Audit Trail – Will it Bring A Paradigm Shift in Accounting Practice?

Audit Trail – Will it Bring A Paradigm Shift in Accounting Practice?

The Ministry of Corporate Affairs in exercise of the powers conferred by section 134 read with section 469 of the Companies Act, 2013 has made further amendments in Companies (Accounts) Rules, 2014 with Notification G.S.R. 205(E) dated on 24-03-2021.

These rules are called the Companies (Accounts) amendments Rules, 2021.

Effective Date: 1st April 2021.

Introduction:

Section 128:

  Ø  Every company shall prepare and keep its books of accounts, other relevant books and papers, and financial statements for each financial year at its Registered Office.

Ø  The books of accounts, other relevant books and papers and financial statements shall explain the transactions effected both the Head Office and Branch offices.

Ø  The books of account, other relevant papers and financial statements shall be kept on an accrual basis and according to double entry system of accounting.

 

2^nd Proviso to Section 128:

The companies are allowed to keep their books of account and other relevant papers in electronic mode in such manners as prescribed under Companies (Accounts) Rules 2014.

 

Rule 3 of Companies (Accounts) Rules 2014:

As per Rule 3 of Companies (Accounts) Rules 2014, the companies are allowed to keep their books of account and other relevant papers in electronic mode. This rule also prescribes certain conditions for maintaining the books and account and other relevant books and papers in electronic mode viz.

Ø  The books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India so as to be usable for subsequent reference.

Ø  They shall be retained completely in the format in which they were originally generated, sent or received, or in a format which shall present accurately the information generated, sent or received and the information contained in the electronic records shall remain complete and unaltered.

Ø  The information in the electronic record of the document shall be capable of being displayed in a legible form.

Ø  There shall be a proper system for storage, retrieval, display, or printout of the electronic records.

Ø  Back-up of the books of account and other books and papers of the company shall be maintained.

Ø  Company shall intimate to the Registrar on an annual basis at the time of filing of financial statement the name of the service provider, the IP address of the service provider, the location of the service provider, cloud address of the service Provider.

 

The Companies (Accounts) Amendment Rules, 2021:

The Companies (Accounts) Amendment Rules, 2021 has inserted a proviso to the Rule 3 of Companies (Accounts)Rule 2014, which requires every company shall use such accounting software which has the facility of providing a ‘Audit Trail’ of records. The said amendment is reproduced below.      

 

“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.”

 

Decoding the 1^st proviso to Rule 3 of Companies (Accounts) Rules 2014, as amended by the Companies (Accounts) Amendment Rules 2021.

 

a)     This proviso applies to companies maintaining books of account through accounting software.

b)     Accounting software shall have a feature of recording the audit trail.

c)     Audit trial shall create the log of each change made including the date of the change.

d)     The Audit Trail cannot be disabled.

 

What is an Audit Trail?

An audit trail is a tool by which accounting transactions are recorded on a step-by-step basis enabling tracing of a transaction to its source.

It helps a person verifying the books of account to trace financial data from output stage to its source document ex. Voucher, Invoice, Receipts enabling the reliability on accounts so verified.

Example:

Let’s say a fabric manufacturing unit needs to purchase raw cotton.

The ‘Cotton Purchase Audit Trail’ shall be as below.

1)     Fabric order from the Marketing Team.

2)     Requisition for cotton from the Production Department to Stores Department.

3)     Stores, in turn, will place an order with the Purchase Department.

4)     Requesting quotations from prospective suppliers.

5)     Process of selecting the best quotation.

6)     Placing the order for Supply.

7)     Purchase of cotton.

 

Importance of Audit Trail in present computerized Accounting Environment.

1) It helps auditors to trace any financial transaction to its source helping them to get reliability on the accounts so audited.

2) Prevents misrepresentation of facts: As each transition can be traced to its source, any fraud, misrepresentation of financial facts can be easily traced.

3) When a Company’s Audit trail is properly followed, The Management is less worried about the misappropriation.

 

 

 

The concept of the Audit Trail is not new to Accounting Professionals. It is as old as the start of the accounting practice. Currently, this tool is indispensably used while auditing in a risk environment though it is not mandatory. Now, the same has been made mandatory by the law itself. This is a welcome move keeping in the interest of true and transparent reporting. But, the said rules are to be followed by all companies, without giving relaxations to Small Companies, One Person Companies, Section 8 Companies, and other companies where the transactions and reporting aspects are very minimal. Though it is a welcome move, the same should not cause any undue hardships for small players.  

 

This Rule will certainly, bring a revolutionary change in accounting practice and reporting thereof too. Perhaps, this tool may act as a single mechanism for fraud detection, misrepresentation, etc.

 

 

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CA Sanjay R Shetty