Audit Trail in Accounting Software: Companies Rule 3(1), Auditor Reporting under Rule 11(g), Retention and Penalty
CA Meet Dhrangadhariya 
October 8, 2026
CA Meet Dhrangadhariya October 8, 2026
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Last updated: 08 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP
Quick summary
An audit trail is a time-stamped record that shows who entered or changed a transaction and when. For companies, having it in the accounting software is no longer a best practice but a legal requirement, and the statutory auditor must say in the audit report whether the company complied.
The proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 says that, for a financial year beginning on or after 01/04/2023, every company which uses accounting software for maintaining its books of account shall use only such software which:
The date was first 01/04/2021 and was deferred twice, finally to 01/04/2023 by the Companies (Accounts) Second Amendment Rules, 2022. For a company with a March year-end, the first year covered was FY 2023-24.
Every company that uses accounting software, which includes private limited companies, OPCs, Section 8 companies, and Government companies. If the books are kept entirely on paper, the rule has nothing to operate on. Accounting software can be on-premise, on the cloud, a SaaS product, hosted in India or abroad, or run by a service provider for the company. Where a separate system (say a billing or payroll tool) generates entries that become part of the books, that system needs the feature too, because its records form part of the books of account.
Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014, read with section 143(3), requires the audit report to state in the section on other legal and regulatory requirements whether the company has used accounting software which:
The ICAI Implementation Guide expects the auditor to check whether the feature can be configured or switched off, whether it was enabled for the whole year, whether every transaction is covered, and whether the records have been kept for the statutory period. Where the books are entirely manual, the auditor states that as a fact.
Section 128(5) requires books of account and the related vouchers to be kept for not less than eight financial years immediately preceding the current year (or all years, if the company is younger than eight years). The audit trail is preserved for that period, which means log storage, backup and the ability to produce the data on request.
Section 128(6) provides that the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person the Board has charged with complying with section 128, is liable to a fine of at least Rs 50,000 and up to Rs 5 lakh if the section is contravened. The imprisonment limb that earlier appeared in that section was omitted by an amendment effective 21/12/2020.
Every company, including a private limited company, OPC and Section 8 company, that maintains its books of account in accounting software. Where books are kept entirely manually, the rule has nothing to apply to and the auditor reports that fact.
From the financial year beginning on or after 01/04/2023, which is FY 2023-24. The original 2021 date was deferred twice.
Record an audit trail of each and every transaction, create an edit log of each change made in the books with the date of the change, and ensure that the audit trail cannot be disabled.
Under Rule 11(g), in the report on other legal and regulatory requirements, whether the company used software with an audit trail feature, whether it operated throughout the year for all transactions, whether it was tampered with, and whether the audit trail was preserved as per statutory requirements.
The books of account and the vouchers must be kept for at least eight financial years under section 128(5), and the audit trail is to be preserved in line with that statutory period.
The rule is made under the Companies Act, 2013 and applies to companies. A firm or LLP is not covered by it.
Section 128(6) provides a fine of Rs 50,000 to Rs 5 lakh on the managing director, whole-time director in charge of finance, the CFO or the person the Board has charged with complying with section 128. The words providing imprisonment were omitted in December 2020.
This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.
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