Also called audit log.

Audit trail is like leaving foot prints on the soil, so that anyone can trace, whose foot prints it was.

Let us understand it further in simple words;

Recording of all events & transactions that has been recorded in the accounting software that can be traced, is AUDIT TRAIL.

It is actually a chronological sequence of events. So that we can trace the history of particular transaction, Like

1. User id; who accessed the system,
2. what data was accessed and
3. when it was accessed i.e. timestamp

Other than these features it also includes feature of

• Failed login attempts and
• System errors.

Let’s take an example;

XYZ Co. records all its data (Master data of vendor, purchase order, sale order, generating invoices etc.) in accounting software and there is no doubt that accounting software helps a lot to the company in maintaining financials. But there is no way to find anomalies, vulnerabilities in accounts of the company and who has made such anomolies in data, at what time , on which date, and  which data has been manipulated i.e. change. 

Concept of audit trail comes here to play it’s role;

First it was not possible to keep an eye on each & every activities or transaction or event that what is going on in the company. imagine about big industries like TATA , RELIANCE, ADANI etc.  if there is no audit trail in the company it becomes easy for the companies to change data for showing higher profits to attract foreign investors. Ultimately all the market is impacted, if there is no audit trail.

For the solution of this problem,

 Ministory of corporate affairs (MCA) introduced Rule 11(g) of Companies (Audit & Auditors ) Rules 2014.

Companies which records events or transactions in accounting software, shall use such accounting software which has a feature  of audit trail that cannot be disabled.

• Audit trail mandatorily applies on the following companies;
• Private companies as per section 2(68) of the Companies act, 2013 or registered under Companies act 1956 as applicable.
• Public companies as per section 2(71) of the Companies act, 2013 or registered under Companies act 1956 as applicable.
• One person company as per section 2(62) of the Companies act, 2013 or registered under Companies act 1956 as applicable.
• Companies owned by Government of India.
• State government Companies.
• Nidhi company as per section 406 of the Companies Act, 2013.
• Non-profit organization as per section 8 of the Companies act,2013.

• Audit trail applicability not falls on Companies which are incorporated outside india.

Consolidated Financials:

Companies; Where consolidated financials are prepared for a company incorporated outside india and the company incorporated in india, no provision for Audit trail  shall be applicable on company which was incorporated outside india.

Where one company is LLP and other is not LLP. Audit trail provision only applies on the company which is not LLP.

• Although there are many benefits of using  accounting software, which has a feature of audit trail

still, there are some business on which audit trail provision is not mandatory to apply.

1. Individual
2. Proprietorship i.e. a non-registered, unincorporated business run solely by one individual proprietor.
3. Partnership registered as per section 4 of the Partnership Act, 1932.
4. Limited Liability Partnership registered under Limited Liability Partnership Act, 2008.

The requirement of audit trail are applicable to the extent, company maintains its books of accounts in electronic form by using accounting software.

Apart from applicability, let’s also understand the responsibilities for Management as well as for Auditor;

Management Responsibility:

Proviso to Rule 3(1) of Companies (accounts) Rules, 2014.

For the F.Y. commencing on or after the 1^st day of April, 2023, every company which uses accounting software for maintaining its books of accounts, shall use only such software which has feature of audit trail of each transaction, creating an audit log of each change made in the books of accounts along with date when such changes were made and ensuring that the audit trail cannot be disabled.

Management has responsibility for the effective implementation of the requirement of proviso to rule 3(1).

Auditor’s Responsibility

Rule 11(g) of companies (Audit & Auditors) rules, 2014 Casts responsibility on the auditor to report in his auditor report under the section ‘Report on other legal and Regulatory Requirement’.

In addition, to comment on whether the company is using accounting software which has a feature of recording audit trail, the auditor is expected to verify the following aspects;

1. Whether audit trail feature can be disabled?
2. Whether audit trail feature was operated throughout  the year?
3. All transactions recorded in the software are covered in the audit trail feature?
4. Whether the audit trail has been preserved as per statutory requirement for record retention?

Assessment and reporting responsibility on auditor are not applicable, where books of accounts are maintained manually by the company, and the same would need to be reported as a statement of fact by the auditor under this clause.

Retaining Audit Trail

Every company which uses accounting software which has a feature of audit trail, shall retain audit trail for 8 years begins from financial year 2023-24.