Wednesday, 30 March 2016

Internal Financial Controls

Facts

Ø  The Companies Act 2013 has introduced new reporting requirement and has cast onerous responsibilities on the statutory auditors as mentioned in Sec 143(3) and Sec 143(12) of Companies Act 2013 because reporting on internal financial control is not covered under the Standards on Auditing issued by ICAI and also because of the fact that no framework has been prescribed under the companies Act’2013 and the Rules thereunder for the evaluation of internal financial controls.
Sec 143(3) and sec 143(12) read with rule 10A of companies (audit and Auditors) Rules-
Auditor to evaluate and issue a separate report on the adequacy and operating effectiveness of Internal Financial Controls (IFC) over the financial reporting and financial statements in case of all companies(Both listed and unlisted).

Ø  The Companies Act 2013 has significantly expanded the scope of internal controls to be considered by the directors of companies to cover all aspects of the operations of the company as the management has the primary responsibility of designing, implementing and maintaining appropriate internal financial controls.

Ø Under the Act, the directors statement of responsibility over establishing adequate internal financial controls and asserting operating effectiveness of such controls of the company is required only in case of listed companies as per Sec 134(5) (e).

Sec 134(5)(e) read with rule 8(5)(viii) of companies (Accounts) Rules, 2014 and schedule VI; clause 49(I)(D):-

Sec 134(5) (e) –Director Responsibility Statement to state that

·         The directors in case of listed company had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
·         Whereby Internal Financial controls consists of policies and procedures adopted by company for ensuring orderly and efficient conduct of its business.
Rule 8(5)(viii) of the companies (Accounts) Rules, 2014:- Board to report details on adequacy and operating effectiveness of Internal financial Controls(IFC) with reference to financial statements.
So, it has now become important to ensure keeping in view internal financial controls which has placed responsibility on directors that how directors are ensuring that proper policies and procedures are in existence and that whether they are operating effectively in terms of
·         Commercial operations and
·         Financial transactions,
during the year though the reporting is required at the balancesheet date, in order for the prevention and timely detection of material misstatements arising out of these operations and transactions that may have an effect on the financial statements.


Ø  Role of Audit committee-Clause (vii) of Sub-section 4 of Section 177 of the Act states that every audit committee shall act in accordance with the terms of reference specified in writing by the board which shall, inter alia, include, “evaluation of internal financial controls and risk management systems”.

2 comments:

  1. This has imposed lot of responsibility on directors...

    ReplyDelete
  2. There are fewer audit companies about internal control weakness.
    Service tax auditing firms in Delhi

    ReplyDelete