Reporting Edit Logs in Independent Auditor's Report on Company's Financial Statements

Rule 11(g) casts responsibility on the auditor in terms of reporting on audit trail by making a specific assertion in the audit report under the section ‘Report on Other Legal and Regulatory Requirements’ {i.e. reporting as per Section 143(3)}. This has been explained in the paragraph below.

To elaborate, in addition to requiring the auditor to comment on whether the company is using accounting software which has a feature of recording audit trail, the auditor is expected to verify the following aspects:

• whether the audit trail feature is configurable (i.e., if it can be disabled or tampered with)?
• whether the audit trail feature was enabled/operated throughout the year?
• whether all transactions recorded in the software are covered in the audit trail feature?
• whether the audit trail has been preserved as per statutory requirements for record retention?

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Considering the applicability date of Rule 11(g), it implies that the auditor is not required to assess the appropriateness of the audit trail of previous years and the assessment will be only for prospective financial years. As per the requirements as mentioned in paragraph 3 above, audit reporting will be triggered for financial years commencing on or after April 1, 2022, however, the applicability of the Account Rules will commence on or after April 1, 2023. Thus, there is likely to be a scenario for the financial year 2022-23 where in the absence of compliance requirements for the companies, auditors would not be able to report under Rule 11(g).

There are three expected scenarios

i. Management may maintain an adequate audit trail as required by the Account Rules.

ii. Management may not have identified all records/transactions for which audit trail should be maintained.

iii. The accounting software does not have the feature to maintain an audit trail, or it was not enabled throughout the audit period.

In Scenario (i), unmodified reporting is expected, while Scenarios (ii) and (iii) outlined above would prompt a modified/adverse reporting under this clause.?

Illustrative Wordings for Reporting

For Scenario (i)

1. Standalone Financial Statements

Based on our examination which included test checks, the company has used 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 year 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 the company as per the statutory requirements for record retention.

2. Consolidated Financial Statements

Based on our examination which included test checks performed by the respective auditors of the subsidiaries, associates, and joint ventures/joint operations which are companies incorporated in India whose financial statements have been audited under the Act, the company, subsidiaries, associates and joint ventures/joint operations have 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 year for all relevant transactions recorded in the software. Further, during the course of our audit, we and respective auditors of the above referred subsidiaries, associates and joint ventures/joint operations did not come across any instance of audit trail feature being tampered with.

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For Scenario (ii) and (iii),

1. Standalone Financial Statements

Based on our examination which included test checks, except for the instances mentioned below, the company has used 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 year for all relevant transactions recorded in the software. Further, during the course of our audit, we did not come across any instance of the audit trail feature being tampered with. Additionally, the audit trail has been preserved by the company as per the statutory requirements for record retention.

2. Consolidated Financial Statements

Based on our examination, which included test checks, performed by the respective auditors of the subsidiaries, associates, and joint ventures/joint operations which are companies incorporated in India whose financial statements have been audited under the Act, except for the instances mentioned below, the company, subsidiaries, associates and joint ventures/joint operations have used 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 year for all relevant transactions recorded in the software. Further, during the course of our audit, we and the respective auditors of the above-referred subsidiaries, associates, and joint ventures/joint operations did not come across any instance of the audit trail feature being tampered with.

General reporting format of exception instances

• Instances of accounting software for maintaining its books of account which did not had a feature of recording audit trail (edit log) facility and the same was not operated throughout the year for all relevant transactions recorded in the software: No of Instances without mentioning name of components.
• Instances of audit trail feature being tampered with
• Instances of non-preservation of the audit trail

Further, reporting with respect to FY 2022-23,

In respect of the financial year 2022-23, where management has not been mandated to use the accounting software with the requisite audit trail facility, the reporting against this clause can be as illustrated below:

“As proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 is applicable for the company only w.e.f. April 1, 2023, reporting under this clause is not applicable.”