India MCA Audit Trail Notification: Everything You Need To Know

Posted In | Finance | Accounting Software | Architecture Firms | Consulting Firms

What is an Audit Trail?

An Audit Trail is a detailed, chronological record where accounting, project details, and other financial data are tracked and traced. It is advisable to have an Audit trail as it would verify and track all kinds of transactions, work processes, accounting details, trades in brokerage accounts etc, especially now that the MCA has made it mandatory.

MCA Notification requiring companies to maintain Audit Trail

According to The Indian Ministry of Company Affairs (MCA) notification dated March 24, 2021 (Companies (Accounts) Amendment Rules, 2021), for the financial year beginning on or after April 1, 2021, every company that uses accounting software to maintain its books of account shall use only Accounting Software that has a feature of recording an -

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.
Ensuring that the audit trail cannot be disabled.

The MCA has later announced that the above amendments will take effect on April 1, 2023, which suggests that accounting software used by businesses will have to comply with the Accounts Rules beginning in the financial year 2023-24.

5 Reasons Why an Audit Trail is Crucial for any Organization?

Compliance

You are required to have an Audit Trail according to the Ministry of Company Affairs (MCA) notification dated March 24, 2021. From April 1, 2022 onwards all the accounting softwares are expected to have an inbuilt option for audit trail. Maintaining compliance with audit trail requirements can help you avoid losing business, customers and contracts. Not following up with the amendments can result in hefty penalties and fines.

Fraud Prevention

Is your data being accessed by too many systems and users? Keeping track of all the activities is a difficult task. It takes time. Further there are many risks involved if done incorrectly. To have a track of malicious acts contempt with data and to keep digital evidence, you need to have an audit trail in place. Every incident can be traced back through the audit trail recordings, allowing fraud and process irregularities to be identified and addressed.

Reconstruction of Events

When technical issues arise, system failure or the integrity of a file or the data is called into question. An audit trail analysis can be used to reconstruct the system's, users', and application's actions. Audit trail helps to reconstruct events after a problem has occurred and aid in the recovery process by recording changes made to reconstruct the file. Reviewing audit trails of system activity to determine how, when, and why normal operations ceased is a more straightforward way to assess the damage.

Accountability of the user

Incorporating an audit trail helps managers maintain individual accountability. It promotes appropriate user behavior and encourages users to take personal responsibility for their actions, recorded in an audit trail. This protects the system from insufficiently used data and unauthorized database changes.

Malware / Cyber Security Risk

Malware and ransomware attacks are on the rise. Keeping track of your audit trail can help you identify and flag instances where outsiders attempt to harm you while improving your company's information security.

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.

In addition, an audit trail can help organizations meet regulatory and compliance requirements related to financial reporting. For example, many regulatory agencies require organizations to maintain detailed records of financial transactions and changes, and an audit trail can help organizations meet these requirements.

An audit trail can also be used to identify and prevent fraudulent activity, as it provides a record of all changes made to financial data. This can help organizations maintain the trust and confidence of stakeholders, such as investors and customers. An audit trail is a crucial tool for financial reporting, as it helps ensure the accuracy, integrity, and security of financial data.

Challenges in Implementing Audit Trail

Desktop Application

Have to reinstall newer versions of the software that have an Audit Trail if the accounting software provider makes it.
Cloud software vendors are better because you don't have to change hardware requirements. The software gets updated automatically.

Database Storage Architecture

Every transaction and the version history has to be tracked, and therefore the database and storage architecture must be accounted for.
Long-term maintenance of audit logs can prove challenging for many organizations because it can occupy extensive storage space that may not be readily available in desktop applications.

Existing software might not be able to support it.

It isn't easy to reconstruct the database transaction order if the old software doesn't have an audit trail. It may be more challenging to comply with regulations, and it may not support verification and audit requirements.
Foreign companies must adhere to the financial authority's local jurisdiction rules. If the company is registered under the MCA, the audit trail feature should be available in their accounting software.

Interlinkages of transaction

Front-end transactions like invoices, billing, and inventory management will need to be accounted for.
Automatic transactions like Exchange gain or loss, Adjustments also need to be accounted for.

Location and back up

Ensure audit trail information is stored in a secure location and backed up regularly. These can be extremely useful in historical reporting and solving problems in the future.
An audit trail should include sufficient information to establish what events occurred and who or what caused them. Tamper proof ensures that authorized users only access the data and for official purposes requires some method of tracking transactions and who has accessed the data and when.

What should a good Accounting Audit Trail Feature Contain?

What happened?

What are the transactions that happened during the financial year?
What are the changes being made in the book of accounts?
What accounts get affected when any transaction is modified?
Track of changes that affect the financial statements including prior period entries.

When did it happen?

What was the timestamp of the transaction?
What financial period did the transaction and change happen?

Who made the change?

What user ID was associated with the transaction update?
What other transaction updates do they generally make?

What is the impact on the transaction?

What journal entries and debits and credits were impacted?
Was the change positive or negative to the related transaction?
What was the difference in amount between new and old account?

Best Practices for Implementing and Maintaining an Audit Trail

Here are some best practices for implementing and maintaining an audit trail:

Determine the scope and purpose of the audit trail: Before implementing an audit trail, it is important to determine the scope and purpose of the audit trail, as well as any regulatory or compliance requirements that must be met. This will help ensure that the audit trail is designed to meet the needs of the organization.
Choose the right audit trail solution: There are many different audit trail solutions available, so it is important to choose one that meets the needs of the organization. This may involve considering factors such as the complexity of the system, the amount of data that needs to be tracked, and the integration requirements with other systems.
Define clear policies and procedures: It is important to define clear policies and procedures for using and accessing the audit trail, as well as for reviewing and analyzing the data. This will help ensure that the audit trail is used consistently and effectively.
Train users on how to use the audit trail: Proper training is essential to ensure that users understand how to use the audit trail effectively. This may include training on how to access and review the data, as well as how to identify and report any issues or anomalies.
Regularly review and analyze the data: To ensure that the audit trail is effective, it is important to regularly review and analyze the data. This may involve generating reports and alerts based on specific events or conditions, as well as manually reviewing the data for any issues or discrepancies.
Implement security measures: Ensuring the security and confidentiality of the audit trail data is crucial. This may involve implementing measures such as encryption and access controls to prevent unauthorized access to the data.
Regularly maintain and update the audit trail: To ensure that the audit trail is effective and accurate, it is important to regularly maintain and update the audit trail. This may involve making updates to the system or database, as well as regularly backing up and archiving the data.

How Gridlex’s Accounting Software Helps Maintain Accounting Transaction Audit Trail?

According to the MCA notification, the new audit trail rule in accounting software has to be implemented from 1 April 2022. All accounting software used by businesses must comply with the MCA notification. Gridlex has been consulting with industry experts, chartered accountants and other professionals to understand better and evaluate the Audit Trail since the notification was sent out. After the research study, we added the Audit Trail feature to Gridlex's AI Accounting Software.

Gridlex’s Sky Accounting software has the following Audit trail features:

Sets individual accountability & prevents incorrect information or unapproved data.
Help the business users or managers to analyze and examine any modification done in transactions.
Help to ensure data integrity and accuracy.
It helps the internal audit teams or management to identify the deviations.
It gives the ability to the reviewers to recognize both usual and unusual activity.
The ability to query and filter audit records for specific information.
It helps you to comply with the regulations.

Gridlex AI Accounting Software provides a very well-functioning audit trail feature that can cover a wide range of industries and organizations. So, if you're looking for secure accounting software with an audit trail feature, try Gridlex AI Accounting Software.

You can contact Gridlex at apps@gridlex.com and on the phone or WhatsApp: +91-90303-10303