Internal Controls Over Financial Reporting India
Internal Controls Over Financial Reporting is a process design to provide reasonable assurance regarding the reliability of financial reporting. The preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The controls are aim at preventing or detecting errors, fraud or non-compliance and safeguarding assets. Examples of controls include:
- Human Resources Processes
- Information Technology Processes
- Accounting Processes
- Operations and Other Business Processes
What is Internal Controls Over Financial Reporting
Internal Controls Over Financial Reporting India are the controls that are put in place by the management of a company to ensure that the financial records of the company are reliable and accurate. It is imperative for listed companies to have controls over their financial reporting so as to ensure that there is no misstatement or manipulation of the financial transactions.
The Institute of Chartered Accountants of India (ICAI) has issued an exposure draft on Internal Control over Financial Reporting (ICFR) envisaging certain changes in the current standards issued by it. The draft also seeks to align with the requirements under section 143 of the Companies Act, 2013, which states that every listed company, and a company having paid up share capital of INR 500 crores or more, shall constitute an audit committee consisting of at least three directors out of which two-thirds shall be independent directors.
The revised standard will mandate all listed companies and other specified classes of companies to implement an Internal Control Over Financial Reporting Framework as per Section 143(3)(i) read with Section 134(5)(e) and Schedule V, Para C, sub clause (XVIII), sub paragraph (a) (i) and (ii) respectively, of Companies Act, 2013.
What is an internal control checklist?
An internal control checklist is intend to give an organization a tool for evaluating the state of its system of internal controls. By periodically comparing the checklist to actual systems, one can spot control breakdowns that should be remedied. Thus, the checklist helps produce a “control conscious” culture.
Internal control checklists are design to help achieve four objectives:
- To help identify gaps between desired control procedures and existing practices
- Provide a framework for reviewing the effectiveness of existing control
- Serve as a guide when testing key controls
- Facilitate identification of opportunities for improving both manual and computerized controls
The purpose of financial control
The purpose of financial control is to ensure the reliability and accuracy of the financial statements in a timely manner.
Including assets, liabilities, income, expenses and cash flow. It also ensures that assets are use effectively and efficiently.
Meanwhile, The Internal Financial Control System should be comprehensive, including a series of direct controls and indirect controls. In addition to management’s daily operations, internal financial control should also include financial reporting processes. The direct control refers to the controls on business activities carried out by the relevant personnel, such as approval for spending money, approval for signing contracts and so on.
Indirect control refers to the establishment of regulations by the company, such as a code of conduct or an anti-fraud policy.
- Direct Controls
- Authorized Signatures: The purpose of using authorized signatures is to avoid unreasonable losses. The signature authority form shall contain all transactions on which the signature is require or approve.
- Approval Requirements: Approval requirements can limit expenditures within budget limits and prevent excessive spending in any department. The approval process should clearly define in the approval procedure manual.
- Separation of Duties