Internal Audit and Internal Control over Financial Reporting (ICFR) are two distinct concepts under the Companies Act. Let’s explore the differences between them and refer to the relevant sections of the Companies Act.
Internal Audit:
Internal audit is a process conducted within an organization to assess and improve the effectiveness of risk management, control, and governance processes. It involves an independent evaluation of an organization’s operations, financial reporting, compliance with laws and regulations, and overall internal control systems. The primary purpose of internal audit is to provide assurance to management and the board of directors regarding the adequacy and effectiveness of internal controls and risk management.
ICFR (Internal Control over Financial Reporting):
ICFR refers to the controls implemented by a company to ensure the reliability of its financial reporting. These controls are designed to provide reasonable assurance that financial statements are accurate, complete, and prepared in accordance with relevant accounting standards. ICFR is specifically focused on the controls related to the preparation of financial statements and the prevention or detection of material misstatements.
Companies Act References:
Section 138 of the Companies Act, 2013: This section pertains to the internal audit of companies. It states that certain classes of companies are required to appoint an internal auditor to conduct an internal audit of the company’s financial transactions, operations, and compliance. The internal auditor’s role is to provide independent assurance on the company’s internal controls and financial reporting.
Section 134 of the Companies Act, 2013: This section deals with the financial statements, Board’s report, and reports on internal financial controls. It mandates that the Board of Directors of a company shall prepare the financial statements on a yearly basis and ensure that proper internal financial controls are in place.
