IFC- An Insight

Internal Financial Controls
– An Insight
February, 2016
P. G. Joshi & Co.
Chartered Accountants

Internal Financial Controls – An Insight
P. G. Joshi & Co.
Are you ready for the
new regime ?
The Companies Act, 2013 has ushered
in the new era of Corporate
Governance and transparency and is
set to have far reaching implications.
The new regime is expected to
turnaround the governance of
corporate sector in India.
Need of turnaround
The recent corporate frauds (Satyam,
Enron), have created an atmosphere
of mistrust in the governance of
corporate.
The USA has already adopted the
Sarbanes Oxley Act in 2002, which
contains regulations on the internal
control expected from companies.
Thus, it was imperative for the
government to come up with
regulations to re-instill the trust in the
corporate sector.
Key Enablers
 Internal Financial Controls
 Stringent norms for appointment
of directors and auditors
 Emphasis on Board Committees
and vigil mechanism
 Improved reporting mechanisms

P. G. Joshi & Co.
What is Internal Financial Control ?
A process designed to provide reasonable assurance regarding the reliability
of financial reporting and preparation of financial statements for external
purposes in accordance with generally accepted accounting principles
Objectives of IFC
 Orderly and efficient conduct of its business
 Adherence to company’s policies
 Safeguarding of assets
 Prevention and detection of frauds and errors
 Financial Information based on GAAP
 Accuracy and completeness of accounting records, and
 Timely preparation of reliable financial information
Reporting on Internal Control
Companies Act, 1956 v/s Companies Act, 2013 – A Comparison
Companies
Act, 1956
CARO,
2003
Purchase of
FA and
Inventory
Sale of
Goods
Companies
Act, 2013
CARO,
2015
Purchase of
FA and
Inventory
Sale of
goods and
services
Internal
Financial
Controls
Entire
Financial
Reporting
Process

P. G. Joshi & Co.
Responsibilities under IFC
Management’s Responsibility
The Companies Act, 2013 requires the Directors’ Responsibility Statement to
state that the directors had laid down internal financial controls to be
followed by the company and that such internal financial controls are
adequate and were operating effectively.
Audit Committee
Terms of Reference to include Evaluation of Internal Financial Controls and Risk
Management Systems
Auditor’s Responsibility
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

P. G. Joshi & Co.
Particulars
Auditor’s
Responsibility
Directors’
Responsibility
Audit Committee
Applicability All Companies All Companies
Listed and
Specified
Public Companies
Reporting
Separate Audit
Report on IFC
Director’s Report
(Director’s
Responsibility
Statement)
Audit Committee
Report
Legal
Provisions
S. 143(3)(i),
Cos. Act, 2013
R. 8(5)(viii),
Cos. (Accounts)
Rules, 2014
S. 177(4)(vii),
Cos. Act, 2013
Objective
Adequacy and
Operating
Effectiveness of
IFC
Adequacy of
Internal
Financial Controls
Evaluation of
Internal
Financial Controls
IFC – Legal Implications on Non - Compliance
Qualified / Adverse /
Reservation of Opinion by
Auditor
Inquiry and Inspection
by ROC (s. 206)
Report to Central
Government (s. 208)
Investigation of the affairs
of the company by Central
Government (s. 210)
Inspector’s Report on
Investigation (s . 223)
Actions on Inspector's
Report – Prosecution /
Winding-Up (s.224)
IFC – Legality - Summary

P. G. Joshi & Co.
Control
Environment
 Integrity and Ethics
 Work Culture
 Organization Structure
 Authority and Responsibility Assignment
 HR Policies and Practices
Risk Assessment
 Identification
 Impact Assessment
 Mitigation
Control Activities
 Performance reviews
 Information Processing
 Physical Controls
 Segregation of Duties
Information
System
 Occurrence
 Classification
 Accuracy and Completeness
 Cut-off
 Presentation and Disclosure
Communication
 Policies
 Procedures
 Codes
 Manuals
Monitoring
 Check on operations for effective and timely performance
 Maintenance
 Review of processes and internal and external reports
IFC – Components

P. G. Joshi & Co.
How to implement IFC ?
Steps to be taken by the Management for IFC Implementation
Development of
System
Designing and development of operations system
with controls, risk mitigation mechanisms and
policies and procedures
Documentation Documenting the policies and Procedures
Communication
Communicating the system and related controls
through the hierarchy of the organization
Monitoring
Monitoring the implementation and operating
effectiveness of system and controls
Evidence
Generating evidence through routine operations
about operating effectiveness for internal financial
controls

P. G. Joshi & Co.
Questions to be answered by CFO?
Control Environment
• Do you have functional level policies?
• Do you have proper organization structure?
• Do you have internal capacity building mechanism?
Control Activities
• Do you have authority and responsibility assignment and monitoring
mechanism?
• Do you have compliance monitoring and reporting mechanism?
• Do you have process level controls?
Risk Assessment
• Do you have proper risk identification mechanism?
• Do you pay adequate focus on safeguarding of assets including
information?
• Do you have plugged in controls in risk vulnerable areas?
Information System and Communication
• Do you have policies and procedures covering all the areas of your
business?
• Have the procedures being communicated to all the stakeholders?
• Do the procedures and processes are easy to comprehend?
Monitoring
• Do you update the key stakeholders about the control system on a periodic
basis?
• Do you have proper internal audit function working in your organization?
• Have you considered self assessment and automation of control reporting?

P. G. Joshi & Co.
How can we help in your IFC Journey ?
# 2 Review the existing structure of business operations and
processes from the perspective of financial reporting
# 3 Gap Analysis of IFC Components and existing business
processes
Identify the deviations from existing processes# 4
# 5 Back-end support for realigning existing business
processes and procedures with the ideal IFC components
# 6 Back end support in documenting the Internal Financial
Controls
# 1
Examine the financial statements to identify significant
account balances and disclosures from the viewpoint of
IFC

P. G. Joshi & Co.
Phase II
‘As Is’
Assessment
Phase I
Preliminary
Analysis and
Planning
Phase III
System Analysis
and Development
Phase IV
Knowledge
Transfer
Confirm Project
Plan
Understand
organization’s
overall business
processes
Meet with key
stakeholders for
validation of
observations
Analyze the
current system
Identify the
deviation in
policies
Risk
Identification
and Assessment
System Analysis
and
Restructuring
Development of
system
components
Discuss –
Review –Amend
- Approve
Test the
operating
effectiveness
Prepare final
signed-off
versions
Conduct
Knowledge
Transfer
Our Approach

P. G. Joshi & Co.
Founded in the year 1954, P. G. Joshi & Co. is a professionally managed Chartered
Accountancy Firm headquartered at Nagpur. Late Shri Prabhakar Gopal Joshi, the
founder, established P.G. Joshi & Co. at Dhanwate Chambers, Pt. Malviya Road,
Sitabuldi, Nagpur, which now serves as the Head Office of the firm.
By starting a branch at Pune in the year 1986, P. G. Joshi & Co. now has a strong
presence in the western region of India. We believe in
• Upholding ethical codes in all our
practices
• Professionalism
• Working in accordance with the
professional standards
• Honesty with clients & dedication to
work
• Maintaining & respecting clients'
confidentiality
About P. G. Joshi & Co.

P. G. Joshi & Co.
Our Offices
Reach us at
Nagpur
Dhanwate Chambers,
Pt. Malviya Road, Sitabuldi,
Nagpur - 400 012
nagpur@pgjco.com
Tel : + 91 712 242 5309 / 254 7053
Mobile: +91 98904 29185
Pune
Flat No.6, Janhavi Apartments,
CTS No. 40/22, Bhonde Colony,
Erandawane, Pune- 411 004
pune@pgjco.com
Tel-Fax: + 91 20 2542 4511
www.pgjco.com
This document is intended for private circulation to the addressee only on specific
request by him and is not meant for re-circulation. Any form of reproduction
dissemination, copying, disclosure, modification, distribution and/or publication of
this document is strictly prohibited. The document is not intended to be an
advertisement or a solicitation. This document contains information in summary form
and is therefore intended for general guidance only. The contents of this document
are solely meant to inform the legal developments and is not a substitute for
professional advice. Legal advice should be sought for based on the specific
circumstances of each case before relying on the contents of this document or before
taking any decision based on the information contained in this document.
P. G. Joshi & Co. disclaims all responsibility and accepts no liability for the
consequences of any person acting or refraining from acting on the basis of such
information.
Disclaimer

IFC- An Insight

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