Internal Financial Control is an advanced reporting concept for companies in India that was introduced to provide clarity and transparency regarding a company's internal controls over financial reporting. The guidance note applies to all types of companies and specifies requirements for boards of directors, statutory auditors, audit committees, and independent directors regarding their responsibilities for evaluating and reporting on the adequacy and effectiveness of a company's internal financial controls. It provides definitions of material weaknesses and indicators that auditors should consider when evaluating internal controls and determining whether to issue a qualified or adverse opinion. Both management and auditors must understand the details of the guidance note to prepare for the new reporting requirements.

1. Internal Financial Control
Audit of ‘Internal Financial controls (hereinafter to be referred as ‘IFC’) over
Financial Reporting’ is a reasonably advanced reporting concept for India. In India
though there were no such requirements earlier, however, similar reporting
requirements existed globally such as section 404 of Sarbanes Oxley Act, 2002 of USA.
Initially when majority of the Sections of the Companies Act, 2013 (hereinafter to be
referred as ‘the Act’) were notified along with Section 143(3)(i), there was lot of
ambiguity not only on part of the company but also on the part of the auditors regarding
the actual reporting.
Later on, MCA has notified the Companies (Audit & Auditors) Amendment Rules,
2014 and introduced new Rule 10A. Further, ICAI has also issued Guidance Notes on
14th September 2015 and both of these steps helped to give more clarity on the said
concept.
I. Applicability:
The said Guidance Note applies for reporting on IFC in respect of listed
companies, unlisted companies, small companies and also one person companies (as
defined in the Companies Act, 2013). It means its applicable to all type of companies
incorporated under the Act.
II. Effective Date:
For Indian listed Companies, the Boards assertion regarding the adequacy and
effectiveness of IFC in Directors Responsibility Statement is required for Fiscal Year
ending 31.03.2015. For others, the requirement relating to both the Directors
Responsibility Statement and Auditors Report are effective for Fiscal Year ending
31.03.2016.
III. Responsibility in IFC:
Board of Directors – Boards’ report of all companies to state the details in respect of
adequacy of IFC with reference to the financial statements.
Statutory Auditor - To express an opinion on the effectiveness of the company’s
internal financial controls financial reporting and the procedures in respect thereof
are carried out along with an audit of the financial statements.
Audit Committee – Audit Committee may call for comments of the auditors about
Internal Control System before their submission to the Board and may also discuss
related issues with internal Auditors, Statutory Auditors and Management of the
Company.

2. Independent Director – Independent Director to satisfy themselves on integrity of
financial information and ensure that Financial Controls and Systems of Risk
Management are Robust and Defensible.
IV. Auditor’s Reporting:
Auditors Reporting on internal financial controls is a requirement specified in
the Act and, therefore, will apply only in case of reporting on financial statements
prepared under the Act and reported under Section 143. However, Section 134(5)(e)of
the Act does not specify any reporting intervals and periods. Thus, internal Control
should be Operating effectively throughout the period under Audit.
As per the guidance note, auditors will have to issue a qualified or an adverse opinion on
ICFR if ‘material weaknesses’ in the company’s ICFR are identified as part of their audit.
Material weakness is a deficiency, or a combination of deficiencies, in ICFR over financial
reporting, such that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or detected on a
timely basis.
A material weakness in ICFR may exist even when the financial statements are not
materially misstated. The guidance note also specifies indicators of material weaknesses,
such as the following:
4.1 Identification of fraud, whether or not material, on the part of senior
management.
4.2 Errors observed in previously issued financial statements in the current
financial year.
4.3 Identification by the auditor of a material misstatement of financial
statements that would not have been detected by the company’s IFC over
financial reporting.
4.4 Ineffective oversight of the company’s external financial reporting and
internal financial controls over financial reporting by the company’s audit
committee.
Both the management and auditors will have to quickly familiarise themselves
with and decipher the details of this guidance note in order to gear up for the year-end
reporting on IFC.
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