Practical Tips on Audit Trail reporting this year
A Compilation by CA Nitesh More
Tip1: Pass all entries before 6 September
Since we certify that financial statements are in agreement with the books of accounts, all adjustment & other entries must be passed on or before the date of signing of FS & Audit reports i.e. 6 September generally, except in case of shorter notice, else Audit Trail will reflect otherwise.
Tip 2: How to audit, if so many delete entries?
No entries should be deleted in accounting software. However, if there are a number of deleted entries in accounting software for 23-24, the responsibility of the auditor is increased. The auditor must examine these deleted entries from the following 2 angles:
✓ The auditor ensure that the accounts reflects the true & fair states of affairs of company.
✓ The auditor should also examine that these deleted entries should not reflect any fraud in the company.
Tip 3: How to audit, if so many edit entries?
No entries should be edited in accounting software. However, if there are a number of edit entries in the accounts for FY 23-24 in the
accounting software, the responsibility of the auditor is also increased. The auditor must examine that these edited entries from the following two aspects:
✓ The auditor ensure that the accounts reflects the true & fair states of affairs of company.
✓ The auditor should also examine that these edited entries should not reflect any material misstatements or a fraud in the company.
Example1: If narrations are edited to included UTR no , received at evening from bank, it is acceptable.
Example2: If entries are edited to understate income or overstate exp. for misstatements, such edit of entries will result in fraud, are not acceptable.
Tip 4: How to report, if accounts are maintained manually?
Management of Company may have decided to maintain accounts manually. This is not a violation. However, fact must be disclosed by auditor. Apart from this, Management may also disclose such fact in Boards Report also.
Example1: On 30.3.23, Board decided to maintain books of accounts manually. However, on 30.6.23, Board decided to again switch to maintain books of accounts using accounting software with audit trail features.
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 company as per the statutory requirements for record retention.
Example2: On 30.3.23, Board decided to maintain books of accounts manually.
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 31.3.24.”
Tip 5: How to report, if audit trail had been maintained for broken period?
Management of Company may have decided & maintained audit trail from a date after 1.4.23 (a date later than when it is mandatory to be implemented). This is a violation & auditor must report accordingly.
Example: On 30.6.23, Board decided to maintain books of accounts using accounting software with audit trail features from 1.7.23.
Ans: There 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 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 tampered with for the aforesaid period. Additionally, the audit trail has been preserved by company as per the statutory requirements for record retention.
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.
Tip 6: How to report, if audit trail had not been maintained during the year?
Management of Company may have decided & maintained audit trail from a date after 1.4.24 (a date later than when it is mandatory to be implemented) . This is a violation & auditor must report accordingly.
Example: On 30.3.24, Board decided to maintain books of accounts using accounting software with audit trail features from 1.4.24. or 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. 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.
Tip 8: Should Company pass “bulk entries at quarter end for most of transactions during the quarter” to prepare books of accounts?
Section 128(1) of the Companies Act, 2013 states that every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company….
Comment: A Company should follow sec 128 in substance. If a Company pass most of transactions at quarter end, then Company will itself create evidence in this audit trail era that it had not maintained proper books of accounts for the substantial part of year/quarter & ROC may levy penalty u/s 128(6). Such a situation should be avoided.
Example: The company passes most of entries for translations during the quarter end.
a) On 1.4.2030, there had been inspection by ROC
b) On 1.4.2028, there had been survey by Income tax department, which passes information to ROC. Can ROC levy penalty u/s 128?
Ans: ROC may take a view that since proper accounts had not been maintained for the substantial part of the year (i.e. substantial part of each quarter), penalty u/s 128(6) will be levied, which can be Rs 50k to Rs 5 lakhs per director/person in default.