Our Risk Advisory Services - Internal Financial Controls

Internal financial controls are the backbone of any organization's financial management system. These controls encompass a set of policies, procedures, and practices designed to safeguard assets, ensure accuracy in financial reporting, and promote compliance with laws and regulations. By establishing clear protocols for authorization, segregation of duties, documentation, and monitoring, businesses can mitigate the risk of fraud, errors, and misuse of resources. Internal financial controls not only provide assurance to stakeholders but also contribute to the overall efficiency and sustainability of the organization.

Internal financial controls (IFC) are defined under Explanation to Section 134(5)(e) as the policies and procedures adopted by the company to ensure:

the orderly and efficient conduct of its business, including adherence to the 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.

Internal Financial Controls Audit involves:

Studying the “as is” process and providing recommendations regarding the “to be" process considering the best practices and risk prevention.
Assessing the adequacy and effectiveness of the existing internal controls designed for each process.
Reporting on the adequacy and effectiveness of the internal controls.

Legal Framework For Internal Financial Controls In India

Schedule IV (II) (4):

Independent director shall satisfy themselves on the integrity of financial information and that of financial controls.

Section 134(5)(e) of the Companies Act 2013:

The report by Board of Directors (BoD) shall include a statement ensuring implementation of adequate internal financial control and adherence of policy and procedures adopted by the company with an objective of orderly and efficient conduct of business, safeguarding company’s assets, prevention and detection of frauds for accuracy and completeness of the accounting records and timely preparation of reliable financial information.

Section 143 (3) (i) of the Companies Act, 2013:

Auditor’s report should state the adequacy and operating effectiveness of the Company’s internal financial controls

Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014:

The Board of Directors’ report of all companies to state the details in respect of adequacy of internal financial controls with reference to the “financial statements”.

Internal Control over Financial Reporting ('ICFR')

Internal financial controls system includes policies and procedures for ensuring the efficiency and effectiveness of business and ensuring the accuracy of accounting records.

Internal Control Over Financial Reporting Audit is 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 that:

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.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements 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 the director of the company.
Provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statement.

JPA provides a one-stop solution for all your IFCR needs starting with devising Business Process Narratives (BPN), Risk Control Matrix (RCM) & establishing Test of Controls (TOC) for each business process. We also evaluate the existing BPN, RCM & TOC, as per the requirement.