FAQs on Audit Trail by CA Nitesh More

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FAQs on Audit Trail by CA Nitesh More

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(FAQ1)(Violation Reporting 1) How to report, if audit trail had not been maintained during the year?

A: This is a violation & auditor must report accordingly. 

Example: The accounting software does not have the features of audit trail during FY 23-24.

Ans: This is a violation. The auditor must report the following:

"Based on our examination which included test checks, the company has used an accounting software for maintaining its books of account which doesn't have a feature of recording audit trail (edit log) facility & same has not operated throughout the year for all the transactions during the year. Since there is no audit trail feature, the question of tempering & preservation of audit trail doesn't arises. However, in our opinion, proper books of accounts stating true & fair states of affairs of the Company, as required under Sec 128(1) of the Companies Act, 2013, has been maintained by the company for the financial year 2023-24."

*(FAQ2)(Violation Reporting 2) How to report, if audit trail had been maintained for broken period?*

Management of Company may have decided & maintained  audit trail in its accounting software from a date after 1.4.23 (a date later than when it is mandatory to be implemented) . *This is a violation* & auditor must qualify his report accordingly. 

*Example:* On 30.6.23, Board had decided to incorporate audit trail feature in its accounting software to maintain books of accounts from 1.7.23. 

Ans: There is a violation. The auditor must qualify his report. A draft qualification may be as follows:

"Based on our examination which included test checks, the company has used an accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility & the same has operated from 1.7.23 to 31.3.24 for all relevant transactions recorded in the software. Further, during the course of our audit, we did not come across any instance of audit trail feature being tampared with for the aforesaid period. Additionally, the audit trail has been preserved by company for the aforementioned period. However, in our opinion, the proper books of accounts stating true & fair states of affairs of the Company, as required under Sec 128(1) of the Companies Act, 2013 has been maintained by the company for the financial year 2023-24."

*(FAQ:3) How to report, if accounts are maintained manually for the part of year or the full year?*

*A)Audit Trail: If accounts are maintained manually for the whole year:* Management of the company may have decided to maintain accounts manually. This is *not a violation. ICAI Implementation guide also states this view*. However, this fact must be reported by the auditor under Rule 11g. 

*B) If accounts are maintained manually for the part of the year:* 

1) As Rule 11g requires the auditor to report that the audit trail feature has been maintained throughout the year. 

*View 1:* One view can be taken that the company cannot maintain the books of accounts electronically for the part of the year. Hence, the company can maintain either manually or in software with audit trail features for the whole year only. Even if one takes this view, in my personal opinion, if in *exceptional circumstances,* the company again decides to shift to maintain books electronically, panelty cannot be levied. In our example No 1, the company had shifted to an electronic system with an audit trail during the year, due to exceptional circumstances, which can be a defence for the company in case of show cause & panelty cannot be levied. 

2) *View 2:* Since it is impossible to maintain audit trail features *in software* in manual system & since audit trail feature is inherent & automatically exists in manual accounting system, there is no violation of this Rule. 

3) Board Report should disclose the details note regarding the same, which auditor may also refer to in its report,in my personal opinion.

*Example 1:* On 30.3.23, the board decided to maintain books of accounts manually. However, on 30.6.23, the board decided to again switch to maintain books of accounts using accounting software with audit trail features, due to:

a) problems in getting adequate man power & also 

b) problem in getting adequate reports in manual systems. 

Ans: There is no violation, in my personal opinion. The auditor may report the following:

"The books of accounts had been maintained manually from 1.4.23 to 30.6.23 & in accounting software from 1.7.23 to 31.3.24. Further, based on our examination which included test checks, the company has used an accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has operated throughout the said period (from 1.7.23 to 31.3.24) for all relevant transactions recorded in the software. Further, during the course of our audit, we did not come across any instance of audit trail feature being tampered with. Additionally, the audit trail has been preserved by the company as per the statutory requirements for record retention. The board had shifted to maintain books electronically again due to exceptional circumstances, as mentioned in the para of  Directors Report. "

*Example 2:* On 30.3.23, the board decided to maintain books of accounts manually from 1st April. 

Ans: There is no violation. ICAI Implementation guide also states this view. The auditor may report the following:

"The books of accounts had been maintained manually from 1.4.23 to 31.3.24."

*(FAQ4) No Mens Rea, No penalty*

Mens rea is basic condition to impose any panelty. If there is no guilty mind (i.e. mens rea), no penalty can be imposed. Hence, no penalty can be imposed in the below situations (examples in Tip 18) or in exceptional circumstances. It requires even in criminal proceedings. *Read more on this:* http://surl.li/nyijff

Regards,

CA Nitesh More 

*Working 4 CA fraternity since 1998*

*Note:* These tips are personal opinions only. You may not find such tips in Companies Act or Implementation Guide. These are draft only.

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FAQs on Audit Trail:CA Nitesh More