S.No. Particulars 1. Meaning of Internal Financial Controls (IFC) 2. Objective of IFC 3. Roadmap to implement Internal Financial Controls 4. Advantages of a robust internal financial control system 5. Internal Financial Controls - Why important? 6. Where is it laid down? 7. Responsibilities of Various Stakeholders 8. Guidance Note issued by ICAI on Internal Financial Controls over Financial Reporting 9. Reporting responsibility of the management 10. Reporting by auditors - whether same scope as that of management 11. Opportunities for Companies As per Section 134 of the Companies Act, 2013 (the Act), the term "Internal Financial Controls" means the policies and procedures adopted by the company for ensuring: The Act has set increased responsibility and accountability on Board of Directors, Audit Committee, Senior Management and Independent Auditors. The approach that should be adopted by Companies should be that of a comprehensive risk management program - Enterprise Risk Management (ERM). Primary objective of IFC to identify opportunities for improvement and to draw up recommendations & good practices that can be used as a benchmark to develop or strengthen their internal control systems and enhance the reliability of their financial statements. By placing more accountability and responsibility on the Board and Audit Committee with respect to internal financial controls, the 2013 Act is attempting to align the corporate governance and financial reporting standards with global best practices. With adequate and effective internal financial controls, some of the benefits that the companies would experience include: Internal financial controls also become important as they help derive values in the form of Section 134: In the case of a listed company, the Directors' Responsibility states that directors, have laid down IFC to be followed by the company and that such controls are adequate and operating effectively. Section 143: The auditor's report should also state whether the company has adequate IFC system in place and the operating effectiveness of such controls. Section 177: 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. Schedule IV: The independent directors should satisfy themselves on the integrity of financial information and ensure that financial controls and systems of risk management are robust and defensible. Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014: The director's report should contain details in respect of adequacy of internal financial controls with reference to the financial reporting. A. Company Management Create & test the framework of internal controls B. Auditor C. Audit Committee /Independent Director D. Board of Directors Under section 143(3)(i) of the Act, an auditor of a company is required to state in his/her audit report whether the company has an adequate Internal Financial Controls (IFC) system in place and the operating effectiveness of such controls. Explanation to Section 134(5)(e) of the Act defines IFC to include policies and procedures adopted by the company for ensuring orderly and efficient conduct of its business, accuracy and completeness of the accounting records, and timely preparation of reliable financial information. As per the Guidance Note "Internal Financial Controls Over Financial Reporting" (ICFR) shall mean: "A process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles". A company's internal financial control over financial reporting includes those policies and procedures: Pertain to the maintenance of the records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company: Provides reasonable assurance that transactions are recorded as necessary to permit preparation of financial statement in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and director of the company. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect of the financial statement. Internal Control Over financial Reporting = Maintenance of financial records (details & Accuracy) + Authorization of Transactions + Safeguarding of assets of the Company The overview of revised Guidance Note issued by the ICAI are as follows: Section 134(5)(e) of the Act (which deals with the directors' responsibility statement) requires directors of listed companies to state whether they had laid down IFC to be followed by the company and that such IFC are adequate and were operating effectively. Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014. This responsibility also includes - - Maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Company and for preventing and detecting frauds and other irregularities - Selection and application of appropriate accounting policies - Making judgments and estimates that are reasonable and prudent - And design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error. Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 (Rules) requires Board's report of every company to state the details in respect of adequacy of IFC with reference to the financial statements. Though not specifically mentioned, the Guidance Note appears to suggest that for: Listed Companies: The directors' responsibility statement to state that IFC are adequate and operating effectively. The Board's report to state the adequacy of IFC with respect to financial statements. Other Companies: The Board's report to state adequacy of IFC with respect to financial statements. The auditor's objective in an audit of IFC - FR (which is generally carried out along with an audit of financial statements) is to express an opinion on the adequacy and operating effectiveness of the company's IFC - FR. A company's internal financial control cannot be considered effective if one or more material weakness exists. Globally also, auditor's reporting on internal controls is together with the reporting on financial statements and such internal controls reported upon relate only to internal controls over financial reporting. To truly unlock the value that can be achieved by adopting the internal financial controls, management should take a step back and evaluate how it is addressing the risks to its organization in light of the company's size, complexity, global reach, and risk profile. In companies' implementation of the internal financial controls, there is a difference between doing the minimum and doing the right thing to effectively address the requirements. Companies that choose to do the right thing will unlock the value, reduce fraud risk, avoid financial reporting surprises, and support sustained business performance over the long term.Meaning of Internal Financial Controls (IFC)
Objective of IFC
Internal Control = Internal Control over financial reporting + Operational control reporting + Fraud prevention reporting
Roadmap to implement Internal Financial Controls
Advantages of a robust internal financial control system
Internal Financial Controls - Why important?
Where it is laid down
Responsibilities of Various Stakeholders
Guidance Note issued by ICAI on Internal Financial Controls over Financial Reporting
Reporting responsibility of the management
Reporting by auditors - whether same scope as that of management
Opportunities for Companies
FAQs
What is the internal financial control of IFC? ›
Meaning of Internal Financial Controls (IFC)
orderly and efficient conduct of business, including adherence to company's policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records, and.
Some of the key differences between IFC and ICFR include the following: IFC is mandatory for listed companies while ICFR is not mandatory but recommendatory. IFC overlooks the entire business control while the ICFR specifically focuses on the control over accuracy of the financial reporting.
Is IFC applicability to consolidated financial statements? ›Hence, the auditor will be required to report under Section 143(3)(i) of the 2013 Act on the adequacy and operating effectiveness of the internal financial controls over financial reporting, even in the case of consolidated financial statements.
What is an IFC checklist? ›Internal Finance Control (IFC) Audit Checklist Software Intro. An Internal Finance Control (IFC) audit checklist is an invaluable tool for comparing a business's practices and processes to the requirements set out by ISO standards.
What is the difference between IFC and internal control? ›The main difference between ICFR (internal control over financial reporting) and IFC (internal financial control) is that IFC is much more comprehensive than ICFR, which specifically relates to financial reporting internal controls.
What are the controls for IFC audit? ›- 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 policies and procedures adopted by the company to ensure orderly and efficient conduct of its business, including adherence to company's policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of accounting records, and the timely preparation of reliable ...
What is the objective of IFC testing? ›Primary objective of IFC to identify opportunities for improvement, and to draw up recommendations and good practices that can use as a benchmark to develop or strengthen their internal control systems and enhance the reliability of their financial statements.
How to test internal financial controls? ›- Create an Inventory of Controls. ...
- Prioritize Controls Testing. ...
- Design an Appropriate Test for Each Control. ...
- Document and Follow Up on Identified Issues.
IFC is applicable solely to all listed entities. It may, however be noted Companies (Accounts) Rules, 2014 needs the Board of Directors' report of all companies to state the details in respect of adequacy of internal financial controls with regard to the “financial statements”.
Is IFC applicable to all companies? ›
IFC over financial reporting means the process is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of statements for external purposes by generally accepted accounting principles. IFC applies solely to all listed entities.
Is IFC applicable to all public companies? ›Any business company in India must comply with the Internal Financial Control (IFC) applicability. It includes public companies, government and non-government companies, and any other kind of business entity.
What is an example of an IFC? ›Example of an IFC Investment
Small subsistence farms account for nearly 80% of the industry's output. FrieslandCampina has promised to share its experience and best practices with the smaller farmers who supply Engro Foods, along with the majority of the dairy processors in Pakistan.
The International Finance Corporation or IFC, is the private sector arm of the World Bank Group and shares its mission to reduce global poverty.
What is IFC and why is it important? ›IFC - a member of the World Bank Group - is the largest global development institution focused exclusively on the private sector in developing countries. We leverage the power of the private sector and share expertise to transform ideas into investments for green growth, inclusive jobs and impactful projects.
What is financial internal control? ›An organization's methods, systems and procedures for (1) protecting resources from waste, loss, theft. or misuse (2) ensuring that resources are used in accordance with law, business and donor intent and (3) producing reliable financial statements based on accurate and verifiable data.
What are the internal controls of the financial industry? ›Internal controls are accounting and auditing processes used in a company's finance department that ensure the integrity of financial reporting and regulatory compliance. Internal controls help companies to comply with laws and regulations, and prevent fraud.
Who is the IFC owned and governed by? ›Established in 1956, IFC is owned by 186 member countries, a group that collectively determines our policies. Through a Board of Governors and a Board of Directors, our member countries guide IFC's programs and activities. Each of our member countries appoints one governor and one alternate.
Who regulates the IFC? ›IFC operates under the authority of its Board of Governors. Each member country has a Governor who is typically the Minister of Finance, and such individual serves on the Board of Governors of both IFC and the World Bank. IFC's Board of Governors has delegated all but its reserved powers to the Board of Directors.