Internal Financial Controls - WIRC-ICAI

1 Internal Financial ControlsWho All Are Responsible?3 What is Internal Financial Control (IFC) ?5 What is Internal Financial Controls over financialreporting (ICFR) ?6 Internal Controls Global Perspective7 Expected response of stakeholders8 Expressing an opinion on Internal control how willyou do it10 Page 3 The Companies Act 2013 Who All Are Responsible? In the case of a listed company, the Directors Responsibility states thatdirectors,have laid down IFCto be followed by the company and thatsuchcontrols are adequate and operating effectively.

2 The auditor s report should also state whether the company hasadequateIFC system in placeand theoperating effectiveness of such Controls Audit committeemay call for comments of auditors about internalcontrol systemsbefore their submission to the Board and may alsodiscuss any related issues with the Internal and statutory auditors and themanagement of the company The independent directors should satisfy themselves on the integrity offinancial information andensure that Financial controlsand systems ofrisk managementare robust and IVDirector sResponsibilityStatementAuditor ReportAudit CommitteeIndependentDirectorsPage 4 The Companies Act 2013 Who All Are Responsible?

3 (contd.)Director s ResponsibilityStatement (134)12 Auditor Report (143)Requirement(as per previous slide)3 Audit Committee (177)4 Independent Directors(Schedule IV)5 Rule 8(5)(viii) of the Companies(Accounts) Rules, 2014 BODreport Financial Statementsonly (ICFR only)Public ListedPublic un-listedPvt Cos pd upshare capital >=INR 20 CrPaid-up sharecapital>= INR 10 CrTurnover >= INR100 CrLoans,Borrowing inaggregate >=INR 50 CrICFRIFCICFRICFRICFRPage 5 What is Internal Financial Control (IFC) ? (Sec 134)As per Section 134 of the Companies Act 2013, the term Internal Financial Controls means thepoliciesand proceduresadopted by the company for ensuring.

4 Orderly and efficient conduct of its business, including adherence to company s policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records, and timely preparation of reliable Financial Financialcontrols oversfinancial reporting(ICFR)OperationalcontrolsFraud prevention++=IFCC omponentsExampleDefinitionSales realization iscorrectly recorded inthe FinancialsDiscount on sale isoffered as per DOA andadherence to DOA ismonitoredUnauthorised changein price master(access Controls )Page 6 What is Internal Financial Controls over Financial reporting(ICFR) ?

5 (Sec 143 - as per ICAI Nov 2014 guidelines) A process designed to provide reasonable assurance regarding the reliability of Financial reporting and thepreparation of Financial statements for external purposes in accordance with generally accepted accountingprinciples .A company's Internal Financial control over Financial reporting includes those policies and procedures :1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company;2.

6 Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorisations of management and directors of thecompany; and3. Provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, ordisposition of the company's assets that could have a material effect on the Financial statements.

7 Maintenance offinancial records(Detail/ Accuracy)Authorizations oftransactions(in accordancewith GAAP)Safeguarding ofthe assets of thecompany++=ICFRC omponentsDefinitionPage 7 Internal Controls Global PerspectiveScopeScopeFrameworkFrameworkG uidanceGuidanceControlassessmentControla ssessmentAuditor attestationAuditor attestationRigour ofimplementationRigour ofimplementationUKAll material Controls ,includingfinancial,operational andcompliance controlsThe UK CorporateGovernance CodeUK CombinedCode/Turnbull guidanceYesYesHighIndiaICFR + Policies/Procedures+ Fraud + SafeguardingAssetsComponents of InternalControls as per SA 315 ICAI Guidance Issued inNovember 2014 Yes CEO/CFO, BoardYes ICFRPast precedent lowNow - expected to be highUSAI nternalControl overFinancial Reporting (ICFR)

8 COSOAS-6 YesYes ICFRHighPage 8 Expected response of stakeholdersuWould like to see arobust framework thatis aligned to acceptablestandardsuReview & question thebasis of your controlsdesign and ongoingassessmentsFocus on Internal Controls ,to the extent these relate tothe Financial reporting(ICFR)Auditors responsibilitylimited to evaluation of Financial reporting Controls CompanyManagementAuditorsAudit Committee/Independent DirectorCreate & test theframework of internalcontrolsuIFC (includingoperational &Compliance)uControls documentationuWould rely on theassessment and viewof the Audit CommitteeuThey may ask foradditional informationBoard of DirectorsPage 9 How will IFC help beyond compliance ?

9 UHelps inbusiness process re-designing toplug revenue leakages & cost containmentopportunitiesuHelps inrationalizing the number ofcontrols across organization moving to smart and automated controlsuHelps instandardizing policies and procedures for multi-location/ multi-business CompaniesuFosters acontrol conscious work culture for people behind controlsuProvidesassurance to the CEO/ CFO as well as improves business performanceuIn some instances, also serves as a base forblue print of optimal procedures while thinking about ERPA imed at strengthening the processes to further improve business, identify costcontainment opportunities as well as drive growthPage 10 Expressing an opinion on Internal control how will you do itScopingDesignassessmentDesign GapremediationOperatingeffectiveness(OE)

10 OverallassessmentandreportingOnetimeOngo ingDetailed scopeUpdate forchangesValidate &documentdesignSeekconfirmation onchangesCorrectiveactionPrepare teststrategy & planReportingapproachTest controlsReportLeverage Technology for effective enablement of controlsPage 11 Key worksteps/ considerations for Scoping:uMap/ Identifysignificant accounts, processesandkey locationsuSegregate scopebetweenBusiness ProcessandITuDiscuss/ alignthe scope withExternal AuditorsuDefinemateriality Key/ non-key RisksuFinalizescope exclusionandvalidate with auditorsuDefine scopeof processes/ activities performedby third partiesuNominate IFC Championacross processes/ locationsuSet up aSteering Committeeto review progress/ remediation plansuAlignAudit Committee and BoarduFinalizetemplates, documentation standards.