CS Urja Mahesh
Karia
Audit of ‘Internal Financial controls (hereinafter to be referred as ‘IFC’)
over Financial Reporting’ is a reasonably advanced reporting concept for India.
In India though there were no such requirements earlier, however, similar
reporting requirements existed globally such as section 404 of Sarbanes Oxley
Act, 2002 of USA.
Initially when majority of the
Sections of the Companies Act, 2013 (hereinafter to be referred as ‘the Act’)
were notified along with Section 143(3)(i), there was lot of ambiguity not only
on part of the company but also on the part of the auditors regarding the
actual reporting.
Later on, MCA has notified the Companies (Audit & Auditors)
Amendment Rules, 2014 and
introduced new Rule 10A. Further, ICAI has also issued Guidance Notes on 14th September 2015 and both of these steps
helped to give more clarity on the said concept.
Introducing this requirement
has caused a lot of apprehension and on the other hand it also induced a lot of
interest.
A combined study of the
concerned provisions Companies Act, 2013 and ICAI Guidance Notes, below given
are some points which can be helpful in understanding the said concept and establishing
IFC in any Company:
I.
Applicability:
The said Guidance Note applies
for reporting on internal financial controls in respect of listed companies, unlisted companies, small companies and also one person companies (as defined in the Companies Act,
2013). It means is applicable to all type of companies incorporated under the Act.
Simple reading of Section
143(3)(i) of the Act and Rule 10 (a) of the Corresponding Rules does not specifically provides
that IFC is applicable only in the case of listed companies.
Therefore, it appears that the
auditor is required to report on adequacy and operating effectiveness of such
internal financial controls even in the case of all companies.
II.
Auditor’s Reporting:
Auditors Reporting on internal
financial controls is a requirement specified in the Act and, therefore, will
apply only in case of reporting on financial statements prepared under the Act
and reported under Section 143.
Accordingly, Reporting on
internal financial controls will not be applicable with respect to interim
financial statements, such as quarterly or half-yearly financial statements,
unless such reporting was required under any other law or regulation.
III.
Specified Date:
The period of testing should
cover the entire period of the financial statements. However, the
reporting by the auditor will be based on the situation existing as at the
balance sheet date.
IV.
Responsibility in IFC:
Board of Directors – Boards’
report of all companies to state the details in respect of adequacy of internal
financial controls with reference to the financial statements.
Statutory Auditor- To express
an opinion on the effectiveness of the company’s internal financial controls
financial reporting and the procedures in respect thereof are carried out along
with an audit of the financial statements.
V.
Top-Down Approach to Internal Financial Controls Over Financial Reporting as
provided by ICAI Guidelines:
VII. Some Other Points clarified in the ICAI Guidance Notes on Audit of
Internal Financial Controls over Financial Reporting :
♣ Even if a specific statement
of responsibility of the directors over internal financial controls is not made
in the board’s report to the members of unlisted companies, ensuring adequacy
and operating effectiveness of the internal financial controls system still
remains with the management and the persons charged with governance in the
company.
♣ A company’s internal financial control over financial reporting includes
policies and procedures that –
(1) Pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(3) Provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
♣ Audit
Engagement Letter: It is
to be issued by the auditor to the company. The auditor can issue 2 types of
Engagement letters viz.
- Either issue combined engagement letter for reporting on financial statement and reporting on Internal Financial Statement; or
- Separate engagement letter for reporting on financial statement and reporting on Internal Financial Statement.
♣
Management Representation Letter: To be issued by the entity to the auditor.
Therefore, the concept of
Internal Financial Control is not only process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements but it also leads to good governance and lucidity or
better transparency in the company.
Disclaimer: The above
views are only a concise over view of corresponding sections of the Companies
Act, 2013 and the guidance note issued by ICAI on IFC and is not exhaustive in
any manner howsoever.
(Author
may be reached at oorjakaria@gmail.com)
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ReplyDeleteThis blog post about internal financial controls over financial reporting is a timely reminder of the importance of sound financial management within organizations. Such controls are vital for transparency and accountability. Thanks for highlighting this critical aspect of financial governance!
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