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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 formation of Audit Committee. The Audit Committee shall consist of a minimum of 3 directors with independent directors forming a majority. The primary purpose of the audit committee is to provide the oversight of the financial reporting process, audit process and the system of internal controls and company’s compliance with laws and regulations. The committee reviews the results of an audit with management and external auditors, including matters required to be communicated to the committee under generally accepted auditing standards. Controls over financial reporting, information technology security and operational matters fall under the purview of the audit committee. It is also responsible for the appointment, oversight and compensation of the work of the auditors.

The majority of the members of the Audit Committee including its Chairperson shall be persons with the 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 therefor.
The audit committee has various authorities including:

• 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 statement before their submission to the Board.
• To discuss any related issues with the internal and statutory auditors and the management of the company.
• To investigate into any matter in relation to the items or referred to it by the Board.
• To obtain professional advice from external sources.
• To have full access to the information contained in the records of the company.

In India, the constitution of audit committees is deemed mandatory for listed companies under the Companies Bill, 2009 and the SEBI Act. The Companies Bill requires every listed company to have an audit committee that comprises a minimum of three directors with independent directors forming a majority with at least one of them with expertise and knowledge in financial management, audit or accounts. The norms to be followed while forming an audit committee according to SEBI has been given below.

• An audit committee must comprise a minimum of three directors as its members.
• Two-thirds of the total number of an audit committee’s members must comprise of independent directors.
• Every member of an audit committee must be financially knowledgeable with at least one of the members having accounting or related financial management expertise.
• An independent director must be appointed as the Chairman of an audit committee.
• The Chairman of an audit committee must be present at all Annual General Meetings with the purpose of answering shareholder queries.
• The audit committee may invite executives, as it considers appropriate, to be present at the meetings held by the committee. The invitees for the meetings of the audit committee may also include the finance director, head of the internal audit and a representative of the statutory audit.
• The Company Secretary must take up the role of being the secretary of the audit committee.

The Audit Committee plays a critical role by ensuring the independence of an audit process. Auditing the operations of a modern corporation is an intricate and complex process that would require the understanding of the rules and judgements taken by the management while preparing financial statements. Audit Committee is formed to act as a conduit of information supplied by the management to the auditors and to insulate an auditor from the pressures of the management. Therefore, such committees are to be independent of management and has the responsibilities of deciding the work or scope, including the fixation of audit fees and the determination of the extent of non-audit services.

• The Audit Committee must mandatorily review the following information according to Clause 49 II (E).
• The management discussion and analysis of the financial condition of the company and the result of the operations.
• The statement of significantly related party transactions as defined by the audit committee and submitted by the management.
• The letters of the management and internal control weaknesses issued by the statutory auditors.
• The reports of internal audits related to internal control weaknesses.
• The review of the appointment, removal and terms of remuneration of the Chief internal auditor.

WEBLIOGRAPHY

• Audit Committees. Retrieved from https://www.indiafilings.com/learn/audit-committee/

• Audit Committee under section 177 of Companies Act 2013. (2014, august 15). Retrieved from https://taxguru.in/company-law/audit-committee-section-177-companies-act2013.html

• Audit committee role and responsibilities. Retrieved from https://www.cfainstitute.org/en/advocacy/issues/audit-committee-role-practices