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Internal Controls over Financial Reporting in the Indian Context
The document outlines the responsibilities of auditors under Section 143 of the Companies Act 2013, emphasizing the importance of internal financial controls (IFCs) and their effectiveness in ensuring reliable financial reporting. It discusses various corporate fraud cases, the causes of such issues, and the legal framework surrounding internal controls and audits. Additionally, it details the components and processes of internal controls, audit risk assessment strategies, and the responsibilities of management and auditors in maintaining effective financial controls.
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Internal Controls over Financial Reporting in the Indian Context
- 1. NewAuditing Responsibilities u/s 143 ofCompanies Act2013 Bharath Rao | 23rd June 2016
- 2. Outline Mistakes IFCs Guidance Note Examples IFCs- bharathraob.com 2
- 3. Mistakes IFCs - bharathraob.com MistakesIFCs Guidance Examples 3
- 4. Mistakes… Carrian Group 1993 Accounting fraud. Anauditor 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. Effects Goodwill? Public Trust? Belief?Jobs Penalties Money IFCs -bharathraob.com 5
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- 7. Regulations and Internal Financial Controls IFCs- bharathraob.com Mistakes IFCs Guidance Examples 7
- 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. Internal Controls The Process designed, implementedand 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
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- 12. ITControls IT Controls Application Controls –(ITAC) IT General Controls - (ITGC) IFCs - bharathraob.com 12
- 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. One More StepUnder Business Process Financials IFCs -bharathraob.com 14
- 15. What Internal Financial Controls? Business Risk IT andOperational Risks Financial Risk Internal Financial Controls IFCs - bharathraob.com 15
- 16. Audit Risk and Sampling Strategy Audit Risk Detection Risk Controllable Risk Inherent Risk HigherSampling Lowers Detection Risk Define Level of Confidence (90%) Forms basis of Sampling (10% of Population) IFCs - bharathraob.com 16
- 17. Guidance Note of ICAI IFCs- bharathraob.com Mistakes IFCs Guidance Examples 17
- 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 ShareCapital, Reserves Revenue from Operations Cost of Production, Sales Depreciation Finance Costs IFCs - bharathraob.com 18
- 19. Suggested Areas Identification and Inspection of Documentation of Policies, Processes Identifyingand 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. The Process to be followedin Detail IFCs - bharathraob.com 20
- 21. IG4– Understanding the IT Environment Significant Accountsand Disclosures It’s Relevant Applications Relevant IT Infrastructure (OS, Database, Hardware) Relevant IT risks Relevant IT Controls IFCs - bharathraob.com 21
- 22. IG 6 – Segregation ofDuties IFCs - bharathraob.com 22
- 23. IG 6 – Segregation ofDuties IFCs - bharathraob.com 23
- 24. IG 10 – Techniques forControl Testing InquiryObservation Examination of Documentation Re- Performance Walkthroughs (IG 12) IFCs - bharathraob.com 24
- 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. 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. 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. 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. Reporting Obtain Management’sAssertion 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. Examples ControlActivities andTestingTemplates IFCs -bharathraob.com Mistakes IFCs Guidance Examples 30
- 31. ThankYou Bharath Rao| +91 88922 29220 | mailme@bharathraob.com | Bharathraob.com | /bharathraob IFCs - bharathraob.com 31
Editor's Notes
- #11 Control Environment The control environment sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure. Control environment factors include the integrity, ethical values and competence of the entity's people; management's philosophy and operating style; the way management assigns authority and responsibility, and organizes and develops its people; and the attention and direction provided by the board of directors. Risk Assessment Every entity faces a variety of risks from external and internal sources that must be assessed. A precondition to risk assessment is establishment of objectives, linked at different levels and internally consistent. Risk assessment is the identification and analysis of relevant risks to achievement of the objectives, forming a basis for determining how the risks should be managed. Because economic, industry, regulatory and operating conditions will continue to change, mechanisms are needed to identify and deal with the special risks associated with change. Control Activities Control activities are the policies and procedures that help ensure management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity's objectives. Control activities occur throughout the organization, at all levels and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties. Information and Communication Pertinent information must be identified, captured and communicated in a form and timeframe that enable people to carry out their responsibilities. Information systems produce reports, containing operational, financial and compliance-related information, that make it possible to run and control the business. They deal not only with internally generated data, but also information about external events, activities and conditions necessary to informed business decision-making and external reporting. Effective communication also must occur in a broader sense, flowing down, across and up the organization. All personnel must receive a clear message from top management that control responsibilities must be taken seriously. They must understand their own role in the internal control system, as well as how individual activities relate to the work of others. They must have a means of communicating significant information upstream. There also needs to be effective communication with external parties, such as customers, suppliers, regulators and shareholders. Monitoring Internal control systems need to be monitored--a process that assesses the quality of the system's performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations. It includes regular management and supervisory activities, and other actions personnel take in performing their duties. The scope and frequency of separate evaluations will depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported to top management and the board.