Audit Trail in Accounting for Private Limited Companies

Audit Trail in Accounting for Private Limited Companies . Starting from April 1, 2023, the Ministry of Corporate Affairs (MCA) mandates companies in India to activate audit trails in their accounting software, aimed to improve transparency and accountability in financial reporting. With the rise of digitalization, businesses, especially in trade, are increasingly adopting POS and ERP software, which offer comprehensive security and traceability features. The new mandate emphasizes the importance of meticulous transaction recording and aligns with global trends towards data integrity and regulatory compliance.
Definition of “Company” Under the Companies Act:

Section 2(20) of the Companies Act, 2013: "Company means a company incorporated under this Act or any previous company law."

Public or Private Limited Company 
Big or Small category Company*
Service-oriented or Production-based
Profit-making or Not-for-Profit (Section 8 Company) 
Foreign Companies (Foreign Subsidiary or WOS)

Scope: This definition includes all types of companies:
Exclusions: Limited Liability Partnerships (LLPs), Firms, Trusts, and Proprietorships are not included under this definition.

Role and Functionality of Accounting Software

Definition: Accounting software is a computer program that assists bookkeepers and accountants in recording and reporting a firm's financial transactions.

Large Firms: Often implement customized solutions integrating data from various departments.
Small Firms: Typically opt for off-the-shelf products.

Variability: The functionality of accounting software differs from product to product.
Deployment: Accounting software can be deployed on-premises, hosted as software-as-a-service (SaaS), or in the cloud.
Manual Record-Keeping: If accounting and record-keeping are done manually with printed books of accounts, the audit trail requirement is not applicable.

Books of Accounts

Preparation and Maintenance: Every company must prepare and keep its books of accounts and financial statements for each financial year, providing a true and fair view of the company's state of affairs and explaining the transactions and maintained at the Registered office otherwise if keeping at other than registered Office, needs to rapport to the ROC in form AOC-5

Accrual Basis and Double Entry System: Accounts must be kept on an accrual basis and follow the double entry system of accounting.

Section 2(13) of the Companies Act: Defines "books of account" to include records related to:

All sums of money received and expended by the company and the related matters.
All sales and purchases of goods and services by the company.
The assets and liabilities of the company.
Items of cost as may be prescribed under section 148 for specified classes of companies.

Rule 11(g): Any software maintaining records or transactions falling under the definition of "books of account" must have an audit trail feature.

Audit Trail

Definition and Purpose: An audit trail (or audit log) is a security-relevant chronological record providing documentary evidence of the sequence of activities affecting a specific operation, procedure, event, or device.

Detailed Chronological Record: Tracks and traces all transactions, work processes, accounting details, and changes within the system.
Functionality: Allows auditors to trace the financial data of a particular transaction from the general ledger to its source document.

Regulatory Compliance and Applicability

Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014: Applicable from April 1, 2023, mandating companies to maintain an audit trail.
Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014: Requires the preservation of audit trails for statutory record retention, although this is not applicable to the financial year ending March 31, 2024.

Importance of Audit Trail

Security and Integrity: Ensures the security and integrity of financial records by providing a detailed log of all transactions and modifications.
Audit Facilitation: Helps auditors verify the authenticity and accuracy of financial records by tracing each transaction back to its origin.
Compliance: Ensures that companies adhere to statutory requirements for record-keeping and audit trails, thereby enhancing transparency and accountability.

By maintaining a robust audit trail in Accounting, companies can not only comply with regulatory requirements under Companies Act but also enhance the reliability and integrity of their financial reporting processes, necessary for maintaining stakeholder trust and ensuring effective governance.
Auditor’s Responsibility:
The Companies Act, 2013, under Section 143(3)(j), mandates auditors to report on specific matters, further detailed in Rule 11 of the Companies (Audit and Auditors) Rules, 2014, recent Companies (Audit and Auditors) Amendment Rules, 2021, introduced a new requirement under Rule 11(g), which obliges auditors to report on whether companies use accounting software with an audit trail feature for bookkeeping, broadens the auditors' responsibilities significantly. 
To assist auditors, the Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) has provided an "Implementation Guide on Reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014," offering detailed guidance on this new requirement.
What is a Small Company as per Companies Act 2013? 
Definition of "Small Company" according to Section 2(85) of Companies Act 2013:
A "small company" is defined as a company, excluding public companies, meeting the following criteria:
- Its paid-up share capital does not exceed fifty lakh rupees or such higher amount as may be prescribed, not exceeding ten crore rupees.
- Its turnover, as per the profit and loss account for the immediately preceding financial year, does not exceed two crore rupees or such higher amount as may be prescribed, not exceeding twenty crore rupees.
Exceptions to this definition include:
- Holding companies or subsidiary companies.
- Companies registered under section 8.
- Companies or body corporates governed by any special Act.
What is a Book of Accounts ?
The term "Books of Account" as defined in Section 2(13) of the Act encompasses the following records:

Receipts and Payments:

Includes all sums of money received and expended by the company.
Encompasses matters related to the transactions for which the receipts and expenditure occur.

Sales and Purchases:

Covers all sales and purchases of goods and services made by the company.

Assets and Liabilities:

Encompasses records related to the assets and liabilities held by the company.

Mandatory Cost Records under Section 148:

Refers to the items of cost as may be prescribed under Section 148.
Applies to companies belonging to any class specified under that section.

Which Software for Accounting is Good for the Audit Trail?
To know about software, connect with Compliance Calendar LLP, for getting best software suggestions and implementation in India. 
In conclusion, the implementation of audit trails in accounting software represents a significant step towards enhancing transparency and accountability in financial reporting for companies in India. As businesses transition into the digital era, the adoption of POS and ERP software solutions becomes crucial, not only for automation but also for ensuring comprehensive security and traceability. Compliance with the MCA's mandate starting from April 1, 2023, underscores the importance of leveraging technology to optimize financial governance practices and mitigate risks associated with financial data manipulation and fraud.

Starting from April 1, 2023, the Ministry of Corporate Affairs (MCA) mandates companies in India to activate audit trails in their accounting software, aimed to improve transparency and accountability in financial reporting. With the rise of digitalization, businesses, especially in trade, are increasingly adopting POS and ERP software, which offer comprehensive security and traceability features. The new mandate emphasizes the importance of meticulous transaction recording and aligns with global trends towards data integrity and regulatory compliance.

Definition of “Company” Under the Companies Act:

Section 2(20) of the Companies Act, 2013: "Company means a company incorporated under this Act or any previous company law."
- Public or Private Limited Company
- Big or Small category Company*
- Service-oriented or Production-based
- Profit-making or Not-for-Profit (Section 8 Company)
- Foreign Companies (Foreign Subsidiary or WOS)

Scope: This definition includes all types of companies:
Exclusions: Limited Liability Partnerships (LLPs), Firms, Trusts, and Proprietorships are not included under this definition.

Role and Functionality of Accounting Software

Definition: Accounting software is a computer program that assists bookkeepers and accountants in recording and reporting a firm's financial transactions.
- Large Firms: Often implement customized solutions integrating data from various departments.
- Small Firms: Typically opt for off-the-shelf products.

Variability: The functionality of accounting software differs from product to product.
Deployment: Accounting software can be deployed on-premises, hosted as software-as-a-service (SaaS), or in the cloud.
Manual Record-Keeping: If accounting and record-keeping are done manually with printed books of accounts, the audit trail requirement is not applicable.

Books of Accounts

Preparation and Maintenance: Every company must prepare and keep its books of accounts and financial statements for each financial year, providing a true and fair view of the company's state of affairs and explaining the transactions and maintained at the Registered office otherwise if keeping at other than registered Office, needs to rapport to the ROC in form AOC-5

Accrual Basis and Double Entry System: Accounts must be kept on an accrual basis and follow the double entry system of accounting.

Section 2(13) of the Companies Act: Defines "books of account" to include records related to:

All sums of money received and expended by the company and the related matters.
All sales and purchases of goods and services by the company.
The assets and liabilities of the company.
Items of cost as may be prescribed under section 148 for specified classes of companies.

Rule 11(g): Any software maintaining records or transactions falling under the definition of "books of account" must have an audit trail feature.

Audit Trail

Definition and Purpose: An audit trail (or audit log) is a security-relevant chronological record providing documentary evidence of the sequence of activities affecting a specific operation, procedure, event, or device.

Detailed Chronological Record: Tracks and traces all transactions, work processes, accounting details, and changes within the system.
Functionality: Allows auditors to trace the financial data of a particular transaction from the general ledger to its source document.

Regulatory Compliance and Applicability

Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014: Applicable from April 1, 2023, mandating companies to maintain an audit trail.
Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014: Requires the preservation of audit trails for statutory record retention, although this is not applicable to the financial year ending March 31, 2024.

Importance of Audit Trail

Security and Integrity: Ensures the security and integrity of financial records by providing a detailed log of all transactions and modifications.
Audit Facilitation: Helps auditors verify the authenticity and accuracy of financial records by tracing each transaction back to its origin.
Compliance: Ensures that companies adhere to statutory requirements for record-keeping and audit trails, thereby enhancing transparency and accountability.

Auditor’s Responsibility:

The Companies Act, 2013, under Section 143(3)(j), mandates auditors to report on specific matters, further detailed in Rule 11 of the Companies (Audit and Auditors) Rules, 2014, recent Companies (Audit and Auditors) Amendment Rules, 2021, introduced a new requirement under Rule 11(g), which obliges auditors to report on whether companies use accounting software with an audit trail feature for bookkeeping, broadens the auditors' responsibilities significantly.

To assist auditors, the Auditing and Assurance Standards Board (AASB) of the Institute of Chartered Accountants of India (ICAI) has provided an "Implementation Guide on Reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014," offering detailed guidance on this new requirement.

What is a Small Company as per Companies Act 2013?

Definition of "Small Company" according to Section 2(85) of Companies Act 2013:

A "small company" is defined as a company, excluding public companies, meeting the following criteria:

- Its paid-up share capital does not exceed fifty lakh rupees or such higher amount as may be prescribed, not exceeding ten crore rupees.

- Its turnover, as per the profit and loss account for the immediately preceding financial year, does not exceed two crore rupees or such higher amount as may be prescribed, not exceeding twenty crore rupees.

Exceptions to this definition include:

- Holding companies or subsidiary companies.

- Companies registered under section 8.

- Companies or body corporates governed by any special Act.

What is a Book of Accounts ?

The term "Books of Account" as defined in Section 2(13) of the Act encompasses the following records:

Receipts and Payments:

Includes all sums of money received and expended by the company.
Encompasses matters related to the transactions for which the receipts and expenditure occur.

Sales and Purchases:

Covers all sales and purchases of goods and services made by the company.

Assets and Liabilities:

Encompasses records related to the assets and liabilities held by the company.

Mandatory Cost Records under Section 148:

Refers to the items of cost as may be prescribed under Section 148.
Applies to companies belonging to any class specified under that section.

Which Software for Accounting is Good for the Audit Trail?

To know about software, connect with Compliance Calendar LLP, for getting best software suggestions and implementation in India.

In conclusion, the implementation of audit trails in accounting software represents a significant step towards enhancing transparency and accountability in financial reporting for companies in India. As businesses transition into the digital era, the adoption of POS and ERP software solutions becomes crucial, not only for automation but also for ensuring comprehensive security and traceability. Compliance with the MCA's mandate starting from April 1, 2023, underscores the importance of leveraging technology to optimize financial governance practices and mitigate risks associated with financial data manipulation and fraud.