Internal Controls over Financial Reporting in the Indian Context

New Auditing Responsibilities u/s 143 of Companies Act 2013Bharath Rao | 23rd June 2016

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IFCs - bharathraob.com 2

Outline Mistakes IFCs

Guidance

NoteExampl

es


Mistakes

Mistakes IFCs Guidance

Examples


Mistakes…

Carrian Group

1993

Accounting fraud. An auditor 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


Effects

Goodwill?

Public Trust?

Belief?Jobs

Penalties Money


Causes

Greed“Too Much” Determinati

on

Inefficient Internal Controls

Loopholes

Lack of Guidance


Regulations and Internal Financial Controls


Examples


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


Internal Controls

The Process designed, implemented and 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


Components of Internal Controls (COSO Framework)

Control Environmen

tRisk

Assessment

Control Activities

Information and

Communication

Monitoring


Internal Control Equation

General

Controls

IT Control

s

Internal

Controls


IT Controls

IT Controls

Application Controls –

(ITAC)

IT General Controls -

(ITGC)


Internal Financial Controls explained as per CA 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


One More Step Under

Business

Process

Financials


What Internal Financial Controls?

Business Risk

IT and Operational Risks

Financial Risk

Internal Financial Controls


Audit Risk and Sampling Strategy

Audit RiskDetection Risk

Controllable Risk

Inherent Risk

Higher Sampling Lowers Detection Risk

Define Level of Confidence (90%) Forms basis of Sampling (10% of

Population)


Guidance Note of ICAI


Examples


Financial Areas

Cash/Bank Balances

Prepaid Expenses

Trade Receivable Inventory

Goodwill and

Intangible Assets

Trade Payables

Provision for

ExpensesLoans/

Borrowings

Employee Benefits Taxes

Share Capital,

Reserves

Revenue from

Operations

Cost of Production,

SalesDepreciatio

nFinance Costs


Suggested Areas

Identification and

Inspection of

Documentation of

Policies, Processes

Identifying and

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 Operationa

l Effectivene

ss, Audit Evidence

and Documentati

on

The Process to be followed


The Process to be followed in Detail


IG 4 – Understanding the IT Environment

Significant Accounts and Disclosures

It’s Relevant Applications

Relevant IT Infrastructure (OS, Database, Hardware)

Relevant IT risks

Relevant IT Controls


IG 6 – Segregation of Duties

Microsoft Word 97 - 2003 Document


IG 6 – Segregation of Duties


IG 10 – Techniques for Control Testing

Inquiry Observation

Examination of

Documentation

Re-Performance

Walkthroughs (IG 12)


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


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


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/Major Testing Period Roll Forward Period

Interim

Date


Some more Newer Concepts

IG 16 – Rotation Plan for testing IFCs

IG 17 – Remediation Testing

IG 18 – Using Work of Internal Auditors (SA 610) and Expert

(SA 620)


Reporting

Obtain Management’s Assertion 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


ExamplesControl Activities and Testing Templates


Examples

Microsoft Word 97 - 2003 Document

Microsoft Excel Worksheet


Thank You Bharath Rao | +91 88922 29220 | [email protected] |Bharathraob.com |/bharathraob

mailto:[email protected]

Internal Controls over Financial Reporting in the Indian Context

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