Internal Audit & Internal Financial Control, According to Companies Act 2013, Internal Financial Control (IFC) is a procedure to follow proper policies, such as prevention and recognition of fraud, obedience to company policies, protection of company assets, preparing and maintaining accurate accounting records according to GAAP (Generally accepted accounting principles). Indian regulators are trying to bring regulatory changes from the western world by introducing and applying Internal Financial Controls (IFC) in the Companies Act 2013.
Auditing standard SA 700 suggest that an IFC report should be “Forming an opinion and reporting on the financial statements”
According to section 143(30) (I) of Companies Act 2013 an auditor of a company is required to mention execution of satisfactory IFC in their audit report. Also, in order to ensure effective execution of business, section 134(5) (e) of the 2013 act require IFC to implement policies and procedures for smooth functioning.
Internal Audit and IFC
Internal audit falls under independent management function, where the aim is to solidify the overall system of the company.
Internal Financial Control (IFC) can help an internal auditor in understanding the process and evaluating risk by providing a three sixty degree view about the policies, procedures and operations of a company. The internal auditor can then validate the process and assure risk mitigation to the audit committee. Internal auditor can focus on the risk involved and provide remedy or help management with the risk identified.
In matters related to effectiveness of the IFC of the company the auditor is answerable to the shareholder and members of the company.
Who are responsible?
According to clause (e) of sub-section 5 of section 134 of Companies Act 2013, directors of a listed company must establish a control environment, confirm obedience to codes of conduct and maintain clarity of internal control responsibilities.
Section 143 require an auditor to ensure efficient IFC system operating with effectiveness in the company.
According to Section 177 audit committees are supposed to manage compliance and operational matters. The audit committee before submitting their report to the board have the authority to ask the auditor about internal control system and discuss related issues with management of the company and internal and statutory auditors.
Schedule IV require Independent directors to confirm systems of risk management and financial control are strong.
Internal Financial Control System: Advantages
The Companies Act 2013 through IFC is attempting to bring together standard of financial reporting and corporate governance by putting accountability on the Board, Audit Committee and Senior Management.
Some of the benefits of IFC are:
- Accountability of board, audit committee and senior management in financial reporting and financial controls to make audits more comprehensive.
- Better control and improved confidence of investors in operations and the process of financial reporting.
- Openness, transparency, accuracy and reliability of financial statements
Internal Financial Control (IFC) with its transparent and accurate financial reporting standard will lead to an efficient system. With the implementation of IFC the cost of compliance will increase. However, for a better corporate governance mechanism in the long run IFC has to be implemented.