Reporting on Internal Financial Controls

Section 143(3)(i) of the Companies Act, 2013 has introduced the requirement of reporting by the auditors on whether the company has an adequate internal financial controls system over financial reporting in place and the operating effectiveness of such controls with effect from the financial year beginning 1st April, 2015. As per the “Guidance Note on Audit of Internal Financial Controls over Financial Reporting” issued by the ICAI, the reporting on Internal Financial Controls is only in the context of the audit of the financial statements. Hence, reporting by the auditors will be restricted to adequacy and effectiveness of internal financial controls relating to financial reporting. The Guidance Note covers aspects such as:

• scope of reporting on financial controls under the Companies Act, 2013,
• essential components of internal controls,
• technical guidance on audit of internal financial controls and implementation guidance on audit of internal financial controls.

Appendices to the Guidance Note include illustrative engagement letter, illustrative management representation letter, illustrative reports on internal financial controls, illustrative risks of material misstatements templates for common business cycles, related control objectives and control activities. The illustrative formats of the report on internal financial controls also include an illustrative format in case of audit of consolidated financial statements.