Act will be considered as accounting software for this purpose. For e.g. if sales are recorded in a standalone software and only consolidated entries are recorded monthly into the accounting software used to maintain the sales ledger, the sales software should also have the audit trail feature since sales invoices would be covered under Books of Account as defined u/s 2(13) of the Act.
Conclusion: The introduction of Audit Trail under the Companies Act, 2013, from April 1, 2023, marks a significant shift in the recording and monitoring of financial transactions. This amendment places a dual responsibility on companies to use compliant accounting software and auditors to report on its effective implementation. Understanding the nuances of audit trail provisions is crucial for both entities to ensure regulatory compliance and maintain the integrity of financial records. Companies are advised to promptly assess and update their accounting software to meet the new requirements. The FAQs provided offer additional clarity on the applicability and nuances of the Audit Trail provisions.
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