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Transcript of IFC- An Insight
Internal Financial Controls – An Insight
February, 2016
P. G. Joshi & Co. Chartered Accountants
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
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
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
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
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
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
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?
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
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
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.
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
This document is intended for private circulation to the addressee only on specific request by him and is not meant for re-circulation. Any form of reproduction dissemination, copying, disclosure, modification, distribution and/or publication of this document is strictly prohibited. The document is not intended to be an advertisement or a solicitation. This document contains information in summary form and is therefore intended for general guidance only. The contents of this document are solely meant to inform the legal developments and is not a substitute for professional advice. Legal advice should be sought for based on the specific circumstances of each case before relying on the contents of this document or before taking any decision based on the information contained in this document. P. G. Joshi & Co. disclaims all responsibility and accepts no liability for the consequences of any person acting or refraining from acting on the basis of such information.
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