An Overview of Internal Financial Controls over Financial Reporting

Introduction

The auditor has to report whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls. Moreover, the reporting on internal financial controls is significantly broader than the reporting on internal controls.

Management’s Responsibility

Companies Act 2013, requires the directors’ responsibility statement to state that the directors, in the case of listed entities, had laid down their internal financial controls to be followed by the company and the same were operating effectively.

Internal financial controls are the policies and procedures adopted by the company for ensuring 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.

Auditors’ Responsibility

The auditor is required to conduct the audit of internal financial controls over financial reporting and express his opinion on the effectiveness of internal financial control. The company’s internal controls cannot be considered effective if one or more material weakness exists. A material weakness in internal financial controls may exist even when the financial statements are not materially misstated.

The internal financial control over the financial reporting of a company includes the policies and procedures which pertain to the maintenance of records that, accurately and fairly reflect the transactions and dispositions of the assets of the company and also provide the reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company. It also provides reasonable assurance related to the prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets.

Benefits of Internal Financial Control System

• • Enhance Senior Management Accountability & Responsibility
  • Improved stockholder confidence in company’s financial reporting progression
  • Trickling back on operational management accountability
  • Developments in the financial reporting and financial controls of the Board
  • More accurate, reliable financial statements Making audits more comprehensive

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