Introduction:

Audit trails, also known as audit logs, play a vital role in ensuring transparency, accountability, and accuracy in business transactions. They provide a complete record of actions taken within a system, including details such as who performed the action, when it occurred, and any changes made. In the context of technology, audit trails are electronic records that capture all system activities and transactions, helping organizations review system configuration, data, and user activities. This article discusses the mandate for audit trails, their importance in business, and the steps companies and auditors need to take for compliance.

Mandate of Audit trail

On March 24, 2020, the Ministry of Corporate Affairs (MCA) in India mandated the use of audit trails for companies starting from April 1, 2020, as per the amendment to the MCA Gazette Notification No. GSR 205(E). This was deferred twice , however now it is applicable for all companies in India starting April 1, 2023. The requirement was aimed at enhancing transparency and accountability in financial reporting. It states that companies using accounting software must utilize software that records an audit trail of each transaction, maintains an edit log of changes made in the books of account, and ensures that the audit trail cannot be disabled. The amendment also requires auditors to report on the usage and preservation of audit trails.

The Need for Audit Trails and the Business Benefits

Audit trail or edit log several benefits to businesses including:

1. Documentation and Reconstruction: Audit trails provide proper documentation for present and future reference, facilitating the reconstruction of events if required.
2. Error Detection and Root Cause Analysis: By transparently identifying errors, audit trails enable businesses to rectify them, conduct root cause analysis, and improve processes, leading to a reduction in errors over time.
3. Timely Error and Fraud Detection: Regular review of audit trails helps identify missing information, abnormal activities, and anomalies that can be analyzed for timely resolution, preventing and detecting errors and fraud.
4. Business Insight and Decision-making: Analyzing audit trails using analytics allows businesses to gain valuable insights and make informed decisions.
5. Enhanced Security and Transparency: Audit trails enhance the security and transparency of financial transactions by identifying backdated, abnormal, or outlier transactions for appropriate review.
6. Improved Trust and Financial Performance: Audit trails contribute to increased trust in financial information, as they bring transparency to financial recording and reporting. They also provide auditors with a better view of a company’s financial performance, helping to verify and check transactions

What Companies Need to Do

It is mandatory for all companies in India to implement audit trail on their accounting software which maintain book of accounts. Here are some of the recommended actions for them to consider:

1. Define Audit trail Policies and Procedures: Establish policies, procedures, and guidelines for audit trails and assign responsible personnel to define, maintain, and monitor compliance.
2. Identify Accounting Systems: Identify all financial accounting systems and data entry points and ensure audit trail functionality is available in each system.
3. Enable and Record Transactions: Enable and record financial transactions, audit logs, and configuration changes in financial systems throughout the year.
4. Maintain Edit Logs: Maintain an edit log for each change made in the books of account, including details such as the date of the change, the person responsible, and the previous and current values.
5. Review Software Compatibility: If existing accounting software lacks audit trail functionality, work with software providers to find a solution or consider migrating to a new application that ensures adequate audit trail capabilities.
6. Lock Audit Trail Configuration and evaluate change control: Prevent unauthorized access to audit trail configuration settings, monitor compliance, and ensure the configuration remains unchanged.
7. Preserve and Retain Reports: Maintain audit trail reports in an uneditable format and retain them for the required period i.e eight years.
8. Regular Review and Access Control: Regularly review audit trails, assign authorized personnel for maintaining audit log configuration, audit trail reports, and reviewing audit trails.

What auditor have to do

Auditors have an essential role in auditing and reporting on audit trail compliance. Here are some key tasks for auditors in this regard:

1. Verify Software Compliance: Verify if the accounting software used by companies has the required audit trail functionality and if the management has complied with the legal and organizational requirements.
2. Review policy and Governance Responsibility: Review the governance, roles, and responsibilities related to recording and monitoring audit trails in financial systems to ensure appropriate segregation of duties.
3. Validate Transaction Accuracy: Check audit trail reports to ensure transparent, accurate, complete, and fair recording of transactions. Address any exceptions found during the review.
4. Review Audit Trail Integrity: Verify that the audit trail feature was enabled throughout the year without tampering or disabling. If disabled, review the reasons and evaluate the alternate logging procedures followed
5. Validate Audit Log Retention: Verify the process for retaining audit logs, ensuring they are backed up and retained as per policies and legal requirements.
6. Evaluate IT Change Management Controls: Review the overall IT change management controls concerning audit logs

Conclusion

Implementation of Mandate for audit trails will enable companies to gain the benefits of transparency, trust, and improved financial reporting. They by ensuring compliance with audit trail requirements can enhance stakeholder including auditors confidence, improve business processes, and strengthen their brand perception.