REGULATORY FILMS

present

Internal Controls Ke

Internal Financial Controls ke

All characters appearing in this work

are fictitious. Any resemblance to

real persons, living or dead, is

purely coincidental.

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Starring…Hero – Companies Act Heroine - COSO Hero’s friend - SEBI

Gabbar – ICAI GN Thakur - Companies

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What is

IFC

Why it is

required?

What’s

our Plan?

Is there

any

framework?

6

The Story so far…

What is

IFC

Why it is

required?

What’s

our Plan?

Is there

any

framework?

7

A process effected by an entity’s board of directors, management, and other personnel,

designed to provide reasonable assurance regarding the achievement of objectives

relating to operations, reporting, and compliance

Thus, the key parameters Internal Controls seeks to address are:

• Effectiveness and efficiency of operations

• Reliability of financial reporting

• Compliance with applicable laws and regulations

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Internal financial controls means

adopted by the company for ensuring

of its business, including

adherence to company’s policies,

safeguarding of assets,

prevention and detection of frauds and errors,

accuracy and completeness of accounting records, and

timely preparation of reliable financial information.

Section 134

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A process designed to provide reasonable assurance regarding:

• the reliability of financial reporting

• the preparation of financial statements for external purposes

in accordance with generally accepted accounting principles

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Terminology Coverage

Cos Act IFC Operations and FR

SEBI ICFR FR

ICAI GN IFC over FR FR

COSO Internal Controls Operations, FR and Compliance

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The Characters

What is IFC

Why it is

required?

What’s

our Plan?

Is there

any

framework?

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Particulars Companies Act, 2013 (w.e.f. April 1, 2014)

SEBI (Clause 49 - New) (w.e.f. October 1, 2014)

Audit

Committee

Role

177 (4)

Evaluation of internal financial

controls and risk management

systems

III. Reviewing :

• Adequacy of the internal control

systems & Evaluation of internal

financial controls and risk

management systems

• Internal investigations of suspected

fraud/ irregularity or failure of

internal controls & report to BOD

• Letters of internal control

weaknesses issued by the statutory

auditors

• Internal audit reports relating to

internal control weaknesses

Hero Hero’s Friend

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Particulars Companies Act, 2013(w.e.f. April 1, 2014)

SEBI (Clause 49-New)(w.e.f. October 1, 2014)

Board of

Directors

134 (5e)

Director’s responsibility statement

to state that:

• Internal financial controls are in

place and these are adequate

and operate effectively (Listed

Cos.)

• Proper systems to ensure

compliance with the provisions

of all applicable laws were

devised (All Cos.)

177 (9)

• Vigil mechanism is established

to report genuine concerns

Companies (Accounts) Rules, 2014 -

Rule 8(5)(viii)

Board of Directors’ report to state:

• Details in respect of adequacy

of internal financial controls

with reference to the “financial

statements” (All Cos.)

D. Key functions of the Board - To ensure:

• Integrity of the company’s accounting and financial

reporting systems

• Appropriate systems of control are in place, in

particular, systems for risk management, financial

and operational control

• Compliance with the law and relevant standards

VIII. MDA

• Discussion on Internal Control systems and their

adequacy

IX. CEO/CFO cert states:

• Established and maintained ICFR and evaluated its

effectiveness

• Disclosed to Auditors and Audit Committee about

control deficiencies and actions taken

• Informed Auditors and Audit Committee about

• Significant changes in ICFR, accounting

policies

• Instances of significant fraud and the

involvement, if any, of management or

employee having significant role in

company’s ICFR

II. F. Whistle Blower policy

• Establish a vigil mechanism to report concerns

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Particulars Companies Act, 2013 SEBI (Clause 49)

Independent

Directors

(w.e.f. April 1, 2014)

Sch IV. Code For Independent Directors

• To satisfy themselves on the integrity of

financial information and that financial

controls and the systems of risk

management are robust and defensible

-

Statutory Auditors

(Recommendatory-

w.e.f. April 1, 2014

Mandatory-

w.e.f. April 1, 2015)

143 (3) Report to State:

• Whether the company has adequate

internal financial controls system in place

and the operating effectiveness of such

controls

-

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Heroine

Control Environment

Risk Assessment

Control Activities

Information &

Communication

Monitoring Activities

1. Demonstrates commitment to integrity and ethical

values

2. Exercises oversight responsibility

3. Establishes structure, authority and responsibility

4. Demonstrates commitment to competence

5. Enforces accountability

6. Specifies suitable objectives

7. Identifies and analyzes risk

8. Assesses fraud risk

9. Identifies and analyzes significant change

10.Selects and develops control activities

11. Selects and develops general controls over

technology

12.Deploys through policies and procedures

13.Uses relevant information

14.Communicates internally

15.Communicates externally

16.Conducts ongoing and/or separate evaluations

17.Evaluates and communicates deficiencies

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The Difficult Character

What is IFC

Why it is

required?

What’s

our Plan?

Is there

any

framework?

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Based on COSO

framework

‘Guidance note for

Auditors on IFC over Financial reporting’

‘Guide to Internal

Controls over Financial

Reporting’

2007 2014

Gabbar

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Pertain to the maintenance of records

• Accurately and fairly reflect

• transactions

• dispositions of the assets of the company

Provide reasonable assurance regarding -

• Recording of transactions permits preparation of FS according to GAAP

• Receipts and expenditures made only with authorisations of management and directors

• Prevention / timely detection-

• unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements

Includes those policies and procedures that:

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Internal Control framework to be assessed at 2 levels - Entity & Process

Entity level (ELC)

•Assess 5 components of COSO framework

•Control Environment, Risk Assessment, Control Activities, Information & Communication & Monitoring

Process level (PLC)

•Select significant financial accounts based on materiality - qualitative or quantitative considerations

•Drill down to process, sub-process, risks, controls

Testing of Controls

• Design effectiveness - Walkthrough

• Operating effectiveness

Conduct ELC to identify ELCs that are:

• Indirect

• Direct – Not precise enough

• Direct – Precise

Detailed process flow diagrams to include:

• risks based on intensity

• manual vs. automated control

• applications used

• logic of automated controls

New

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The plot…

What is IFC

Why it is

required?

What’s

our Plan?

Is there

any

framework?

Process level

Identify significant accounts

Identify Process & Sub-process

Identify Risks

Define Control Activities

Map Control Activities in each IC

Walkthrough

Testing

Entity level

Finally a happy ending…

The EndProduced by: Regulatory Films