Audit Trail compulsory to be installed in accounting software w.e.f. 01.04.2023  

Introduction

The Ministry of Corporate Affairs (MCA) has issued two notifications, one on March 24, 2021 and the other on April 1, 2022, stating that all companies are now obligated to have an audit trail feature in their accounting software by April 1, 2023. The notification stated and informed all companies that effective April 1, 2023, the accounting software utilized by them must adhere to the provisions set forth in the Companies (Accounts) Rules, 2014. The Ministry of Corporate Affairs (MCA) has mandated the inclusion of an audit trail feature in accounting software to reduce the possibility of fraudulent transactions or tampering with the company’s financial records, as well as to improve transparency. The audit trail shall allow auditors to track each stage of a transaction’s financial data, starting from the general ledger.

What is Audit Trail?

• An audit trail is a record or set of records that provides evidence of the sequence of activities related to a specific operation, procedure, event, or device.
• It can also be referred to as an audit log.
• Audit trails are crucial for maintaining security and providing documentary evidence of transactions.
• They provide a step-by-step sequential record that traces financial data back to their source.
• Audit trails are used to verify and track various types of transactions, including accounting transactions and trades in brokerage accounts.
• In accounting, it refers to documentation of detailed transactions that support summary ledger entries.
• This documentation can be in either paper or electronic form.
• Audit trails help prevent fraudulent activities by tracing any unauthorized transactions.
• They can also be used to improve accountability and compliance with regulations.
• Overall, audit trails are essential for maintaining accurate financial records and ensuring the integrity of transactions.

Key Features and Impact of the Audit Trail Announcement by MCA

• The new rule mandates every Company incorporated under the Companies Act, 2013 (or 1956), w.e.f., 01-Apr-2023, to use Accounting Software having the feature of “Edit Log”, which cannot be disabled.
• The Edit Log feature records an audit trail of each and every transaction, creates an edit log of each change made in books of account along with the date when such changes were made and ensures that the audit trail cannot be disabled.
• The Audit Trail Report generated by the accounting software must be maintained as a record by the company. The Audited Financial Statements must have details/contents of this Report as this is statutory compliance.
• Tally users can activate the Edit Log feature in Tally Prime through a Tally Consultant. Every voucher, Modified, Amended, Deleted, entered in back date shall form part of ‘Edit Log’.
• The Companies must ensure that no back-dated entries are passed, no voucher deleted/amended or modified. The Accounts Team must adopt this behavior in the strictest manner, failing which it will create unnecessary trouble for the Company.

Importance of Audit Trails

Here are some key takeaways regarding the importance of audit trails:

• A systematic approach for record-keeping.
• Enables early detection of irregularities and process breakdown.
• Helps identify internal fraud by keeping track of activities.
• Provides evidence and information to regulators in cases of suspected fraud or illegal financial activity.
• Helps identify outside data breach issues.
• Required by companies to comply with statutory and regulatory provisions and accounting standards.
• A sequential record detailing the history and events related to a specific transaction or ledger entry.

Conclusion

In conclusion, Audit Trail Announcement by MCA is a positive step towards enhancing transparency and reducing data manipulation of companies. The implementation of the rule from 1st April, 2023, will require companies to use accounting software with the Edit Log feature and maintain the Report as a record. It is important for companies to adopt this behavior in the strictest manner to avoid any penalties or legal complications.