What is Audit Trail

Today, 24th March 2021, the Ministry of Corporate Affairs (MCA) has issued two important Notifications, namely

  1. Amendment to Rule related to Accounts
  2. Amendment to Rule related to Audits

The Amendment to Accounts is something interesting and new to all businessmen. The Notification says “Provided that for the financial year commencing on or after the 1st day of April 2022, 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”

This means

  • Every company (private/public/listed/unlisted/Section 8, all registered as company under MCA)
  • From the 1st April 2021 (Postponed to 1st April 2022)
  • Should use accounting software which has a feature of audit trail
  • Create an edit log
  • Ensure that the audit trail cannot be disabled.

What is an audit trail? How does it work?

Before answering this, let me answer your question – Tally Software, Quick Books, Zoho, Xero, etc. have audit trail feature! So, no need to invest money in buying new software. Relax.

M/s Trial and Error is a partnership firm, which is using the Tally accounting package. They have purchased goods worth Rs.59,000 on 19th March 2021. The accounts executive passed an entry in the books on 20th March; the supervisor edited the transaction by amending the narration on 25th March; the Finance Manager edited the purchase value to Rs.50,000 and transferred the GST component to GST Input Credit ledger.

The audit trail of this transaction looks as under (you can download the audit trail report from Tools & Reports\General Reports\Audit Trail)

  • 19th March 2021 – entry created
  • 20th March 2021 – edited by Mr. Supervisor
  • 25th March 2021 – edited by Mr. FM

Thus, the trail (the log, chronological events pertaining to each transaction is recorded in the Audit Trail Report).  In short, an audit trail or audit log is a history of every transaction.

Why does the Government want this feature in the Accounting package?

To see if an invoice has been changed or altered or deleted at a subsequent date. Through the audit trail, one can see the original amount entered, date and the changed amount and date, changed by whom, etc. This is to know whether fudging of Sales or purchases are done by the company.

How will it impact the industry?

Some of the age-old practices such as changing the Invoice Date, value, description at a subsequent date get captured in the software. During the scrutiny/assessments, the Tax department or any regulator can ask for the audit trail of the specific transaction to see whether any alterations are done by the company. This may help the regulator to fix any fraudulent activities in books of accounts.

In software such as Quick Books this feature is already enabled and in packages like Tally, the feature has to be enabled. Will there be any additional cost for doing this? Not sure, the service provider may take a nominal fee for doing this service.

Notification regarding Audit

This is about additional matters to be reported by the Auditor in his annual report. One of the points in this Report which is added today is –

“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”

So, friends, accounts to be tamper-proof and the auditor has the responsibility of reporting if it has tampered. This feature will also help to plug in-house frauds if any.  Initially, one may find it difficult to adjust to the newer things, but slowly we will all get used to it. That is how we are tuned, aren’t we?

You will have lesser chances of manipulation from now on. The Government is watching your business closely! 

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 25+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional and Registered Valuer (F&SA).Prasad welcomes your comments and questions. Please email him at [email protected]

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