internal controls over financial reporting in the indian context
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New Auditing Responsibilities u/s 143 of Companies Act 2013Bharath Rao | 23rd June 2016
C:\Users\Bharath\Desktop\ICFR\TCS Annual
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Outline Mistakes IFCs
Guidance
NoteExampl
es
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Mistakes
Mistakes IFCs Guidance
Examples
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Mistakes…
Carrian Group
1993
Accounting fraud. An auditor was murdered, an adviser committed suicide. The largest collapse in Hong Kong history
WorldCom
2001
Fraudulent Accounting Methods to increase. The Legend of all scams
Peregrine Systems
2002 Overstated sales
Satyam 2009
Falsification of Accounts. Legend of Indian Corporate Scams
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Effects
Goodwill?
Public Trust?
Belief?Jobs
Penalties Money
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Causes
Greed“Too Much” Determinati
on
Inefficient Internal Controls
Loopholes
Lack of Guidance
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Regulations and Internal Financial Controls
Mistakes IFCs Guidance
Examples
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Section 134 –
• Director’s Responsibility Statement –
• Listed Companies shall have IFCs
Section 143 –
• Auditor’s Report shall State –
• Adequate IFCs System and is operating effectively
Section 149 –
• Independent Directors –
• Integrity of Financial Information and IFCs are robust and Dependable
Section 177 –
• Audit Committee –
• Evaluate IFCs and Risk Management System
Clause 49(V)(c) –
• CEO/CFO Certification –
• Accept Responsibility for establishing and maintaining ICFR and have valuated their effectiveness.
Regulations
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Internal Controls
The Process designed, implemented and maintained by TCWG and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with regards to reliability of financial reporting, effectiveness and efficiency of operations, safeguarding of assets and compliance of applicable laws and regulations
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Components of Internal Controls (COSO Framework)
Control Environmen
tRisk
Assessment
Control Activities
Information and
Communication
Monitoring
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Internal Control Equation
General
Controls
IT Control
s
Internal
Controls
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IT Controls
IT Controls
Application Controls –
(ITAC)
IT General Controls -
(ITGC)
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Internal Financial Controls explained as per CA 2013
Explanation to section 134(5)(e) — For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company
for ensuring the orderly and efficient conduct of its business,
including adherence to company’s policies, the safeguarding of its assets,
the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records,
and the timely preparation of reliable financial information
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One More Step Under
Business
Process
Financials
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What Internal Financial Controls?
Business Risk
IT and Operational Risks
Financial Risk
Internal Financial Controls
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Audit Risk and Sampling Strategy
Audit RiskDetection Risk
Controllable Risk
Inherent Risk
Higher Sampling Lowers Detection Risk
Define Level of Confidence (90%) Forms basis of Sampling (10% of
Population)
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Guidance Note of ICAI
Mistakes IFCs Guidance
Examples
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Financial Areas
Cash/Bank Balances
Prepaid Expenses
Trade Receivable Inventory
Goodwill and
Intangible Assets
Trade Payables
Provision for
ExpensesLoans/
Borrowings
Employee Benefits Taxes
Share Capital,
Reserves
Revenue from
Operations
Cost of Production,
SalesDepreciatio
nFinance Costs
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Suggested Areas
Identification and
Inspection of
Documentation of
Policies, Processes
Identifying and
Understanding the
business applications and their
roles
Perform Design Effectiveness to
check if Policies and Documented
Procedures are sufficient and
adequate to the size of the business
Perform Testing for Operationa
l Effectivene
ss, Audit Evidence
and Documentati
on
The Process to be followed
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The Process to be followed in Detail
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IG 4 – Understanding the IT Environment
Significant Accounts and Disclosures
It’s Relevant Applications
Relevant IT Infrastructure (OS, Database, Hardware)
Relevant IT risks
Relevant IT Controls
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IG 6 – Segregation of Duties
Microsoft Word 97 - 2003 Document
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IG 6 – Segregation of Duties
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IG 10 – Techniques for Control Testing
Inquiry Observation
Examination of
Documentation
Re-Performance
Walkthroughs (IG 12)
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IG 11 – IFC – Testing of Design
Objectives: Conclude on effectiveness of the
design to assess risk Plan the nature, timing and extent of
the tests for operating effectiveness Understand the Nature and
significance of the risks of material misstatement addressed by the control
Characteristics or details of the control Factors to determine whether the control
is appropriately designed to address the identified risk.
Competence and authority of the person(s) performing the control
Frequency and consistency with which the control is performed
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IG 13 – IFC – Test of Operating Effectiveness
Assess Findings and Conclude
Perform tests of Operating Effectiveness
Plan the NTE of Operating Effectiveness based on results of
Design Effectiveness
Assess the risk associated with the control
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IG 15 – Roll Forward Testing
Objective: To identify any changes to the business
occurred that could give rise to new, or affect existing risks of material misstatement,
That would necessitate implementing new controls or modifying the design of existing controls
Existing controls continue to operate effectively in the roll forward period
Identification of “Roll Forward Period” Auditor rolls-forward the conclusions of
the effectiveness of those relevant controls which were tested and concluded to be effective as at an interim date
Initial/Major Testing Period Roll Forward Period
Interim
Date
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Some more Newer Concepts
IG 16 – Rotation Plan for testing IFCs
IG 17 – Remediation Testing
IG 18 – Using Work of Internal Auditors (SA 610) and Expert
(SA 620)
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Reporting
Obtain Management’s Assertion regarding Internal Financial Controls
Details of Areas, Processes and the Internal Controls deployed and their status
Define Auditor’s Responsibility (SA 210) and limitations
Report (As an Annexure or Separate Report) – SA 700, SA 705
Opinion regarding the design and operating effectiveness of the IFCs
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ExamplesControl Activities and Testing Templates
Mistakes IFCs Guidance
Examples
Microsoft Word 97 - 2003 Document
Microsoft Excel Worksheet
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Thank You Bharath Rao | +91 88922 29220 | mailme@bharathraob.com |Bharathraob.com |/bharathraob
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