Accounting for Managers Notes for Unit III reporting and internal controls 21st April 23.pdf

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1. Accounting for Managers
CA A G Krishnan
[email protected]
9886217080

2. The portion that will be covered by me
•Unit III
•Corporate Reporting, Corporate Governance and relatedsubjects.
•Reportingoninternalcontrols
•Reporting on Internal Financial Controls
•Related party transactions and similar corporate governance based
reports
•Sarbans Oxley Act
•Indian interpretation and implementation of internal controls

3. Corporate Governance
•Corporate governance is the structure of rules, practices, and processes
used to direct and manage a company.
•A company's board of directors is the primary force influencing corporate
governance.
•Bad corporate governance can cast doubt on a company's operations and
its ultimate profitability.
•Corporate governance covers the areas of environmental awareness,
ethical behavior, corporate strategy, compensation, and risk management.
•The basic principles of corporate governance are accountability,
transparency, fairness, responsibility, and risk management.

4. Four pillars of corporate governance
•Fairness
•The board of directors must treat shareholders, employees, vendors, and communities
fairly and with equal consideration.
•Transparency
•The board should provide timely, accurate, and clear information about such things as
financial performance, conflicts of interest, and risks to shareholders and other
stakeholders.
•Risk Management
•The board and management must determine risks of all kinds and how best to control
them. They must act on those recommendations to manage them. They must inform all
relevant parties about the existence and status of risks.
•Responsibility
•The board is responsible for the oversight of corporate matters and management
activities. It must be aware of and support the successful, ongoing performance of the
company. Part of its responsibility is to recruit and hire a CEO. It must act in the best
interests of a company and its investors.

5. Benefits of corporate governance
•Good corporate governance creates transparent rules and controls,
provides guidance to leadership, and aligns the interests of shareholders,
directors, management, and employees.
•It helps build trust with investors, the community, and public officials.
•Corporate governance can provide investors and stakeholders with a clear
idea of a company's direction and business integrity.
•It promotes long-term financial viability, opportunity, and returns.
•It can facilitate the raising of capital.
•Good corporate governance can translate to rising share prices.
•It can lessen the potential for financial loss, waste, risks, and corruption.
•It is a game plan for resilience and long-term success.

6. •The organizational framework for corporate governance initiatives in
India consists of the Ministry of Corporate Affairs (MCA) and the
Securities and Exchange Board of India (SEBI). SEBI monitors and
regulates corporate governance of listed companies in India through
Clause 49. This clause is incorporated in the listing agreement of stock
exchanges with companies and it is compulsory for listed companies
to comply with its provisions. MCA through its various appointed
committees and forums such as National Foundation for Corporate
Governance (NFCG), a not-for-profit trust, facilitates exchange of
experiences and ideas amongst corporate leaders, policy makers,
regulators, law enforcing agencies and non- government
organizations.

7. Corporate Governance in practice
•Constitution of the Board of Directors –appointment of independent
directors and women directors
•Audit Committee, constitution and also independent director to be
the chairperson of the committee
•Related party transactions –reporting
•Investors Grievance Redressal, Executive remuneration, etc.
Formation of such sub level committesconstituting of the Board of
Directors
•Risk management
•Directors responsibility statement ( please see subsequent slide on
this)
•CEO / CFO certification ( please see subsequent slide on this)

8. Listed companies and corporate governance
•The basic criterion on which the whole Listing Agreement based is
Corporate Governance. Currently there are 54 Clauses in the Listing
Agreement and all of them based on this very concept. Further, there
is a clause which specifically deals with Corporate Governance i.e.
Clause 49. By way of Listing Agreement inter alia, Stock Exchange
ensures on behalf of SEBI that the Companies are following good
Corporate Governance Practice.

9. Corporate Governance and the listing agreement especially Clause 49
•Following new disclosure requirements have been specified in the revised clause 49:
(i) Statement on transactions with related parties in the ordinary course of business shall be placed before the Audit committee
periodically;
(ii) Details of material individual transactions with related parties which are not in the normal course of business shall be placed
before the Audit committee; and
(iii) Details of material individual transactions with related parties or others, which are not on arm’s length basis, should be placed
before Audit committee together with management’s justification for the same. Here also, the word ‘material’ has not been
defined. Listed companies should ascertain from their respective audit committees the frequency of reporting such transactions.
(iv) Financial statements should disclose together with management’s explanation any accounting treatment different from that
prescribed in Accounting Standard.
(v)The company will lay down procedures to inform board members about the risk assessment and minimization procedures which
shall be periodically reviewed by the Board.
(vi) The company shall disclose to the Audit committee on a quarterly basis the use of funds raised through public/
rights/preferential issues. Annually a statement showing use of funds for purposes other than those stated in
Offer document/prospectus should be placed before the Audit committee. Such statement should be certified by the statutory
auditors.
(vii) Under ‘Remuneration of Directors’ new disclosure requirements have been prescribed, which include criteria of making
payments to nonexecutive directors, shares and convertible instruments held by non-executive directors and shareholding (both
own and held on beneficial basis) of nonexecutive directors to be disclosed in the notice of general meeting called for approving
appointment of such director.

10. Sarbanes-Oxley Act of 2002 (USA based legislation which is incorporated
through Clause 49 of the listing agreement (SEBI and the exchanges)
•The Sarbanes-Oxley Act of 2002 is a federal law that established
sweeping auditing and financial regulations for public companies
•The main areas that the Act is focused on are:
•Increasing criminal punishment
•Accounting regulation
•New protections
•Corporate responsibility
•Federal lawmakers enacted the Sarbanes-Oxley Act in large part due
to corporate scandals at the start of the 21st century.

11. •Internal controls are a system of policies, procedures, reviews, segregation of
duties, and other activities that are used to minimize the risk of asset loss,
produce accurate financial statements, and conduct operations in an efficient and
orderly manner.
•What is an Internal Control Checklist?
•An internal control checklist is intended to give an organization a tool for
evaluating the state of its system of internal controls. By periodically comparing
the checklist to actual systems, one can spot control breakdowns that should be
remedied. When followed regularly, a checklist has the following benefits:
•There are fewer audit comments about internal control weaknesses
•Management can gain assurance that reported financial results are accurate
•There is a reduced risk of asset losses due to fraud
•There is less chance that the organization is not complying with any applicable
regulatory requirements

12. •When going through an internal control checklist, the intent is to spot
any controls that are missing or weak. Such a finding does not
automatically indicate the presence of a control problem that
requires remediation. If there are offsetting controls elsewhere in the
system, a weak control could be considered acceptable. For example,
if a signature plate is used to sign checks, this could be considered a
control weakness, except that a formal approval is required upstream
for every purchase order issued. This offsetting control ensures that
purchases are still approved somewhere in the purchasing system.

13. Payables Control Checklist
•All invoices greater than $50 are approved by a manager
•A three-way match of the purchase order, receiving document, and
supplier invoice is conducted
•Blank checks are stored in a locked location
•The sequence of check numbers is tracked
•Checks are manually signed
•Invoices are stamped "paid" when they have been paid

14. Customer Billing Control Checklist
•All discounts and special prices are confirmed
•Invoices are checked for errors
•Unmatched bills of lading are reviewed
•The sales order total is compared to the invoice total
•Statements of unpaid amounts are issued to customers

15. Payroll Control Checklist
•Time sheets are matched to a list of current employees
•The hours stated on time sheets are approved by supervisors
•The totals entered into the payroll system are matched to time sheet
totals
•The preliminary payroll register is reviewed and approved by the
payroll manager
•All payroll checks are manually distributed to the people named on
the checks

16. DIRECTORS’ RESPONSIBILITY STATEMENT
•Pursuant to the provisions of Section 134(3)(c) of the Companies Act, your
Directors state that:
•In the preparation of the annual accounts for the year ended March 31,
2022, the applicable accounting standards have been followed along with
proper explanation relating to material departures;
•the directors have selected such accounting policies and applied them
consistently and made judgments and estimates that are reasonable and
prudent, so as to give a true and fair view of the state of affairs of the
Company as on March 31, 2022 and of the profit and loss of the Company
for the year ended on that date;
•the directors have taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of this Act
for safeguarding the assets of the Company and for preventing and
detecting fraud and other irregularities

17. DIRECTORS’ RESPONSIBILITY STATEMENT
•the directors have prepared the annual accounts on a “going concern”
basis;
•the directors have laid down internal financial controls which are
being followed by the Company and that such internal controls are
adequate and are operating effectively;
•the directors have devised proper systems to ensure compliance with
the provisions of all applicable laws and that such systems were
adequate and operating effectively.

18. DIRECTORS’ RESPONSIBILITY STATEMENT
•The Company has set up proper and adequate Internal Financial
Controls with respect to financial statements. Systems Audit is carried
out by an internal team of officials with a combined finance and
technical background. This is in addition to the internal audit by firms
of Chartered Accountants/ Cost Accountants. Manuals pertaining to
various functions/activities such as Purchase, Outsourcing, Stores,
Accounts, Systems Audit etc., have been updated and implemented.
Any instance of material weakness in the operations, if observed, is
followed up with necessary remedial measures and suitable
disclosures have been made in the Notes to Accounts.

19. CEO/CFO CERTIFICATION
•In terms of Regulation 17(8) of SEBI (LODR) Regulations, 2015 the
Compliance Certificate issued by the CEO and CFO on the financial
statements and internal controls relating to financial reporting for the
year 2021-22 was submitted to the Board at its 455th meeting held
on 13th May, 2022 and is attached to this Report.

20. CEO/CFO CERTIFICATION
•The Board of Directors Limited
•We have reviewed financial statements and the cash flow statement of for the twelve
months period ended March 31, 2022 and that to the best of knowledge and belief:
•these statements do not contain any materially untrue statement or omit any material fact or contain
statements that might be misleading;
•these statements together present a true and fair view of the company’s affairs and are in compliance with
existing accounting standards, applicable laws and regulations.
•There are, to the best of our knowledge and belief, no transactions entered into by the company
during the year which are fraudulent, illegal or violative of the company’s code of conduct.
•We accept responsibility for establishing and maintaining internal controls for financial reporting
and that we have evaluated the effectiveness of internal control systems of the Company
pertaining to financial reporting. We have come across one reportable deficiencies in the design
or operation of such internal controls, and necessary corrective action has already been initiated.
•We have indicated to the auditors:
•that there are no significant changes in internal control over financial reporting during the period;
•that there are no significant changes in accounting policies during the period.
•that there are no instances of significant fraud of which we have become aware.

21. Reporting on Internal Financial Controls by auditor
•ANNEXURE “A” TO THE INDEPENDENT AUDITOR’S REPORT OF EVEN DATE ON THE STANDALONE
FINANCIAL STATEMENTS OF LIMITED.
•Report on the Internal Financial Controls under Clause (i) of Sub-section 3 of Section 143 of the
Companies Act, 2013 (“the Act”).
•We have audited the Internal Financial controls with reference to financial statements of (“the
Company”) as of March 31, 2022 in conjunction with our audit of the Standalone Financial
Statements of the Company for the year ended on that date.
•Management’s Responsibility for Internal Financial Controls
•The Company’s Management is responsible for establishing and maintaining Internal Financial
controls with reference to financial statements criteria established by the Company, considering
the essential components of Internal Control stated in the Guidance Note on Audit of Internal
Financial controls with reference to financial statements, issued by the Institute of Chartered
Accountants of India (ICAI). These responsibilities include the design, implementation and
maintenance of adequate internal financial controls that were operating effectively 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, as required under the Companies Act, 2013.
•

22. Reporting on Internal Financial Controls by auditor
•Auditors’ Responsibility
•Our responsibility is to express an opinion on the Company’s Internal Financial controls with reference to
financial statements based on our audit. We conducted our audit in accordance with the Guidance Note on
Audit of Internal Financial controls with reference to financial statements (the “Guidance Note”) and the
Standards on Auditing, issued by ICAI and deemed to be prescribed under Section 143(10) of the Companies
Act, 2013, to the extent applicable to an audit of Internal Financial Controls, both applicable to an audit of
Internal Financial Controls and both issued by ICAI. Those Standards and the Guidance Note require that we
comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether adequate Internal Financial controls with reference to financial statements was established and
maintained and if such controls operated effectively in all material respects.
•Our audit involves performing procedures to obtain audit evidence about the adequacy of the Internal
Financial Controls System over Financial Reporting and their operating effectiveness. Our audit of Internal
Financial controls with reference to financial statements included obtaining an understanding of Internal
Financial controls with reference to financial statements, assessing the risk that a material weakness exists
and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. The procedures selected depend on the Auditors’ judgement, including the assessment of the risks of
material misstatement of the Financial Statements, whether due to fraud or error.
•We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion on the division Internal Financial Controls System over Financial Reporting.

23. Reporting on Internal Financial Controls by auditor
•Meaning of Internal Financial controls with reference to financial statements
•A company’s Internal Financial Control over Financial Reporting is a process 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 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 authorisations of Management and Directors of the Company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorised
acquisition, use or disposition of the Company’s assets that could have a material effect
on the financial statements.
•

24. Reporting on Internal Financial Controls by auditor
•Inherent Limitations of Internal Financial controls with reference to financial
statements
•Because of the inherent limitations of Internal Financial controls with reference to
financial statements, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may occur and not be
detected. Also, projections of any evaluation of the Internal Financial controls with
reference to financial statements to future periods are subject to the risk that the
Internal Financial Control over Financial Reporting may become inadequate because of
changes in conditions or that the degree of compliance with the policies or procedures
may deteriorate.
•Opinion
•In our opinion, the Company has, in all material respects, an adequate Internal Financial
Controls System over Financial Reporting and such Internal Financial controls with
reference to financial statements were operating effectively as at March 31, 2022, based
on the Internal Control over Financial Reporting criteria established by the Company,
considering the essential components of internal control stated in the Guidance Note on
Audit of Internal Financial controls with reference to financial statements issued by ICAI.

28. IND AS 24 Related party disclosure
•Relationships between a parent and its subsidiaries shall be disclosed irrespective
of whether there have been transactions between them. An entity shall disclose
the name of its parent and, if different, the ultimate controlling party. If neither
the entity’s parent nor the ultimate controlling party produces consolidated
financial statements available for public use, the name of the next most senior
parent that does so shall also be disclosed.
•To enable users of financial statements to form a view about the effects of related
party relationships on an entity, it is appropriate to disclose the related party
relationship when control exists, irrespective of whether there have been
transactions between the related parties. This is because the existence of control
relationship may prevent the reporting entity from being independent in making
its financial and operating decisions. The disclosure of the name of the related
party and the nature of the related party relationship where control exists may
sometimes be at least as relevant in appraising an entity’s prospects as are the
operating results and the financial position presented in its financial statements.
Such a related party may establish the entity’s credit standing, determine the
source and price of its raw materials, and determine to whom and at what price
the product is sold.