—Guide
Audit Trail Requirement for Accounting Software: What Indian Companies Must Know
The audit trail (edit log) rule for company accounting software from April 2023, the daily backup requirement, and what auditors now check.
Since 1 April 2023, every Indian company must use accounting software that keeps an audit trail of every change made to its books. Together with an earlier rule on daily backups in India, it has turned software choice into a compliance question. This guide explains the rules.
The Audit Trail Rule
Under the Companies (Accounts) Rules, 2014, as amended, a company that keeps its books electronically must use software that:
- Records an audit trail of each and every transaction.
- Creates an edit log of each change made in the books, along with the date when the change was made.
- Doesn't allow the audit trail to be disabled.
The rule applies to every company, of any size, for financial years starting on or after 1 April 2023.
What Auditors Report
The company's statutory auditor must report on whether the company used software with an audit trail feature, whether it operated throughout the year for all relevant transactions, and whether it was tampered with. Auditors also check that the audit trail has been preserved as required. A company that doesn't comply will see it in its audit report.
The Daily Backup Rule
Separately, books kept electronically must remain accessible in India at all times, and a backup — including on cloud — must be kept on servers physically located in India, taken on a daily basis. Companies also inform the ROC each year of details of the service provider and location of the servers, where they're maintained by a service provider.
What This Means in Practice
- Spreadsheets aren't a compliant way for a company to keep its books.
- Older desktop software may need upgrading to a version with a non-disableable audit trail.
- Cloud software hosted abroad needs a daily backup to Indian servers.
- The audit trail must be on for the full year, not switched on before the audit.
Does It Apply to LLPs and Proprietors?
The audit trail rule is in the Companies (Accounts) Rules, so it applies to companies. LLPs and proprietors aren't bound by it, though using software with an audit trail is good practice for anyone.
Getting Help
Think Filing reviews whether your accounting software and backup arrangements comply, and helps you move to a compliant setup if they don't.