Applicability of Accounting Software with Audit Trail

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Applicability of Accounting Software with Audit Trail

To reduce the risk of fraudulent transactions or manipulation in the books of accounts, the MCA has issued a notice requiring the company to use accounting software that has a feature of recording an audit trail of each and almost every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made, and ensuring that the audit trail cannot be disabled, with effect from the financial year beginning on or after 1st January.

With effect from April 1, 2022, organisations’ accounting software must include an audit trail feature. The inclusion of such a capability in accounting software will increase the transparency of a company’s annual report disclosures. This will also result in a stress-free audit, easy error correction, and time savings as well as fraud prevention.

In this article, we will talk about ‘Applicability of Accounting Software with Audit Trail’.

Table of Content 

What is an Audit Trail and How Does It Work?

An audit trail is a process record that can be used to trace accounting, trade data, or other financial data back to its source. Many sorts of activities, such as accounting records and trades in brokerage accounts, are verified and tracked using audit trails. When determining the authenticity of an asset account, source of funds, or trade, audit trails can be helpful.

Types of Audit Trails 

There are three basic types of audit trails that are utilised in various businesses or for various purposes.

  • External Audit 
  • Internal Audits 
  • Internal Revenue Service (IRS) Audits

External Audit 

CPA firms are often employed by businesses to do external audits in order to help them create a better and more trustworthy image of their finances. The final audit report contains the outside auditor’s assessment of the company’s financial position.

Internal Audits 

Regulatory, operational, fiscal, and information systems audits are all examples of internal audits. Employees from other areas can be cross-trained to objectively audit other departments to ensure that processes, norms, and managerial tasks are carried out correctly.

Internal Revenue Service (IRS) Audits

An IRS audit is a popular sort of external audit (and one that you don’t want!). It’s usually done when there are indications that a person or company isn’t paying the correct amount of taxes. The IRS conducts the audit to check that the financial papers match the amounts on the taxpayer’s tax documents.

Importance of Audit Trail

  • In accounting software, an audit trail refers to a record of all activities such as generating, modifying, updating, removing, or cancelling a specific event, as well as who did it and when.
  • From making a sales or buy invoice to updating the invoice data, from creating a new item/ ledger to changing its default behaviour, an Accounting software’s Audit trail can be retrieved in a single click.
  • They are so precise that if a sales bill is edited, the whole history of the invoice amount, time, date, and accountable counter person will be logged, from creation to change.
  • This involves tracking void items, void payments, price look-up auditing, aborted and edited or cancelled bills, and so on.
  • Its goal is to track, sanction, and prohibit fraudulent alterations in the financial system.

Benefits of Audit Trails and Logging

The goal of audit trails (or audit logs) is to eliminate fraud, material errors, and unauthorised use by acting as record-keepers that document proof of particular events, procedures, or operations. A documented audit trail can even be seen on your grocery store transaction. Finally, audit trails aid in the improvement of internal controls and data security.

Internal controls are defined under the Sarbanes-Oxley Act of 2002 (SOX) and the COSO Internal Control-Integrated Framework as accounting policies, data security, digital security, IT, system software, technology, cybersecurity, and business intelligence controls.

Importance of accounting software with audit trail feature 

By capturing and preserving a track of all activities inside the financial transaction, the audit trail was created to ensure transaction integrity and transparency. As a result, businesses will be able to conduct fair dealings, protect themselves against data fraud, and remain compliant with the new legislation.

 Here are some of the reasons why accounting software with audit trail capabilities is so important:

  • The audit trail assures the legitimacy of transactions, making it easier to detect and track fraud.
  • Accounting software that includes an audit trail feature allows organizations to easily access all financial information.
  • It displays any transactions that have been modified or altered, providing visibility.
  • Assists businesses in remaining compliant and transparent.

Enterprises Which are Covered by the MCA Audit Trail Policy

According to the MCA‘s most recent revision, the following businesses will be obliged to follow the audit trail rule:

  • Public and Private Limited Companies
  • Companies run by a single person (OPCs)
  • Government of India-owned businesses
  • Companies owned by the state government
  • Companies/Organisations that are not for profit
  • Nidhi Enterprises

Implications of the New Audit Trail Rule 

It is indisputable that maintaining an end-to-end record of all financial transactions such as purchases, sales, and expenses can be quite useful in tracing any system irregularities. Additionally, the edit log would allow firms to analyze each activity, assisting them in maintaining compliance.

The new rule was enacted to increase transparency and limit or eliminate corporate data manipulation. This also means that any accounting software must have an Audit Trail feature order for customers to be compliant with the new amendment, and it must include the following enhancements:

  • Keep track of any transactional changes in the books of account and establish an edit record.
  • When any modifications are made to the timeline, make a note of the date.
  • Accounting software must prevent the edit log from being turned off.

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Conclusion

Companies may need to make big changes to their software or switch to a new system entirely. Companies must begin planning for this transition as soon as feasible because such changes require significant work and planning. Such software will considerably improve the Indian Inc.’s openness, accountability, and, eventually, corporate governance. MSME businesses, on the other hand, may find themselves in a bind due to the relatively greater cost of such software, especially in the post-pandemic environment.

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