What is an Audit Trail?

Audit trails are often used in finance and software as tools for assessing and reporting on management and operational activities. A grocery shop receipt is the greatest example of a simple audit trail covering a transaction.

What purpose is served by the Audit Trail? 

An audit trail can be used for the following reasons:

• Tracking irregularities in the financial transactions
• Identifying data breach issues from outside the company.
• Setting up a better compliance mechanism.
• Increased privacy and more control in the form of electronic records.

When the above attributes are incorporated in the company, it can reduce time, cost, and efforts for recording and auditing financial transactions. The resources in the form of time, cost, and efforts can then be allocated in different directions within the company, such as planning, monitoring, organizing and directing, etc.

How can an Audit Trail assist a Company?

The audit trail has numerous benefits, some of which are mentioned below:

• It can help the management to have better control over internal transactions.
• Easy access to records.
• Increased prevention against fraud.
• Easy identification of financial inconsistencies.
• Easy validation of financial transactions.
• Reduction of time included in the audit process.
• It can also be helpful in internal audits.
• It helps in the due diligence required by the lenders as a part of the process for analyzing the company's credibility.
• Access to past data can help examine the corrective measures taken in the past and their effects on the company.
• Increases efficiency while examination of the financial report by saving time and effort.
• Statutory compliances can become uncomplicated, and penalties can be avoided.
• Records can be adequately secured and for a more extended period.

How is an Audit Trail being introduced for the Companies?

The Government took a step forward to establish better control and transparency in the company by introducing an amendment in Companies (Audit and Auditors) Rules 2014, which is known as the Companies (Audit and Auditors) Amendment Rules 2021, notified by the Ministry of Corporate Affairs on March 24, 2021. 

The amendment provides that the auditor’s report shall include the details of:

• The company maintains accounting software for recording financial transactions. 
• Such software has the feature of recording audit trails, and the software has been used throughout the year to record all the financial transactions. 
• The company has followed the provisions for the preservation and non-tampering of the audit trail.

Such an amendment can minimize fraud, and auditors can easily access the recorded transactions.