Audit trail :-  It is an detailed chronological record where accounting ,financial data and other details are tracked and traced .It tracks all kinds of transactions work processes, accounting details and changes made there within and especially MCA has now made it mandatory .It verifies and validates financial, software and business transactions by tracking user activity

Why MCA has made it mandatory to comply with audit trail:- It has been mandated to the companies to use Accounting software that has feature of recording an “Audit trail”  for comprehensive recording of changes made in the financial data, prevention of fraudulent activities , reconstruction of data in case of system failure .

Applicable Provisions  :- MCA has introduced the concept of ‘AUDIT TRAIL” by inserting proviso to  Rule 3(1) of Companies (Accounts) Rules ,2014 as follows:

Every company which uses accounting  software  for maintaining  its books of account ,shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in the books of accounts along with the date when such changes were made  and ensuring  that audit trail cannot be  disabled  w.e.f 1st April ,2023

The Importance of an Audit Trail in Financial Reporting:- An audit trail is an essential tool for financial reporting, as it provides a comprehensive record of all changes made to financial data, including the date and time of the change, the user who made the change, and a description of the change. This can help ensure the accuracy and integrity of financial data and can be used to support internal and external audits and also helps companies to meet regulatory and compliance requirements.

Advantages  :-

  • Helps to detect unauthorized access, errors, and fraud
  • To restore data in case of any system failure
  • Detection of malware
  • Ensure data integrity and security
  • Helps audit team to identify any deviations
  • Helps in compliance with regulations

Disadvantages :–  may require huge storage space as every transaction is traced and stored. Requires re- installation of new software that supports recording  of audit trail

Audit trail has to be maintained for 8 years from the end of the financial year to which it relates.