How Audit Trail (Edit log) can Lead to Increased Compliance and Transparency

What Are The Stages Of The Auditing Process & Why It Is Important?
| Updated on: April 1, 2022

An audit trail is the time-stamped step-by-step record of all actions and activities within an application by a user. The record can cover all actions that involve creating, editing, or deleting records. An audit trail also records automated actions within the system. It is one of the accounting best practices to maintain an audit trail. Audit trails are used during the auditing process when there is the need to verify a specific entry or transaction. The auditors can trace all actions that were performed related to the transaction in question to verify it. Audit trails are especially useful when there is some suspicion of foul play or fraud with relation to the transaction or the overall books of accounts. They are a means by which the auditors can hold the company accountable for its record of transactions. 

Audit Trail – Edit Log the New Statutory Watch Guard for Businesses Why do We Need an Audit Trail for Businesses?

What are the goals to create an audit trail in India?

 An audit trail (edit log) is a sequential log of all activities in the system with details of the user, date and time. When the books of accounts are audited, certain transactions may need more investigation. An audit trail is essential for the proper and thorough audit of a company’s books of accounts. It is an accounting best practice to have a complete and thorough audit trail.

The goals of creating an audit trail in India are:

  • Creating an atmosphere of transparency at all levels of business in the country
  • Implement systems that are smooth and transparent
  • Eliminate the loopholes and confusion that exists in systems today
  • Facility employer compliance
  • Ensure compliance with laws, standards and regulations, and best practices
  • Prove compliance or lack of compliance as applicable
  • Ability to perform business analysis retrospectively
  • Intelligent and systematic records that help reconstruct the series of events under audit
  • The ability to trace events without wasting time on interviewing employees to reconstruct what happened
  • Easily spot, identify and trace any unusual activities, mistakes, or corrections in the records
  • Enhance the security of the accounting process within the organisation by easily detecting unauthorised intrusions, data theft and frauds easily
  • Help identify problem areas and improve the business practices and systems to correct the problem
  • Securely track activities and easily prove malpractice when it is detected. This is especially useful in the case of a legal or official investigation into the accounting practices
  • Ensure the safety, security and compliance of the accounting systems, which gives peace of mind to the business owners, investors and all parties involved

Audit trail rule for businesses using accounting software from 1st April,2023

According to the notification issued by the Ministry of Corporate Affairs (MCA), businesses that fall under the purview of MCA and use accounting software for maintaining books of accounts should have an audit trail feature. The accounting software used by such businesses should create an edit log of every transaction with changes made in the books of accounts. The software should capture the date details when such changes (edits) are made and ensure the edit trail cannot be disabled.

In simple words, the expectation is to maintain the edit log of every transition right from recording to tracking the changes that may take place. 

Audit Trail (edit log) features of TallyPrime Edit Log Release 2.1

According to the recent notification, the new audit trail rule in accounting software will now be implemented from 1st April,2023. This was originally planned for 2021 and but later the effective date was moved to 1st April,2022. Now, it is postponed to 1st April, 2023. 

Why is audit trail (edit log) mandatory for businesses governed by MCA?

India is making its presence felt across various industries globally. However, there is still a struggle with issues such as fraud and corruption within the country. Though malpractices are not prevalent in all companies, it is important for India to change the way its business practices are perceived globally.

An audit trail is essential to enforce compliance across all companies. When you use an accounting system, the audit trail keeps a record of every action. A sequential record of every transaction with time and date is an important factor in preventing corruption and other malpractices in accounting. When the users of an accounting system know that their every action is logged, they will be hesitant to attempt to misuse the system.

An audit trail is a measure that will create an atmosphere of accountability in all the people using the accounting system. In the unfortunate event of malpractice being investigated, it will also provide factual records of the history of the transaction. This record will speak for itself rather than having to question personnel and rely on their recollection of events. In small companies, it will be very easy to recollect and track a certain transaction. However, in larger companies, the number of transactions and related events will be huge. Automated tracking ensures that there is regulatory compliance regardless of the size or complexity of the company.

It will also enforce the integrity and accuracy of the accounting systems. If there is any intrusion on data or the system, it will all be recorded and logged. This is essential for the security of the huge amounts of personal or sensitive information that is stored in accounting systems.

What are the audit trail (edit log) features to look in accounting software?

An audit trail needs to have certain essential features in order to be useful. Some of the main traits of an audit trail are:

Sequential order

The audit trail should record the details of actions performed in the system in chronological order by date and time. When a certain transaction is being investigated, the accounting software should be able to trace the details of the voucher to all the actions that led to it. For example, when tracking a purchase, the audit trail should show all the actions from the start point of creating a purchase order right through to the shipping, receipt and the addition of the purchase to the relevant account. If it is a large purchase of equipment, it should be traceable from the purchase order creation through to the entry on the fixed assets.

Scope

The scope for recording events in terms of actions and time frame can be endless. The system should define and record events within a reasonable scope. The accounting software should track all the changes done on the translation and the related financial masters and capture such details in the audit log.

In simple words, the software should track and log changes right from creation to alteration to deletion. It is an essential requirement to meet the compliance as per the guidelines issued by MCA. It can be compliant accounting software only when the software is built with these capabilities.

Technical Log vs. audit log

An audit log should not be confused or interchanged with software logging. In accounting software, the log is merely a program level record of admin actions and exceptional events that are used for software debugging. This should not be confused with an audit log. Accounting software should have a separate log for the software issues and a dedicated audit trail log that is for accounting compliance. Be aware of the difference when you choose accounting software for your business.

User details in the audit log

The audit log without the user details is incomplete. Just like knowing what has changed in translation is essential, it is equally important to know who has done the change. The accounting software should capture user name details right from creation to alteration to deletion. It is one of the mandatory requirements as per guidelines issued by MCA.

Versions Difference

Merely knowing the events of activities that took place for a transaction will not help you construct the complete picture. To analyse the impact of changes, it is important to know what elements of transactions have been modified, changed etc. The accounting software you use or the one you choose should show the version difference and facilitate the comparison between previous versions.

Edit log feature to enabled all the time

Only when you maintain the log continuously you will reap the benefits of audit log. As long as books of accounts are valid and the company requires to keep them, the audit log should be maintained for the duration of the validity of the records. As per MCA guidelines, the edit log should be enabled all the time without an option to disable it in accounting software.

What are the challenges under an audit trail?

There are many practical challenges when recording and using an audit trail. Some of them are:

Volume and costs

In a medium to large-sized business, the volume of transactions is huge. So, when every action is recorded in the audit trail it makes for a huge number of transactions per day. When this log is to be maintained over months or longer, it needs large dedicated storage. This is rather expensive for companies especially if there is no regulation on how long these trails have to be preserved.

Memos

It is the general accounting practice to create memos to handle exceptions in accounting transactions. However, a mandatory audit trail requires that every individual action be logged which is more cumbersome than a single memo. If there are many transactions that have to be verified, the sheer volume of the audit trail steps can become burdensome for accountants.

Industry-specific issues

Certain industries have extremely volatile pricing that fluctuates wildly. Some examples are chemicals and coal. Here, the accounting process is useful for creating the accounting entries as per the standard prices. But the actual final price is either negotiated by management or driven by the markets. This results in the accounting team having to make many edits to the same transaction. When the audit trail is verified for these industries, it may create more confusion than it solves.

Technical expertise

When there is the awareness that there will be a recorded audit trail, the accounting personnel will be more careful with their entries. But, if the accounting entries are made by staff with insufficient knowledge there will be the need for many corrections. This adds to the burden of the audit trail. So, more skilled manpower will have to be employed which adds to the costs for the company.

Using the right technology

An audit trail should string together all the events that led to a particular entry. So, the software solution that is chosen is very important to show the trail clearly. Choosing a compliant software solution is essential to have a usable and unambiguous audit trail that helps in the investigation of an entry.

Audit trail (edit log) features of TallyPrime Edit Log Release 2.1

The latest release 'TallyPrime Edit Log Release 2.1', is enhanced with the edit log feature that caters to the amendment released by the Ministry of Corporate Affairs (MCA). Following are the features of  TallyPrime edit log release:

  • Track the edits for masters and every transaction
  • Capture the date details and username when such changes (edits) are made
  • Difference report to show the elements of the version that have been modified
  • Reports are enhanced to filter the edited transactions
  • Designed to ensure edit log feature will be enabled all the time to meet the MCA guidelines of ‘Edit trail cannot be disabled.’

Read more about audit trail

Audit Trail – Meaning & Examples, Why do We Need an Audit Trail (Edit Log) for Businesses, How to Prepare your Business for Audit Trail (Edit Log) Rule, 5 Features to Look in Audit Trail (Edit Log) Accounting Software, Audit Trail – Edit Log the New Statutory Watch Guard for Businesses

Audit trail rule

Postponement of Audit Trail (Edit Log) Rule in Accounting Software to 1st April,2023, Business Impact of Audit Trail (Edit Log) Rule, Key Requirements of the Audit Trail (Edit Log) Rule Issued by MCA, Audit Trail Rule (Edit Log) Applicability – Businesses who Should Follow the Rule 

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