Companies of all sizes, whether they are privately or publicly held, must establish an adequate system of policies and procedures for ICFR or internal controls over financial reporting. If the company has no material weaknesses, the internal control system can prevent material errors and fraud in transactions and helps present financial statements in a fair manner. Read this article on Detailed Overview of Internal Controls Over Financial Reporting/ICFR to know more about ICFR.
Businesses in the UAE can take advantage of the various opportunities brought about by the city’s fast-paced, technology-driven change through accurate and reliable financial reporting. Due to UAE’s development and rising worldwide challenge from opponents using the newest data-driven financial reporting systems, businesses in the region may greatly benefit from ICFR/Internal Controls Over Financial Reporting.
After the adoption of the Sarbanes-Oxley (SOX) Act in 2002, authorities worldwide have increased the reporting responsibilities from this viewpoint.
What is ICFR?
Internal Control Over Financial Reporting/ICFR is a procedure created to give an organization or person a satisfactory level of assurance, making sure the accuracy of financial reporting and preparation of financial statements for being used by outside parties in compliance with the accounting standards guidelines.
The structure and operational performance of the precautions and controls management implemented over financial and accounting reporting are some of the critical factors in its capacity to carry out its financial reporting obligations. [MOU1]
Objectives of ICFR Implementation in the UAE
- The importance of internal controls for a business contributes to increasing trust in the accuracy of financial data in line with the best international practices.
- In the good interests of diverse business stakeholders, it helps improve the standard of financial reporting procedures.
- It attempts to increase the openness and accuracy of financial reporting procedures, which will finally help in integrating financial data.
Key Components of ICFR
Listed below are the key components of ICFR or Internal Controls Over Financial Reporting:
- Risk Evaluation: The process used by businesses to detect the risk in financial statements is called a risk assessment concerning ICFR. Individuals who are qualified to perform these risk assessments for ICFR must be aware of reporting requirements, financial reporting, and fraudulent risks.
- Control Environment: The set of procedures, guidelines, and organizational frameworks which are known as control environments will help to set up the understructure for implementing internal control throughout the business.
- Control Activities: Another important element of ICFR is the measures taken through regulations and processes intended to reduce financial reporting risk. The ideas listed below can aid in understanding control activities:
○ Division of tasks
○ Controls at the process and entity levels
○ Detective and preventive controls
○ Information Technology (IT) controls
- Controls Monitoring: This key component includes procedures that guarantee the effectiveness of controls with the correction of flaws and prompt identification. Control monitoring can be carried out by implementing CSA (Control Self-Assessment), in which each process owner must regularly evaluate the control.
- Information Systems and Communications: This key component in the ICFR relates to much of the communication routes and information exchange. The business needs information to carry out its internal control obligations and to help achieve its goals. Both external and internal sources are used by management to produce, gather, and utilize relevant information of high quality. Communication must share, provide, and acquire information repeatedly and continuously. Internal communication is the process of communicating information so that everyone in the company gets the same message. In response to the demands and expectations, external communication gives information to external parties.
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Roles and Responsibilities of ICFR
The roles and responsibilities of ICFR or Internal Control Over Financial Reporting are listed below:
- The company’s management is in charge of implementing, developing, and maintaining ICFR/Internal Control over Financial Reporting.
- Periodically evaluate the performance of ICFR in compliance with the SOX (Sarbanes-Oxley) act.
- To reasonably back the evaluation of ICFR, keep evidence including the paperwork.
- Establish the management’s accountability for ICFR in quarterly reporting.
- Report the management’s assessment of the ICFR of the firm annually.
- Update the audit committee on the efficiency and functioning of the controls.
- Evaluate the financial reporting system using a risk-based approach, ensuring to pay more attention to the controls over the financial reporting sections that are prone to substantial error.
- Acquire awareness of each element of the company’s ICFR even in a financial statement-only audit.
- Any internal control flaws must be reported promptly to the audit committee and management.
- Report on the success of management’s internal control over financial reporting (ICFR) while conducting an integrated audit.
- Supervise the management’s creation of financial statements, and the controls’ design and implementation.
- Regulate financial reporting in line with Sarbanes-Oxley (SOX) Act.
- Assess the evaluation of hazards in financial reporting.
- Examine the management’s expected actions to the cited financial reporting threats.
- Keep an eye on and monitor the internal audit’s operations, including the reports.
- Manage and employ the outside auditor.
Suppose the management or the staff is unable to identify false statements in a timely manner while carrying out their required duties as part of the usual course of business, in that case, there is an ICFR deficit. It is the duty of the management to determine how seriously the flaws might affect the reliability of the company’s financial reporting procedures when deficits in control functioning are discovered.
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