IFC- An Insight

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Internal Financial Controls An Insight February, 2016 P. G. Joshi & Co. Chartered Accountants

Transcript of IFC- An Insight

Page 1: IFC- An Insight

Internal Financial Controls – An Insight

February, 2016

P. G. Joshi & Co. Chartered Accountants

Page 2: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

Are you ready for the

new regime ?

The Companies Act, 2013 has ushered

in the new era of Corporate

Governance and transparency and is

set to have far reaching implications.

The new regime is expected to

turnaround the governance of

corporate sector in India.

Need of turnaround

The recent corporate frauds (Satyam,

Enron), have created an atmosphere

of mistrust in the governance of

corporate.

The USA has already adopted the

Sarbanes Oxley Act in 2002, which

contains regulations on the internal

control expected from companies.

Thus, it was imperative for the

government to come up with

regulations to re-instill the trust in the

corporate sector.

Key Enablers

Internal Financial Controls

Stringent norms for appointment

of directors and auditors

Emphasis on Board Committees

and vigil mechanism

Improved reporting mechanisms

Page 3: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

What is Internal Financial Control ?

A process designed to provide reasonable assurance regarding the reliability

of financial reporting and preparation of financial statements for external

purposes in accordance with generally accepted accounting principles

Objectives of IFC

Orderly and efficient conduct of its business

Adherence to company’s policies

Safeguarding of assets

Prevention and detection of frauds and errors

Financial Information based on GAAP

Accuracy and completeness of accounting records, and

Timely preparation of reliable financial information

Reporting on Internal Control

Companies Act, 1956 v/s Companies Act, 2013 – A Comparison

Companies Act, 1956

CARO, 2003

Purchase of FA and

Inventory

Sale of Goods

Companies Act, 2013

CARO, 2015

Purchase of FA and

Inventory

Sale of goods and

services

Internal Financial Controls

Entire Financial Reporting

Process

Page 4: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

Responsibilities under IFC

Management’s Responsibility

The Companies Act, 2013 requires the Directors’ Responsibility Statement to

state that the directors had laid down internal financial controls to be

followed by the company and that such internal financial controls are

adequate and were operating effectively.

Audit Committee

Terms of Reference to include Evaluation of Internal Financial Controls and Risk

Management Systems

Auditor’s Responsibility

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 only

Page 5: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

Particulars Auditor’s

Responsibility Directors’

Responsibility Audit Committee

Applicability All Companies All Companies Listed and Specified

Public Companies

Reporting Separate Audit Report on IFC

Director’s Report (Director’s

Responsibility Statement)

Audit Committee Report

Legal Provisions

S. 143(3)(i), Cos. Act, 2013

R. 8(5)(viii), Cos. (Accounts)

Rules, 2014

S. 177(4)(vii), Cos. Act, 2013

Objective

Adequacy and Operating

Effectiveness of IFC

Adequacy of Internal

Financial Controls

Evaluation of Internal

Financial Controls

IFC – Legal Implications on Non - Compliance Qualified / Adverse /

Reservation of Opinion by

Auditor

Inquiry and Inspection by ROC (s. 206)

Report to Central Government (s. 208)

Investigation of the affairs of the company by Central

Government (s. 210)

Inspector’s Report on Investigation (s . 223)

Actions on Inspector's Report – Prosecution /

Winding-Up (s.224)

IFC – Legality - Summary

Page 6: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

Control Environment

Integrity and Ethics

Work Culture

Organization Structure

Authority and Responsibility Assignment

HR Policies and Practices

Risk Assessment

Identification

Impact Assessment

Mitigation

Control Activities

Performance reviews

Information Processing

Physical Controls

Segregation of Duties

Information System

Occurrence

Classification

Accuracy and Completeness

Cut-off

Presentation and Disclosure

Communication

Policies

Procedures

Codes

Manuals

Monitoring

Check on operations for effective and timely performance

Maintenance

Review of processes and internal and external reports

IFC – Components

Page 7: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

How to implement IFC ?

Steps to be taken by the Management for IFC Implementation

Development of System

Designing and development of operations system with controls, risk mitigation mechanisms and policies and procedures

Documentation Documenting the policies and Procedures

Communication Communicating the system and related controls through the hierarchy of the organization

Monitoring Monitoring the implementation and operating effectiveness of system and controls

Evidence Generating evidence through routine operations about operating effectiveness for internal financial controls

Page 8: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

Questions to be answered by CFO?

Control Environment

• Do you have functional level policies?

• Do you have proper organization structure?

• Do you have internal capacity building mechanism?

Control Activities

• Do you have authority and responsibility assignment and monitoring mechanism?

• Do you have compliance monitoring and reporting mechanism?

• Do you have process level controls?

Risk Assessment

• Do you have proper risk identification mechanism?

• Do you pay adequate focus on safeguarding of assets including information?

• Do you have plugged in controls in risk vulnerable areas?

Information System and Communication

• Do you have policies and procedures covering all the areas of your business?

• Have the procedures being communicated to all the stakeholders?

• Do the procedures and processes are easy to comprehend?

Monitoring

• Do you update the key stakeholders about the control system on a periodic basis?

• Do you have proper internal audit function working in your organization?

• Have you considered self assessment and automation of control reporting?

Page 9: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

How can we help in your IFC Journey ?

# 2 Review the existing structure of business operations and processes from the perspective of financial reporting

# 3 Gap Analysis of IFC Components and existing business processes

Identify the deviations from existing processes # 4

# 5 Back-end support for realigning existing business processes and procedures with the ideal IFC components

# 6 Back end support in documenting the Internal Financial Controls

# 1 Examine the financial statements to identify significant account balances and disclosures from the viewpoint of IFC

Page 10: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

Phase II

‘As Is’ Assessment

Phase I

Preliminary Analysis and

Planning

Phase III

System Analysis and Development

Phase IV

Knowledge Transfer

Confirm Project Plan

Understand organization’s

overall business processes

Meet with key stakeholders for

validation of observations

Analyze the current system

Identify the deviation in

policies

Risk Identification

and Assessment

System Analysis and

Restructuring

Development of system

components

Discuss – Review –Amend

- Approve

Test the operating

effectiveness

Prepare final signed-off versions

Conduct Knowledge

Transfer

Our Approach

Page 11: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

Founded in the year 1954, P. G. Joshi & Co. is a professionally managed Chartered

Accountancy Firm headquartered at Nagpur. Late Shri Prabhakar Gopal Joshi, the

founder, established P.G. Joshi & Co. at Dhanwate Chambers, Pt. Malviya Road,

Sitabuldi, Nagpur, which now serves as the Head Office of the firm.

By starting a branch at Pune in the year 1986, P. G. Joshi & Co. now has a strong

presence in the western region of India. We believe in

• Upholding ethical codes in all our

practices

• Professionalism

• Working in accordance with the

professional standards

• Honesty with clients & dedication to

work

• Maintaining & respecting clients'

confidentiality

About P. G. Joshi & Co.

Page 12: IFC- An Insight

Internal Financial Controls – An Insight

P. G. Joshi & Co. Chartered Accountants

Our Offices

Reach us at

Nagpur

Dhanwate Chambers, Pt. Malviya Road, Sitabuldi,

Nagpur - 400 012 [email protected]

Tel : + 91 712 242 5309 / 254 7053 Mobile: +91 98904 29185

Pune

Flat No.6, Janhavi Apartments, CTS No. 40/22, Bhonde Colony,

Erandawane, Pune- 411 004 [email protected]

Tel-Fax: + 91 20 2542 4511

www.pgjco.com

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