An audit committee is one of the major operating committees of a company’s board of directors that is in charge of overseeing financial reporting and disclosure. It aims to enhance the confidence in the integrity of the company’s financial reports and announcements.

Section 177 of the Companies Act, 2013 and Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules, 2014 deals with the Audit Committee.

• Applicability of Audit Committee:

The Board of directors of every listed company and the following classes of companies, as prescribed under Rule 6 of Companies (Meetings of Board and its powers) Rules, 2014 shall constitute an Audit Committee.

(i) all public companies with a paid up capital of Rs.10 Crores or more;

(ii) all public companies having turnover of Rs.100 Crores or more;

(iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores or more.

The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account for the purposes of this rule.

• Composition:

The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority.

The majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement.

The Board’s report under section 134(3) shall disclose the composition of an Audit committee and where the Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in such report along with the reasons there for.

The Chairman of the Audit Committee shall be an independent director. The Chairman of the Audit Committee shall be present at Annual General Meeting to answer shareholder queries.

The Company Secretary shall act as the secretary to the committee.

• Meetings of the Committee 

Audit Committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present.

• Functions of Audit Committee:

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,—

(i) The recommendation for appointment, remuneration and terms of appointment of auditors of the company;

(ii) Review and monitor the auditor’s independence and performance, and effectiveness of audit process;

(iii) Examination of the financial statement and the auditors’ report thereon;

(iv)Approval or any subsequent modification of transactions of the company with related parties;

(v) Scrutiny of inter-corporate loans and investments;

(vi) Valuation of undertakings or assets of the company, wherever it is necessary;

(vii) Evaluation of internal financial controls and risk management systems;

(viii) Monitoring the end use of funds raised through public offers and related matters.

• Powers of Audit Committee:

The Audit committee shall have the authority –

1. To call for the comments of the auditors about internal control systems, the scope of audit, including the observations of the auditors and review of financial statement before their submission to the Board
2. To discuss any related issues with the internal and statutory auditors and the management of the company.
3. To investigate into any matter in relation to the items or referred to it by the Board
4. To obtain professional advice from external sources
5. To have full access to information contained in the records of the company.

• Penalty for non-compliances

If any Company contravene the provisions of Section 177 of the Companies Act 2013[, the Company would be liable to pay fine of Rs. 1 lakh to Rs 5 lakh and officers who are in default will be liable to pay fine Rs. 25,000 to Rs. 1,00,000 or imprisonment up to 1 year or both.