Internal Control Over Financial Reporting

Introduction

According to Company’s Act 2013, the term Internal Financial Controls (IFC) has been defined as the policies and procedures adopted by the Company to ensure orderly and efficient conduct of its business, including adherence to company’s policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of accounting records, and the timely preparation of reliable financial information. The purpose of IFC given by Companies Act 2013 is to protect both listed as well as unlisted companies against any kinds of frauds in their books provided done by insider or an outsider.

Internal controls on financial reporting have become increasingly relevant, as risk management has become more crucial.Effective internal controls ensure accuracy in financial reporting, compliance with laws and regulations and efficient operations.The challenges companies face while implementing a financial reporting programme include compliance overkill, paucity of resources and lack of skills.Companies must opt for outsourcing and automation of their non-key finance processes to enable standardization and faster access to data

Applicability of Reporting on Internal Financial Controls

Director’s Responsibility of Listed Companies

Section 134 of the Companies Act, 2013 requires the Directors’ Statement of Responsibility to state that the Directors had established adequate internal financial controls to be followed in the Company and asserting that such Internal Financial Controls are operating effectively

Director’s Responsibility of Unlisted Companies

Section 134 (5) (e) of the Companies Act, 2013 is applicable on the Listed Companies. However, Rule 8(5)(viii) of Companies (Accounts) Rules, 2014 requires in the Directors Statement of Responsibility to state that the Directors had established adequate internal financial controls with references to the financial statements

Auditor’s Responsibility

Under section 143 (3) of the Companies Act, 2013, the auditor is required to state in its report that whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.

The auditor's objective in an audit of internal financial controls over financial reporting is to express an opinion on the effectiveness of the company's internal financial controls over financial reporting. The auditor needs to obtain reasonable assurance to state whether an adequate internal financial controls system was maintained and whether such internal financial controls system operated effectively in the company in all material respects with respect to financial reporting.

The auditor report should state whether the company has adequate internal control systems in place and whether they were operating effectively as at the balance sheet date.

Importance of Effective Internal Controls on a Company

In our opinion, effective internal controls matter to a company in the following five essential ways:

• It ensures accuracy in financial reporting

• It ensures compliance with laws and regulations

• It builds effective and efficient operations

• It allows for a peaceful night’s sleep – ensures that the management team and the stakeholders are not faced with risks since they adhere to the required regulations

• It saves money

Challenges Faced by Companies While Implementing a Financial Reporting Compliance Program


• Failure to identify/quantify all material risks.

• Failure to obtain multilevel management commitment.

• Failure to integrate the program among all functions

• Failure to provide a mechanism to incentivize employees

• Failure to monitor effectiveness of program

• Failure to keep senior management apprised and engaged

• Failure to properly and thoroughly train employees

• • Failure to report violations

Services Offered

With Our core team dedicated and experienced in implementation of Internal Control Over Financial Reporting of various manufacturing, trading and service industry we offer below assistance services for your organization with efficient and timeliness approach:

• Review of existing process and controls documentation.

• Review of ‘Entity level controls’ such as code of conduct, whistleblower mechanisms, delegation of Authority management reporting, etc.

• Evaluate control testing results from existing monitoring mechanisms such as Internal Audit scope and coverage; management self-assessment questionnaires, ERM etc.

• Track controls and testing of controls of processes

• Drafting of Business Processes Narratives over all material business processes.

• Risks & Controls Matrices as required.

Working in the capacity of an Internal Control Over Financial Control auditor, we provide following services: 

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