<h1>Definition of Internal Controls </h1>

<li>Internal financial controls are defined in the explanation to Section 134(5)(e) of the Companies Act 2013 as the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company policies. </li>
<li>Safeguarding of its assets, </li>
<li>Prevention & detection of frauds and errors. </li>
<li>Accuracy & completeness of accounting records and </li>
<li>Timely preparation of reliable financial information </li>
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Ministry of Corporate Affairs (MCA) has notified that Section 143(3)(i) of the Companies Act 2013 shall not be applicable for those audit reports of private limited companies /One-person companies (OPC) which has an annual turnover of less than Rs 50 Crores or has aggregate borrowings of less than 25 Crores from banks, financial institutions, or body corporate at any time during the financial year.

<h2>Internal Auditor’s [IA] Role with reference to IFC </h2>

As per IIA’s international standards for the professional practice of internal auditing # 2100 – ‘Nature of work’ requires that the internal audit activity evaluate & contribute to the improvement of the organization’s governance, risk management, and control processes using a systematic, disciplined, and risk-based approach. The Internal Auditor should possess three qualities i.e., Integrity, Independence, and provide assurance to the management. Internal Auditor should give their observations while being honest and his/her decisions should be non-biased. The Internal Auditor should act as a consultant and help the management in carrying out its responsibilities.

<h3>Activities & Lead Responsibilities for IFC Efforts </h3>

The following activities and responsibilities are important for any Internal Auditor for completing any IFC assignment and they are as follows– 

<b>PLANNING-</b> To plan out the flow of activities to be performed and to decide the scope of the audit and to participate in team planning and to give recommendations.

<b>EXECUTION-</b> Advising the management in the processes to be used and perform quality reviews. To perform the testing of the management documents and to achieve the highest possible reliability for the external auditors. Performing follows up reviews and identifying control gaps.

<b>REPORTING-</b> Advising the management based on the report prepared. To act as a coordinator between the management and the external auditor 

<b>MONITORING–</b> Ongoing the monitoring of the services and performing periodic audits. 

<h3>Role of Internal Audit </h3>

The Companies Act, 2013 specifies the various roles of management, audit committee, and the external auditors. The services of internal audit meeting the requirements of IFC under the Companies Act,2013 should not interfere with the requirements of the IIA’s International Standards to maintain independence and objectivity. The standards provide the pathway for carrying out an effective internal audit activity. The role of the Internal Auditor is to meet the obligations in consideration of the standards. Activities that meet the requirement of IFC are as follows – Project oversight, Consulting & Project, and Ongoing monitoring & testing project audit. The Internal Auditor must support the management in carrying out the responsibilities to oversight the entire project. Monitoring the progress of the report and giving recommendations to the project team.

<h4>Consulting and Project Support </h4>

Provide documentation for processes under the scope. To guide the process owners on different risks and to maintain control awareness. Perform quality assurance review for key controls before handing them over to the external auditor.

<h4>On-Going Monitoring & Testing </h4>

Perform tests of different departments as per the scope of the audit. Identifying the control gaps and review the plans and policies of the management for bridging the control gaps. Using a risk-based approach in planning the audit. This will help to focus on the departments where financial risk is present at a higher level. Internal Auditors should be involved throughout a project’s life cycle.

<h4>Internal Auditing Activity as a Source of Consultant </h4>

Internal auditors should act as a consultant for recommending the controls to address the related risks and for identifying & implementing the risk and control assessment methodologies. However, to adopt the suggestions and recommendations given by the auditor is in the hands of the management. Internal auditors can participate in implementing the new processes in which financial controls are affected. 

<h4>Internal Auditing as a Source of Resources for Documentation/Testing </h4>

Internal Auditors are requested to aid the management in documenting the internal controls. The INTERNAL AUDITOR must make sure that his/her objectivity is not impaired by working closely with the management. 

Merely documenting the policies, identifying the gaps, and giving recommendations do not affect the objectivity of the IA.

<h5>Control Self-Assessment [CSA] </h5>

CSA may be used as an effective and efficient means for management to assess the controls. If during the CSA the INTERNAL AUDITOR owns the assessment, or he/she is the main source of documentation then the objectivity is impaired.

<h5>Disclosure Process </h5>

The Internal Auditor must complete some type of certification to validate the IFC process. The certification must be supported by adequate evidence as required by the standards. The Internal Auditor must identify the key financial controls and make sure that they are designed properly.

<h6>How Riskpro can help you? </h6>

RiskPro offers Risk Based Internal Audit services and IFC. Riskpro also has an Internal Audit & IFC Management Software. For more details on our services or to schedule an online demo of the software, please connect with us at info@riskpro.in. 

<p><small><b>Sources of The Article:</b>
Internal Auditor’s Role in relation to Internal Financial Controls reporting in India – a book published by IIA
https://www.quora.com/What-is-the-difference-between-an-internal-financial-control-and-an-internal-control-over-financial-reporting
https://www.slideshare.net/CAPramodJain1/caro-2016-and-internal-financial-controls
https://taxguru.in/company-law/internal-financial-controls-introduction.html
https://img1.exportersindia.com/product_images/bc-full/dir_140/4179872/internal-financial-control-1483097954-2665517.jpeg </small></p>

<p><small> <b>Author:</b> 
Raj Kapadia 
Associate Audit Services
Riskpro India 
info@riskpro.in December 2020
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