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Internal Financial Control

Internal Financial Control means policies and procedures adopted by the company to ensure efficient conduct of the business. It is applicable to only listed companies.

Internal Financial Control over Financial Reporting, 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 (GAAP).

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At AKM, we provide following services to ensure compliance:

  • Drafting of Risk and Control Matrix
  • SOP Development
  • Testing of Internal Controls

Drafting of Risk and Control Matrix (RACM):

Risk and control matrix identifies the risk an organisation bears and maps them to the controls placed by the organisation on them.

Our service encompasses the following key components:

  • Risk Identification
  • Risk Assessment
  • Control Evaluation
  • Matrix Development
  • Documentation & Reporting

SOP Development:

Standard Operating Procedure (SOPs) describe the internal procedures followed within an organisation and roles and responsibilities of each process.

Developing Standard Operating Procedure (SOPs) is crucial for ensuring efficiency and compliance in an organisation. We at AKM, not only create SOP’s but also review it and update it periodically.

Testing of Internal Controls:

It is a continuous process, and organizations conduct these tests periodically to ensure efficiency and effectiveness of controls. It further addresses any changes in the business environment that may impact the control environment of an organisation.

Disclosure Requirement/Responsibility of IFC/ICoFR

  • Section 134(5)(e) of Companies Act 2013 requires in case of listed company, Director’s Responsibility states that directors, have laid down IFC to be followed by the company and that such controls are adequate and operating effectively.
  • Rule 8(5)(viii) of the Companies Rules, 2014 requires the board report of all companies except One Person Company and Small company to state the details in respect of adequacy of internal financial controls with reference to the financial statements.
  • Section 143(3)(i) of the Act requires the auditors’ report to state whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls”.
  • Section 177(5) of the Act requires audit committee may call for comments of auditors about internal control systems before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company.
  • Section 149(8) read with Schedule IV requires independent directors to satisfy themselves on the integrity of financial information and ensure that financial controls and system of risk management are robust and defensible

FAQs

MCA vide its notification dated 13th June 2017 (G.S.R. 583(E)) provided exemption from applicability of Internal Controls over financial reporting (ICoFR) to following private companies**:

  • • One-person Company (OPC) or a Small Company; or
  • • T/O < 50 Crores as per latest audited financial statement or aggregate borrowings < 25 Crore from banks or financial institutions or anybody corporate at any point of time during the financial year

** Exempt only if no default in filing financial statements under section 137 or annual return under section 92 of Companies Act 2013 with the Registrar.

To provide proper guidelines on performing tasks efficiently within an organisation. It enhances quality, provides consistency and leads to reduction in errors.

SOPs involve documenting the procedures which is also required for efficient internal financial controls and compliances to Companies Act.

The responsibility of developing and maintaining SOP falls on Process Owners or Managers. It can be an employee of the organisation with exert knowledge on the processes.

In order to prepare well defined SOPs and with lesser burden on the process owners, management appoints internal auditors/consultant to prepare and review the SOPs.

RACM is important for organisation to take structured approach towards mitigating risk. It helps an organisation to identify gaps in their processes and improve efficiency of internal controls.

Review and updation of RACM and SOP depends upon the requirement of an organisation. Usually, it’s done on an annual basis but if organisation is susceptible to frequent changes, it can be done on quarterly basis as well.