A Breief on Audit Trail

This document discusses a specific rule (Rule 11(g)) introduced under the Companies Act, 2013 in India. The rule focuses on the use of accounting software by companies and requires auditors to report on certain aspects related to the software.

In simple terms, this passage is talking about new rules and requirements for companies related to how they maintain their financial records using accounting software. Here are the key points:

Background:

There are rules (Section 143(3) of the Companies Act, 2013) that auditors must follow when reporting on a company's financial status. New rules (Rule 11 of the Companies (Audit and Auditors) Rules, 2014) were introduced in 2021 and amended in 2023.

Applicability:

This rule was supposed to apply from April 1, 2021, but it was deferred to April 1, 2022, and later to April 1, 2023.

Categories to which the said requirement will be applicable are stated as follows:  

•            All Public Companies, Private Limited Companies and Foreign Companies
• One-Person Companies (OPCs)
• Companies owned by the Government of India
• State Government Companies
• Not-for-Profit Companies/Organization
• Nidhi Companies

However, it exempts the below categories of assessee from applicability of the Audit Trail:

•              Individuals
•  Proprietorship concerns
•  Partnership firms
•  Limited Liability Partnership

It is to be noted that the specified criteria for an audit trail apply when a company maintains its records electronically through accounting software. In cases where manual record-keeping is exclusively utilized for the books of account, the obligations and reporting responsibilities outlined in Rule 11(g) do not apply. Consequently, the auditor is required to report this as a factual statement under the respective clause.

So, what is Rule 11(g)?

Rule 11(g) mandates that companies, starting from April 1, 2023, should use accounting software that has an 'audit trail' feature. This feature records all activities or changes made in the software. Auditors need to check if this feature has been used throughout the year and has not been tampered with, and if the records have been preserved as per legal requirements.

Audit Trail is like a detailed history record of all actions in a computer system or application, ensuring transparency and accountability. It helps trace the history of transactions, who accessed the system, what changes were made, and when. It is crucial for security and compliance, especially in regulated industries.

Auditor’s Responsibility:

Auditors must now report not only on financial matters but also on whether the company is using the required accounting software with the audit trail feature.

Auditors need to evaluate how the company ensures the audit trail feature is consistently enabled and not tampered with.

The auditor needs to keep records of their work to show they followed the rules and standards while conducting the audit.

Obtaining Written Representations:

The auditor is required to secure written representations from management pertaining to the following aspects:

i. Acknowledging management's responsibility for establishing and maintaining effective controls for the consistent identification, maintenance, control, and monitoring of audit trails as per prescribed requirements.

ii. Affirming that management has conducted an evaluation, assessing the adequacy and effectiveness of the company's procedures to comply with prescribed audit trail requirements.

 

iii. Confirming management's conclusion, as outlined in its assessment, regarding the adequacy and effectiveness of the company's procedures concerning audit trails.

iv. Confirming that management has disclosed to the auditor all deficiencies in the design or operation of controls related to audit trails identified during management's evaluation.

 

v. Describing instances where, during the review and testing of samples related to the disablement of the audit trail facility of the accounting software, the identification of any fraud resulted in a material misstatement to the company's financial statements.

vi. Confirming whether control deficiencies previously communicated to the audit committee in relation to audit trails during past engagements have been resolved, with specific identification of any deficiency that remains unresolved.

Given that the primary responsibility for establishing and maintaining audit trails lies with both management and the Board of Directors, it is imperative that the Board, when approving the financial statements, formally acknowledges the policies and procedures set forth by management regarding the assertion and conclusion on the adequacy and operating effectiveness of audit trails. Furthermore, the Board should acknowledge deficiencies, significant deficiencies, and material weaknesses identified by management, internal auditors, and the external auditor.

Management's Role:

Companies must use accounting software meeting certain criteria. Management is responsible for implementing and maintaining these requirements.

Preservation of Audit Trails:

The auditor must confirm whether the company is preserving these audit trails as required by law.

Conclusion:

These new rules aim to bring transparency and reduce manipulation of financial data by ensuring companies use accounting software with specific features. The audit trail feature helps track changes in financial records, and companies need to comply with these rules to remain transparent and accountable.

 

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Advisory: Information relates to the law prevailing in the year of publication/ as indicated. The above article is only to enable public to have a quick and an easy understanding. Viewers are advised to ascertain the correct position/prevailing law before relying upon any document