Introduction
The Ministry of Corporate Affairs (MCA), through its notification dated March 24, 2021, amended the Companies (Audit and Auditors) Rules, 2014. This amendment, specifically to Rule 11, introduced the concept of an ‘Audit Trail’ in the corporate sector, as per Section 128 and Rule 3(1) of the Companies (Accounts) Rules, 2014. Notably, this is the first instance of such a requirement in India.
What is an Audit Trail?
An audit trail refers to a step-by-step, chronological record of all events and transactions within a computer system or application. It includes details of who made the changes, when they were made, and what the changes were.
Applicability and Implementation
The audit trail requirements, initially set to be applicable from April 1, 2021, are now enforced from April 1, 2023, for all companies, including small companies, Section 8 companies, One Person Companies, and others as registered under the Companies Act.
Responsibilities and Compliance
Company management is responsible for implementing an audit trail, as per Rule 3(1) of the Companies (Accounts) Rules, 2014. Auditors, as per Sections 143(3)(j) and Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014, must verify its effective implementation. Companies are required to use accounting software that maintains an audit trail for each transaction, which cannot be disabled.
Documentation and Maintenance
Under Section 128(5) of the Companies Act, companies must preserve their books of account, including the audit trail, for a minimum of eight years from the date of applicability of the Account Rules.
Frequently Asked Questions (FAQs)
Q1. Does the Audit Trail requirement apply to LLPs?
A1. No, the audit trail requirement under Section 128 and Rule 3(1) of the Companies (Accounts) Rules, 2014, applies only to companies and not to LLPs or other entities like partnerships.
Q2. Are foreign companies operating in India subject to the Audit Trail requirement?
A2. Yes, foreign companies, as defined in the Act, are subject to these provisions, including their auditors, under the Companies (Registration of Foreign Companies) Rules, 2014.
Q3. Do the Audit Trail requirements apply to consolidated financial statements?
A3. Yes, the audit trail requirements apply to both standalone and consolidated financial statements as per the applicable statutory provisions.
Q4. Can authorities request a company’s audit trail?
A4. Yes, authorities can request the books of account, which include the audit trail, as part of their inspection as per the Companies Act.
Q5. What is the minimum period for maintaining the audit trail record?
A5. As per Section 128(5) of the Companies Act, companies must retain the audit trail for a minimum period of eight years.
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