Audit Committee

Audit Committee
29 August 2020

Audit Committee

Audit Committee is one of the important pillars of the corporate governance mechanism in the company. It is charged with the oversight of financial reporting and disclosures. It boosts the confidence in the integrity of the company’s financial reporting, the internal control process, and the risk management systems. It reviews and monitors the auditor’s independence and performance and the effectiveness of the audit process. It examines the financial statement and the auditor’s report thereon.

The primary purpose of a company’s audit committee is to provide oversight of the financial reporting process, the audit process, the company’s system of internal controls, and compliance with laws and regulations. This Committee is sometimes set up as the requirement of law and sometimes setting up as adoption of best practices of good corporate governance.

Scope of Audit Committee
  1. Audit Committee may then call for the comments of the auditors about internal control systems, the scope of the audit, including the observations of the auditors and review of financial statements before their submission to the Board.
  2. Discussing the related issues with the internal, statutory auditors and the management of the Company.
  3. Audit Committee has the authority to investigate matters referred to by the Board.
  4. To obtain professional advice from external sources.
  5. Having full access to the records of the Company.

The KMP shall also have a right to be heard in the meetings of the Audit Committee when it considers the auditor report, though they shall not have voting rights.

The Board’s report of the Company 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 a report along with the reasons for not accepting the recommendation.

Constitution of Audit Committee ( Section 177(1) and Rule 6 of the Companies (Meetings of the Board and its Powers) Rules,2014)
  1. Every Listed Public Company
  2. Public Companies with paid-up capital of 10crore rupees or more
  3. Public Companies having Turnover of 100crore rupees or more
  4. Public Companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50crore rupees.

The paid-up share capital or turnover or outstanding loans or borrowings or debentures or deposits will be taken into consideration as existing on the date of last audited financial statements shall be taken into account for the purpose of this rule.

Composition of Audit Committee [Section 177(2)]
  1. Minimum 3 Directors, with the majority being Independent Director
  2. The chairperson should able to read and understand the financial statement.
  3. The requirement of Independent Directors is not applicable to Section 8 Companies.
Composition of Audit Committee under SEBI (LODR) Regulations, 2015
  1. Minimum 3 Directors
  2. Two-third members shall be independent Director and in a listed entity having outstanding SR equity shares, it shall only comprise of Independent Directors.
  3. All members shall be financially literate and at least one member shall have accounting or related financial management expertise.
  4. The chairperson shall be the Independent Director.
Number of Meetings and Quorum
  1. For Unlisted Company:
    1. As it deems fit to serve the purpose it may meet a number of times as required.
    2. Minimum numbers of meetings and quorum may be decided by the Board of Directors
  2. For Listed Companies:
    1. At least 4 times in a year and not more than 120 days should elapse between meetings
    2. Two members of One- Third of the members of the audit committee, whichever is greater, with at least two Independent Directors.
Functions of the 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-

  1. The recommendation for appointment, remuneration, and terms of appointment of auditors of the company.
  2. Review and monitor the auditor’s independence and performance and effectiveness of the audit process,
  3. Evaluation of internal financial controls and risk management systems.
  4. Monitoring the end use of funds raised through public offers and related matters.
  5. Scrutiny of inter-corporate loans and investments.
Powers of Audit Committee
  1. To call for the comments of the auditors about internal control systems, the scope of the audit, including the observations of the auditors and review of financial statements 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 the information contained in the records of the Company.
Vigil Mechanism

Vigil Mechanism provides adequate safeguards against victimization of persons. It is established for directors and employees to report their grievances and concerns. Rule 7 of Companies (Meetings of Board and its Powers) Rules,2014 describes the establishment of Vigil Mechanism for every Listed Company and companies prescribed below:

  1. Companies that accept deposits from the public.
  2. Companies that have borrowed money from banks and public financial institutions in excess of Rs. 50 Crores.

The Board of Directors shall nominate a director to play the role of the Audit Committee for the purpose of the Vigil Mechanism for reporting purposes. The aggrieved person will have direct access with the Chairperson/Nominated Director of the Audit Committee.

In the case of repeated frivolous complaints, the audit committee or the director nominated can take suitable action against the concerned director or employee including reprimand.

The details of the establishment of such a mechanism shall be disclosed on the company’s website, and in the Board ‘s report.

Penalty for Violation of Audit Committee Provisions
  1. For Company: Fine of Rs. 1 lakh to Rs. 5 lakhs
  2. For every officer of Company in default: Imprisonment up to 1 year or with a fine of Rs. 25000 to Rs. 1 lakh or with both.