Internal Financial Control

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Table of ContentsWhat is Internal Financial Control (IFC)?What is Internal Financial Control Over Financial Reporting (ICFR)?Who All Are Responsible?Expressing an opinion on Internal Control – How will you do it?How will IFC help beyond complianceKey Objectives of CoverageKey Highlights of the Guidance Note issued by ICAIPenalties for Non complianceHow will A.P. Doshi & Co help for IFC ?Why A.P. Doshi & Co. ?Conclusion

What is Internal Financial Control (IFC)?

(Section 134)

Internal Financial Controls over

Financial Reporting(ICFR)

+ Operational Controls + Fraud Prevention = IFC

Sales Realisation is correctly recorded in the Financials

Discount on sales isoffered as per DOA and Adherence to DOA is monitored

Unauthorised change in the price master(Access Control)

As per section 134 of the Companies Act 2013, the term "Internal Financial Control" means the policies and procedures adopted by the company for ensuring: orderly and efficient control of its business, including adherence to its company’s policies, Safeguarding of its Assets, prevention and detection of frauds and errors, accuracy and completeness of accounting records, andtimely preparation of reliable financial information.

Components

Examples

Definition

What is Internal Financial Control over Financial Reporting (ICFR) ? (Sec 143 - as per ICAI Guidelines

Maintainance of Financial Records (Detail / Accuracy)

+ Authorisation of Transactions +

Safeguarding the assets of the

company= ICFR

"A process designed to provide resasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in ccordance with generally accepted accounting principles". A company's internal financial control over financial reporting includes those policies and procedures : Pertains to maintanance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;Provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statement in accordance of generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; andProvide reasonable assurance regarding prevention or timely detection of unauthorised acquistions, use, or disposition of company's assets that could have a material effect on the financial statements".

Components

Definition

The Companies Act 2013 – Who All Are

Responsible?Section 134

Director’s Responsibility Statement

In the case of Listed Company, Director’s Responsibility state that directors, have laid down IFC to be followed by the company and that such controls are adequate and operating effectively.

Section 143

Auditor Report

The Auditor’s Report should also state whether the company has adequate IFC system in place and operating effectiveness of such controls.

Section 177

Audit Committee

Audit Committee may call for comments of Auditor on IFC before their submission to the board and may also discuss any related issues with the internal & statutory auditors and management of the company.

Sch IV Independent Directors

The Independent Directors should satisfy themselves on the integrity of financial information and ensure that financial controls and systems of risk management are robust and defensible

IFC

ICFR

ICFR

ICFR

The Companies Act 2013 – Who All Are

Responsible?Requirements

(Based on Previous Slide) Public Listed Public Un-listed

Pvt Cos Paid Up Share Capital >= 20Cr

Paid up Share Capital >= 10 Cr

Turnover >= 100Cr

Loans, Borrowing in aggregate >= 50Cr

1 Director's Responsibility Statement (134)

       

2 Auditor's Report (143)

3 Audit Committee (177)  

4 Independent Directors (Sch IV)

 

5 Rule 8(5)(viii) of the companies (Account) Rules 2014 - BOD report - Financial Statement only (ICFR only)

 

IFC

ICFRICFR

ICFR

ICFR

How will IFC help beyond compliance ?

Help in business process re-designing to plug revenue leakages & cost containment opportunities

Helps in rationalizing the number of controls across organization – moving to smart and automated controls

Helps in standardizing policies and procedures for multi-location / multi-business companies

Foster a control conscious work culture for people behind controls Provide assurance to the CEO / CFO as well as improves business

performance In some instances, also serves as base for blue print of optimal procedures

while thinking about ERPAimed at strengthening the process to further improve business, identify cost containment opportunities as well as drive growth

Key Objectives of Coverage

Assignment of responsibility, delegation of authority, segregation of duties and establishment of related policies and procedures to provide a basis for accountability and controls

Assets and ownership interests exist at a specific date & Assets are the rights of the entity at a specified date

Enable proactive anti-fraud controls and a fraud risk management framework to mitigate fraud risks to the company

All transactions occurred during a specific period have been recorded & Assets, liability, revenue and expense components are recorded at appropriate amounts

Financial items are properly described, sorted and classified & Financial information is provided as per the timelines defined by the relevant stakeholders

Key Highlights of the Guidance Note

issued by ICAI

Guidance note has indicated the presence of 5 internal control components and operating together in an integrated manner

There is no need to specifically adopt a particular framework however the guidance note refers to SA 315 issued by ICAI at various places

Scope of internal financial controls is restricted to internal controls over financial reporting only. However Boards still need to comply provide their report on the operational controls

Auditors reporting on internal controls over financial reporting is applicable for all listed as well as unlisted companies. No transition period for small and medium enterprises

The auditor should report if the company has an adequate internal control systems in place and whether they were operating effectively as at the balance sheet date. Hence does not apply to interim statements

The requirements are intended to apply in the case of the consolidated financial statements. Foreign subsidiaries may be excluded, however domestic subsidiaries , JVs and associates registered as a company under the companies act will be covered

Management should form a basis to document the framework and substantiate the effectiveness of the framework which forms a basis of evaluation by other parties interacting with the entity, such as regulators, auditors, or customers

Controls need to be defined at an Entity level as well as Process level. IT and Fraud aspects need to be covered in the framework. Once defined these controls should confirm to their design and need to operate effectively across all transactions.

Penalties for Non compliance with the

Requirements

Certain personnel defined as Officer in default include: Whole-time Directors Key Managerial Personnel

(CEO/CFO/Co. Secretary) Any person in accordance

with whose advice, boards acts

Every director, in respect of a contravention of any of the provisions of this Act, who is aware of or participated in such contraventions

Penal Provisions under Companies Act

‐ Imprisonment up to 5 years or fine up to INR 5 lakh or both.

‐ Penal provisions for not complying with Section 134 : Failure to give this disclosure will lead to penalty up to INR 25 lakh on the company and 3 years and / or up to INR 5 lakh on the “Officers in default”

How will A.P. Doshi & Co help for IFC ?

Perform a diagnostic review of existing Internal Control to evaluate whether it meets the requirement of Companies Act, 2013 with respect to IFC and identify the gaps & recommend how to fill the gap.

Assisting in documentation of Internal Financial control at both levels at entity level as well as process level including fraud controls (i.e. SOP Preparation)

Assists post implementation to test the all implemented controls to check whether it is being followed regularly and properly without any lapse. Apart from this we shall provide training subsequent to IFC implementation.

Helps management in complete implementation of of IFC framework from planning to reporting by undertaking various activities as agreed by the management.

Helps in developing policies, Standard Operation Procedures with the help of extensive templates.

Why A.P. Doshi & Co. ? Credibility: APD has extensive experience in carrying out IFC

engagements for clients with various business . We have a team of professionals with the right skills and experience to cater to your requirements.

Knowledge Centric: Our team possess an extensive knowledge of the typical nature of exceptions noted during audit by auditors which can aid us to identify the loopholes and crack the solutions at an early stage. Strong analytical, problem solving and decision making skills to evaluate alternatives and provide recommendations on business issues along with due care with respect to compliance

Ready Tools & Templates for Quick Development: APD’s ready process on the internal control templates are delivered in both text and spreadsheet formats so you can easily develop and print internal control checklists and questionnaires assisting your organization in strengthening internal financial control environment.

Contact DetailsA . P. Doshi & Co. Chartered

AccountantsD 613 / 614, Neelkanth Business Park,Vidyavihar (West),Mumbai – 400 086.# 022 2514 68 54 / 55 / 56mitesh@apdoshi.comamlesh@apdoshi.comwww.apdoshi.com

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