What are Internal controls?

Internal controls are the processes, regulations, and procedures that a corporation implements to assure the accuracy of financial and accounting information, encourage accountability, and prevent fraud.

What are Internal Financial Controls?

As per 134(5)(e) of the Companies Act 2013, "Internal Financial Controls" (IFC) refers to the policies and procedures implemented by the company to ensure:

• the orderly and efficient operation of its business, including, adherence to corporate 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

Benefits of Internal Financial Control System

• Increasing Senior Management Accountability & Responsibility
• Increased stockholder trust in the company's financial reporting progression
• Reducing operational management accountability
• Changes in the Board's financial reporting and financial controls
• More dependable and accurate financial statements making audits more thorough

What are the various steps in the implementation and audit of IFC?

Planning

• Identification of major account balances and disclosure items as part of planning
• Recognize and comprehend major transaction flows.
• Determine the risks of material misstatements and the measures that manage those risks.
• List the applications, accompanying IT environment, and general IT controls.

Design and Implementation

• Assess the controls' design
• Evaluate the effectiveness of controls
• Evaluate the effects of the audit and develop further appropriate processes
• Operational efficiency evaluation of the plan

Operating Effectiveness

• Plan the level, timing, and scope of the operational effectiveness testing.
• Perform operational effectiveness testing, evaluate results,
• Perform draw conclusions about operational effectiveness,
• Form opinion on IFC

Reporting

• Analyze the effect on the audit opinion
• Formalize your audit opinion on financial statements.

What are Internal Controls over Financial Reporting?

Internal control over financial reporting (ICFR or ICOFR) is a set of rules and procedures that a firm uses to assess the risk associated with its financial statements and to give reasonable assurance that those financial statements are accurate.

A company's internal financial control over financial reporting consists of the policies and processes that deal with the upkeep of records that fairly and accurately reflect the company's asset transactions and dispositions and offer a reasonable level of assurance that transactions are documented as required to enable the production of financial statements in accordance with generally accepted accounting principles.

Difference between IFC and ICFR

• IFC's scope is very vast whereas the scope of ICFR is restricted to financial reporting only.
• IFC is defined in the Companies Act, 2013 under Section 134. ICFR is defined in the Guidance Note issued by ICAI in Sep’2015.
• In IFC applicability is mandatory for listed companies and for ICFR it is mandatory for unlisted companies.

Conclusion

Implementing Internal Financial Controls is a major internal effort that would require a lot of time and resources for a business. By raising the attention of the Board of Directors and auditors, IFC regulations have undoubtedly provided the opportunity to improve the internal control environment in most organizations.

Author

Anita Jagasia

Senior Manager – Marketing & Operations

RiskPro India