Page 75 - CA Inter Audit PARAM

CA Ravi Taori
Author’s Note

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C AATS is good IT system for companies

QNO Meaning of IFC in Detail Old Course –(N21M)
ICS.33.400 Bhaskar CNO- SA315-P2.380
Explain the meaning of internal financial controls as per the Companies Act, 2013. Also explain its objectives
Answer Clause (e) of Sub-section 5 of Section 134 explains the meaning of internal financial controls as,
“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.”
From the above definition, it is clear that internal financial controls are the policies and procedures
adopted by the company for:
1. ensuring the orderly and efficient conduct of its business, including adherence to company’s
policies,
2. the safeguarding of its assets,
3. the prevention and detection of frauds and errors,
4. the accuracy and completeness of the accounting records, and
5. the timely preparation of reliable financial information.”

QNO Law Related to IFC Old Course -- (N21R)
ICS.33.500 Bhaskar CNO- SA315-P2.380
Auditor’s reporting on internal financial controls is a requirement specified in the Act and, therefore, will
apply only in case of reporting on financial statements prepared under the Act and reported under Section
143. Explain in detail quoting specifically the Law in the above context covering each and every aspect.
Answer Auditor’s reporting on internal financial controls is a requirement specified in the Act and, therefore,
will apply only in case of reporting on financial statements prepared under the Act and reported under
Section 143.

Accordingly, reporting on internal financial controls will not be applicable with respect to interim
financial statements, such as quarterly or half -yearly financial statements, unless such reporting is
required under any other law or regulation.

Objectives of an auditor in an audit of internal financial controls over financial reporting: The
auditor’s objective in an audit of internal financial controls over financial reporting is, “ to express an
opinion on the effectiveness of the company’s internal financial controls over financial reporting.”
It is carried out along with an audit of the financial statements.

Reporting under Section 143(3)(i) is dependent on the underlying criteria for internal financial
controls over financial reporting adopted by the management. However, any system of internal
controls provides only a reasonable assurance on achievement of the objectives for which it has been
established. Also, the auditor shall use the concept of materiality in determining the extent of testing
such controls.

Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the board report of all companies
to state the details in respect of adequacy of internal financial controls with reference to the financial
statements.
The inclusion of the matters relating to internal financial controls in the directors responsibility
statement is in addition to the requirement of the directors stating that they have taken proper and
sufficient care for the maintenance of adequate accounting records in accordance with the provisions
of the 2013 Act for safeguarding the assets of the company and for preventing and detecting fraud
and other irregularities.

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