March 31, 2021

Mandatory use of Audit Trail in the Accounting Software from 1st April 2021 and the New Audit Disclosure Requirements

On 24th March 2021, the Ministry of Corporate Affairs made certain changes in the manner in which companies are required to disclose their annual accounts and made it mandatory to use accounting software having audit trail features that cannot be disabled throughout the year.

The MCA for this purpose has notified amendments in the Companies (Accounts) Rules, 2014 and Companies (Audit and Auditors) Rules, 2014.

These amendments are due to come into effect from the 1st of April, 2021. Through these amendments, MCA has aimed at maintaining uniformity in accounting and increasing the transparency in records disclosed by the companies.

Now let us understand these changes are going to affect the process of disclosure of annual accounts from now.

1. Mandatory use of Accounting Software having Audit Trail

The subrule 1 of rule 3 requires that the books of account and other relevant books and papers maintained in electronic mode must remain accessible in India for subsequent reference.

Now with the new amendment, a condition has been added to subrule 1 which requires that from financial year starting from 1st of April 2021,

“every company using accounting software for maintaining its books of account shall use only a software that has an audit trail feature in it for each and every transaction, and must create an edit log of each change made in the books of account along with the date and also ensure that the audit trail cannot be disabled”.

An audit trail feature in an accounting software provides a step by step record by which accounting data can be traced to its source.

Further, in order to give this a strict implementation, the amendment in the Companies (Audit and Auditors) Rules, 2014 has made it compulsory for the auditor to mention certain details under the “other matters” from this financial year, by adding a new clause (g) to rule 11.

The first requirement is to mention whether or not the company has used an accounting software that has the feature of recording an audit trail in it.

If this requirement is fulfilled, the next requirement is to mention whether such facility has operated throughout the year or not, ensuring there was no tampering with the audit trail.

These provisions not only create uniformity in the maintenance of electronic books of account by the companies but also makes it compulsory for companies to use a technology that ensures greater accountability and check.

2. Disclosure on lending fund by Ultimate Beneficiaries for further lending or investing via Intermediaries other than disclosed in notes to accounts

The newly added subclause (i) in the clause (e) of Companies (Audit and Auditors) Rules, 2014 now require auditor to comment that

“Whether the management has represented that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of fund) by the company to or in any other person(s) or entity(ies), including foreign entities (Intermediaries), with the understanding, whether recorded in writing or otherwise, that the intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the company (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the “Ultimate Beneficiaries.”

The purpose of above amendment is to ensure that no company i.e. ultimate beneficiaries has not given any advances, loaned or invested to any company, person or entities i..e Intermediaries which further lend or invest that fund to any other company, person or entities on the direction of ultimate beneficiary without disclosing into notes to accounts.

This restricts a lending company to lend or invest the funds somewhere with the help of intermediary companies (whether domestic or foreign) without disclosing in Notes to accounts separately.

The auditor’s report has to mention whether this compliance was ensured or not under the “other matters”.

3. Disclosure on receiving fund by Intermediaries for further lending or investing from funding parties other than disclosed in notes to accounts

Similarly, the newly added subclause (ii) of clause (e) of Companies (Audit and Auditors) Rules, 2014 now require auditor to comment that

“Whether the management has represented that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been received by the company from any person(s) or entity(ies), including foreign entities (Funding parties), with the understanding, whether recorded in writing or otherwise, that the company shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the funding party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.”

The purpose of above amendment is to ensure that no company has received any fund from any company, person or entities i..e funding party or ultimate beneficiary for further lend or investing that fund to any other company, person or entities on the direction of ultimate beneficiary without disclosing into notes to accounts.

The auditor’s report has to mention whether this compliance was ensured or not under the “other matters”.

4. Dividend declared or paid is in compliance of section 123 of CA, 2013.

Through clause (f), the amendment requires the auditor’s report to include views and comments on whether the dividend declared or paid during the year by the company is in compliance with Section 123 of the Companies Act, 2013.

Thus, now it has become necessary for the company to disclose whether the compliances as required under the Act with respect to the dividends were ensured or not.

5. New Disclosures in Board Report

Further, in sub-rule 5 of rule 8, two new clauses have been added. Rule 8 deals with the matters that are to be included in the Board’s report.

The clause (xi) of the sub-rule 5 requires the report to include details of an application made or any proceeding pending under the Insolvency and Bankruptcy Code, 2016 during the year along with their status as at the end of the financial year.

While clause (xii) of the sub-rule 5 requires the details of the difference between the amount of the valuation done at the time of one-time settlement and the valuation done while taking a loan from the Banks or Financial Institutions along with the reasons thereof in the Board’s Report.ty on behalf of such parties, without disclosure of such transactions. Any material misstatement with regard to these two subclauses must be strictly avoided.

6. Amendments in Balance sheet schedules from 1st day of April, 2021

In exercise of the powers conferred by sub-section (1) of section 467 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following further amendments in Schedule III to the said Act with effect from 1st day of April, 2021, namely:-

Disclosure of Shareholding of Promoters
Trade Payables ageing schedule with age 1 year, 1-2 year, 2-3 year & More than 3 years
Reconciliation of the gross and net carrying amounts of each class of assets
Trade Receivables ageing schedule with age 1 year, 1-2 year, 2-3 year & More than 3 years
Detailed disclosure regarding title deeds of Immovable Property not held in name of the Company.
Disclosure regarding revaluation & CWIP ageing.
Loans or Advances granted to promoters, directors, KMPs and the related parties
Details of Benami Property held
Reconciliation and reasons of material discrepancies, in quarterly statements submitted to bank and books of accounts.
Disclosure where a company is a declared wilful defaulter by any bank or financial Institution
Relationship with Struck off Companies
Pending registration of charges or satisfaction with Registrar of Companies
Compliance with number of layers of companies
Disclosure of 11 Ratios
Compliance with approved Scheme(s) of Arrangements
Utilisation of Borrowed funds and share premium
Details of transaction not recorded in the books that has been surrendered or disclosed as income in the tax assessments
Disclosure regarding Corporate Social Responsibility
Details of Crypto Currency or Virtual Currency

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

Mandatory to have Audit Trail feature in Accounting Software with effect from 1st April 2023

The audit trail is indeed a commendable step taken by the government to improvise transparency in accounting transactions. However, such an amendment has been implemented with the least clarification. Considering the impact, MCA is required to address various issues such as the definition of Audit Trail, Edit Logs, Class of companies on which such amendment is applicable, how to deal with data of earlier Financial years to be finalized after 01.04.2023, etc.

10/04/2023 No Comments