Audit Committee under the Companies Act

An audit committee is a committee of the board that provides focused oversight of a company’s financial reporting and audit process. Under Section 177 of the Companies Act, 2013, it supervises matters such as auditor independence, internal financial controls, related party transactions and the use of funds raised from the public.

Applicability and composition

The board of every listed public company and every other prescribed class of company must constitute an audit committee.

• It must have at least three directors, with independent directors forming a majority.
• A majority of its members, including its chairperson, must be able to read and understand financial statements.

Core oversight functions

The committee acts according to written terms of reference specified by the board. Its statutory responsibilities cover the principal areas where financial reporting and management decisions require independent scrutiny.

• It recommends the appointment, remuneration and terms of appointment of auditors.
• It reviews auditor independence and performance, the effectiveness of the audit process, financial statements and the auditor’s report.
• It approves or modifies related party transactions and scrutinises inter-corporate loans and investments.
• It evaluates internal financial controls, risk-management systems and, where necessary, the valuation of undertakings or assets.
• It monitors the end use of money raised through public offers and related matters.

Powers and accountability

The committee may investigate matters within its terms of reference, obtain outside professional advice and access relevant company records.

• It may seek auditors’ comments on internal controls, audit scope and audit observations, and may discuss issues with internal and statutory auditors.
• Auditors and key managerial personnel have a right to be heard when the auditor’s report is considered, but they have no right to vote.
• The committee oversees the vigil mechanism and facilitates direct access to its chairperson in appropriate or exceptional cases.
• If the board rejects an audit committee recommendation, the Board’s report must disclose the recommendation and the reasons for rejection.

How UPSC asks this