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”.
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