Ifc audit

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Jatin garg

Jatin garg (Querist)
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19 January 2016 Sir please tell me what is IFC audit??

Arpit Shah

Arpit Shah (Expert)
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20 January 2016 Summary- Guidance Note on Audit of Internal Financial Controls over Financial Reporting

Management’s Responsibility
Clause (e) of Sub-section 5 of Section 134 explains the meaning of the term, “internal financial controls” as “the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.
Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the Board of Directors’ report of all companies to state the details in respect of adequacy of internal financial controls with reference to the financial statements.
The inclusion of the matters relating to internal financial controls in the directors’ responsibility statement is in addition to the requirement for the directors to state that they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the 2013 Act, for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.
Auditors’ Responsibility
The auditor’s objective in an audit of internal financial controls over financial reporting is to express an opinion on the effectiveness of the company’s internal financial controls over financial reporting and the procedures in respect thereof are carried out along with an audit of the financial statements. Because a company’s internal controls cannot be considered effective if one or more material weakness exists, to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain sufficient appropriate evidence to obtain reasonable assurance about whether material weakness exists as of the date specified in management’s assessment. A material weakness in internal financial controls may exist even when the financial statements are not materially misstated.
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.
Accordingly, the term ‘internal financial controls’ wherever used in this Guidance Note in the context of the responsibility of the auditor for reporting on such controls under Section 143(3)(i) of the Act, per se implies and relates to internal financial controls over financial reporting.
For this purpose, “internal financial controls over financial reporting” shall mean “A process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal financial control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Criteria for Internal Financial Controls Over Financial Reporting
To state whether a set of financial statements presents a true and fair view, it is essential to benchmark and check the financial statements for compliance with the financial reporting framework. The Accounting Standards specified under the Companies Act, 1956 (which are deemed to be applicable as per Section 133 of the 2013 Act, read with Rule 7 of Companies (Accounts) Rules, 2014) is one of the criteria constituting the financial reporting framework based on which companies prepare and present their financial statements and against which the auditors evaluate if the financial statements present a true and fair view of the state of affairs and operations of the company in an audit of the financial statements carried out under the 2013 Act.
Similarly, a benchmark internal control system, based on suitable criteria, is essential to enable the management and auditors to assess and state adequacy of and compliance with the system of internal control.
In the Indian context, for example, Appendix 1 “Internal Control Components” of SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment”2 provides the necessary criteria for internal financial controls over financial reporting for companies.
Specified date for reporting on the aforesaid adequacy
The Auditor should report if the company has adequate internal control systems in place and whether they were operating effectively as at the balance sheet date if the same has not been corrected by the management Further, reporting on internal financial controls over financial reporting will not be applicable with respect to interim financial statements, such as quarterly or half-yearly financial statements, unless such reporting is required under any other law or regulation .
Appendix I to SA 315 explains the five components of any internal control as they relate to a financial statement audit. The five components are:
i. Control environment
ii. Entity’s risk assessment process
iii. Control activities
iv. Information system and communication
v. Monitoring of controls
Addressing the Risk of Fraud
Controls that might address these risks include:
Controls over significant, unusual transactions, particularly those that result in late or unusual journal entries;
Controls over journal entries and adjustments made in the period-end financial reporting process;
Controls over related party transactions;
Controls related to significant management estimates; and
Controls that mitigate incentives for, and pressures on, management to falsify or inappropriately manage financial results.

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Arpit Shah

Arpit Shah (Expert)
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20 January 2016 Internal Financial Control under Companies Act, 2013

What is IFC?
As enumerated under Sec 134(5) of Companies Act, 2013(“Act”) , the Directors Responsibility Statement shall include a declaration from Director that internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
Thus as stated in the explanation under the said section : IFC “means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information”
Why IFC?
Since the Act, envisages significant changes in the provisions related to governance, e-management, compliance and enforcement, disclosure norms, auditors and mergers. The Internal Control will enhance the applicability of provisions of the Act. It would give more power in the hands of shareholders and the Government.
IFC gained its importance after Satyam imbroglio which erupted in 2009. Internal financial controls are designed to provide reasonable assurance that a company’s financial statements are reliable and prepared in accordance with the law.
Provisions under Act for IFC
1. Section 134 of the Act
In case of Listed Companies the Directors responsibility statement states that IFC shall be followed by the company and all the IFC are adequate and were operating effectively.
2. Section 143 of the Act
Pursuant to Sec 143(3) (i) has stated that the Auditors report shall state whether the company has adequate IFC system in place and the operating effectiveness of such controls
3. Section 177 of the Act
As per Sec 177(5) the Audit Committee shall call for the Comments of the Auditors about Internal Control system before submission to the Board.
Pursuant to Sec 177(4) (vii), the Audit Committee shall act in accordance with the terms of reference specified in writing by the Board pertaining to evaluation of IFC
4. As per Section 149(8) of the Act , which states the company and Independent Directors have to abide by Schedule IV ,the said schedule has put the onus on Independent Directors to statisfy themselves with financial control and risk management are robust and defensible

New Provisions on Act for Internal Control
Inclusive definition of KMP has makes them liable in the event of default. As defined in Sec 2(51) of the Act KMP would include the Chief Executive Officer or the managing director or the manager; the company secretary; the whole-time director; the Chief Financial Officer; and such other officer as may be prescribed. In case of Sec 2(60) of the Act the Officer in Default includes KMP thus the onus on KMP has increased to maintain the compliance of Internal Controls.
Precisely defining Independent Director under Sec 2(47) of the Act , setting up criteria under Sec 149(6) for appointment of Independent Director and a specific composition of Board has enhanced the involvement of all Directors has envisaged prompt and transparent decision making.
Class Action Suits according to Sec 245 of the Act ,CAS can be filed against Company , Directors , Audit Firms , Expert , Advisor , Consultant or any other person and appointment of small shareholder director has enhanced the participation and accountability of stakeholders
Whistle Blower Policy under Sec 177(9)
Setting up of NCLT/NCLAT a specialized quasi-judicial body to faster and prompt resolution of corporate issues.
Disclosures
Directors Responsibility Statement
Maintenance of Electronic Records
Disclosure as per Clause 55 of Listing Agreement
Tenure of Auditors and not refrain then for rendering certain services
Secretarial Audit as per Sec 204 of the Act
Conclusion
The Concept of IFC is in promoting good governance, total transparency, integrity and accountability of management and the board of directors

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