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Internal Controls over Financial Reporting in the Indian Context

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Section 143 of the Indian Companies Act 2013 has rewarded auditors with additional auditing responsibilities wherein assurance must be provided on the Internal Controls present in a Company's Business Environment. The Auditor must provide an opinion on the operating effectiveness of these Internal Financial Controls.

The Institute of Chartered Accountants of India has released a Guidance Note which provides the required guidance to an Auditor to conduct an Audit of the same.

This presentation deals with the legal requirement of IFCs, Auditing Responsibilities and Implementation Guides from guidance note.

This presentation was presented at the Study Circle conducted by the Mangalore Branch of SIRC of ICAI on 23rd June 2016.

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Internal Controls over Financial Reporting in the Indian Context

  1. 1. NewAuditing Responsibilities u/s 143 ofCompanies Act 2013 Bharath Rao | 23rd June 2016
  2. 2. Outline Mistakes IFCs Guidance Note Examples IFCs - bharathraob.com 2
  3. 3. Mistakes IFCs - bharathraob.com Mistakes IFCs Guidance Examples 3
  4. 4. Mistakes… Carrian Group 1993 Accounting fraud. An auditor was murdered, an adviser committed suicide.The largest collapse in Hong Kong history WorldCom 2001 Fraudulent Accounting Methods to increase.The Legend of all scams Peregrine Systems 2002 Overstated sales Satyam 2009 Falsification of Accounts. Legend of Indian Corporate Scams IFCs - bharathraob.com 4
  5. 5. Effects Goodwill? Public Trust? Belief?Jobs Penalties Money IFCs - bharathraob.com 5
  6. 6. Causes Greed “Too Much” Determination Inefficient Internal Controls Loopholes Lack of Guidance IFCs - bharathraob.com 6
  7. 7. Regulations and Internal Financial Controls IFCs - bharathraob.com Mistakes IFCs Guidance Examples 7
  8. 8. Section 134 – • Director’s Responsibility Statement – • Listed Companies shall have IFCs Section 143 – • Auditor’s Report shall State – • Adequate IFCs System and is operating effectively Section 149 – • Independent Directors – • Integrity of Financial Information and IFCs are robust and Dependable Section 177 – • Audit Committee – • Evaluate IFCs and Risk Management System Clause 49(V)(c) – • CEO/CFO Certification – • Accept Responsibility for establishing and maintaining ICFR and have valuated their effectiveness. Regulations IFCs - bharathraob.com 8
  9. 9. Internal Controls The Process designed, implemented and maintained by TCWG and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with regards to reliability of financial reporting, effectiveness and efficiency of operations, safeguarding of assets and compliance of applicable laws and regulations IFCs - bharathraob.com 9
  10. 10. Components of Internal Controls (COSO Framework) Control Environment Risk Assessment Control Activities Information and Communication Monitoring IFCs - bharathraob.com 10
  11. 11. Internal Control Equation General Controls IT Controls Internal Controls IFCs - bharathraob.com 11
  12. 12. ITControls IT Controls Application Controls – (ITAC) IT General Controls - (ITGC) IFCs - bharathraob.com 12
  13. 13. Internal Financial Controls explained as perCA 2013  Explanation to section 134(5)(e) — For the purposes of this clause, the term “internal financial controls” 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 IFCs - bharathraob.com 13
  14. 14. One More StepUnder Business Process Financials IFCs - bharathraob.com 14
  15. 15. What Internal Financial Controls? Business Risk IT and Operational Risks Financial Risk Internal Financial Controls IFCs - bharathraob.com 15
  16. 16. Audit Risk and Sampling Strategy Audit Risk Detection Risk Controllable Risk Inherent Risk Higher Sampling Lowers Detection Risk Define Level of Confidence (90%)  Forms basis of Sampling (10% of Population) IFCs - bharathraob.com 16
  17. 17. Guidance Note of ICAI IFCs - bharathraob.com Mistakes IFCs Guidance Examples 17
  18. 18. Financial Areas Cash/Bank Balances Prepaid Expenses Trade Receivable Inventory Goodwill and Intangible Assets Trade Payables Provision for Expenses Loans/Borrowi ngs Employee Benefits Taxes Share Capital, Reserves Revenue from Operations Cost of Production, Sales Depreciation Finance Costs IFCs - bharathraob.com 18
  19. 19. Suggested Areas Identification and Inspection of Documentation of Policies, Processes Identifying and Understanding the business applications and their roles Perform Design Effectiveness to check if Policies and Documented Procedures are sufficient and adequate to the size of the business Perform Testing for Operational Effectiveness, Audit Evidence and Documentation The Process to be followed IFCs - bharathraob.com 19
  20. 20. The Process to be followed in Detail IFCs - bharathraob.com 20
  21. 21. IG4– Understanding the IT Environment Significant Accounts and Disclosures It’s Relevant Applications Relevant IT Infrastructure (OS, Database, Hardware) Relevant IT risks Relevant IT Controls IFCs - bharathraob.com 21
  22. 22. IG 6 – Segregation of Duties IFCs - bharathraob.com 22
  23. 23. IG 6 – Segregation of Duties IFCs - bharathraob.com 23
  24. 24. IG 10 – Techniques forControl Testing Inquiry Observation Examination of Documentation Re- Performance Walkthroughs (IG 12) IFCs - bharathraob.com 24
  25. 25. IG 11 – IFC – Testing of Design  Objectives:  Conclude on effectiveness of the design to assess risk  Plan the nature, timing and extent of the tests for operating effectiveness  Understand the Nature and significance of the risks of material misstatement addressed by the control  Characteristics or details of the control  Factors to determine whether the control is appropriately designed to address the identified risk.  Competence and authority of the person(s) performing the control  Frequency and consistency with which the control is performed IFCs - bharathraob.com 25
  26. 26. IG 13 – IFC – Test of Operating Effectiveness Assess Findings and Conclude Perform tests of Operating Effectiveness Plan the NTE of Operating Effectiveness based on results of Design Effectiveness Assess the risk associated with the control IFCs - bharathraob.com 26
  27. 27. IG 15 – Roll Forward Testing  Objective:  To identify any changes to the business occurred that could give rise to new, or affect existing risks of material misstatement,  That would necessitate implementing new controls or modifying the design of existing controls  Existing controls continue to operate effectively in the roll forward period  Identification of “Roll Forward Period”  Auditor rolls-forward the conclusions of the effectiveness of those relevant controls which were tested and concluded to be effective as at an interim date Initial/MajorTesting Period Roll Forward Period Interim Date IFCs - bharathraob.com 27
  28. 28. Some more Newer Concepts IG 16 – Rotation Plan for testing IFCs IG 17 – RemediationTesting IG 18 – Using Work of Internal Auditors (SA 610) and Expert (SA 620) IFCs - bharathraob.com 28
  29. 29. Reporting  Obtain Management’s Assertion regarding Internal Financial Controls  Details of Areas, Processes and the Internal Controls deployed and their status  Define Auditor’s Responsibility (SA 210) and limitations  Report (As an Annexure or Separate Report) – SA 700, SA 705  Opinion regarding the design and operating effectiveness of the IFCs IFCs - bharathraob.com 29
  30. 30. Examples ControlActivities andTestingTemplates IFCs - bharathraob.com Mistakes IFCs Guidance Examples 30
  31. 31. ThankYou  Bharath Rao | +91 88922 29220 | mailme@bharathraob.com | Bharathraob.com | /bharathraob IFCs - bharathraob.com 31

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