What is an audit trail?
An audit trail, for a company, is the edit log in its accounting software: a record of each transaction and of each later change, with the date of the change. From 1 April 2023 a company that keeps its books in accounting software may use only software that has this feature, and the feature cannot be disabled.
What must the software record?
Rule 3(1) of the Companies (Accounts) Rules, 2014 requires three things together.
- An audit trail of every transaction.
- An edit log of each change, with the date the change was made.
- A feature that cannot be switched off.
The log shows who changed an entry and what it said before. It is not a second set of books, and it is not the statutory audit itself. The audit reads the log.
Which entities does the rule cover?
Every company that uses accounting software for its books, including a private company, a public company, a one person company, a small company, and a section 8 company. Turnover is irrelevant.
A partnership firm, a proprietorship, and an LLP are not companies, so this rule does not apply to them. A company that still keeps manual books is outside the software proviso. The moment the books move into software, the proviso applies.
What does the auditor report?
Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 requires the auditor to state whether the company used software with an audit trail, whether that trail operated throughout the year for all transactions and was not tampered with, and whether it was preserved for the statutory retention period. A gap is reported in the auditor’s report.
How long is the log kept?
Section 128 requires the books of account to be kept for eight years. The audit trail is preserved with those books for that retention period. Backing up the file does not replace a log that records each edit. The financial statements are still approved by the board and adopted at the annual general meeting.
Frequently asked questions
Four questions cover switching the log off, an LLP, a small company, and the audit report.
Can the company switch the audit trail off?
No. The feature has to stay on for every transaction recorded in the software. A log that can be disabled does not meet the rule.
Does the rule apply to an LLP or a proprietorship?
No. Rule 3(1) is a company rule. A partnership firm, a proprietorship, and an LLP are outside it.
Does a small company get an exemption?
No. Size and turnover do not take a company out of the rule if it keeps its books in accounting software.
Is a qualified audit report the only result of a gap?
The auditor states whether the feature operated throughout the year and was not tampered with. A gap is reported there. The Act’s penalties for books of account are separate.
Sources
The software rule is Rule 3(1) of the Companies (Accounts) Rules, 2014. The auditor’s statement is Rule 11(g).