An audit trail is a step-by-step record by which accounting, trade details, or other financial data can be traced to their source. Audit trails are used to verify and track many types of transactions, including accounting transactions and trades in brokerage accounts.
It is an detailed chronological record where accounting, financial data and other details are tracked and traced. It tracks all kinds of transactions work processes, accounting details and changes made there within and especially MCA has now made it mandatory w.e.f. 01st April, 2023.
Applicability of provisions of Audit Trail
The MCA vide its notification dated 24th March, 2021 had introduced the concept of audit trails by inserting proviso to rule 3(1) of the Companies (Accounts) Rules, 2014.
the MCA has amended the proviso vide Companies (Accounts) Second Amendment Rules, 2022. Hence the provision of audit trail is now applicable w.e.f. 1st April, 2023.
Type of companies who should follow the rule
As per the Companies Act 2013, the new amendment released by the MCA will be applicable to the following companies, including the companies that are managed by State and Central Government, NGOs who are receiving funds from various stakeholders:
- All Public and Private Limited Companies
- One Person Companies (OPCs)
- Companies owned by Government of India
- State Government Companies
- Not-for-Profit Companies/Organization
- Nidhi Companies
The Importance of an Audit Trail in Financial Reporting
An audit trail is an essential tool for financial reporting, as it provides a comprehensive record of all changes made to financial data, including the date and time of the change, the user who made the change, and a description of the change. This can help ensure the accuracy and integrity of financial data and can be used to support internal and external audits and also helps companies to meet regulatory and compliance requirements.
Factors to Consider
An audit trail generally starts with an invoice receipt. To verify the invoice receipt, the auditor backtracks the transaction from account payable to the source of the operation. Also, the mode of payment for a particular transaction, i.e. a digital payment or cheque is validated during the process.
Most businesses and organisations use audit trails as a useful management tool for monitoring finances along with other various resources. Audit trails are considered one of the best tools for validating transactions, verifying, and discovering missing information in a company’s financial data.
What must be included in the Audit Trail?
- Details of every transaction that takes place within the company, including the date, amount and nature of the transaction.
- Details of every change made to the books of accounts, including the date and nature of the change.
- Details of all authorization for transactions and changes made to the books of accounts, including the names of the persons who authorized them.
- Details of all approvals and rejections of transactions and changes made to the books of accounts, including the names of the person who approved or rejected them.
- Details of all access to the books of accounts, including the date and time of access, and the name of the person who accessed them.
- Details of all backup and restoration activities related to the books of accounts.
In conclusion, the new reporting requirement under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 is a step towards increasing the transparency and reliability of financial reporting. This will enable the auditors of companies to discharge their duties more efficiently and effectively, thereby ensuring that the financial reporting process is accurate and reliable.
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