Audit Committee Requirements under Companies Act 2013

Narendra Kumar

10 Sep, 2020

In an organization, The Board carries a lot of responsibilities in making a decision. The role of Boards is very important in running an organization. For the Board members, it becomes difficult to take every decision. Hence, the board can constitute the Audit Committee. Committees are formed to improve the board effectiveness and efficiency, in areas where more focused, specialized and technical discussions are required. However, the Board of Directors is ultimately responsible for the acts of the committee. Board is responsible for defining the committee role and structure.

Audit Committee

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 provisions of the Audit Committees. Let’s understand what the applicability, roles, and responsibility of the Audit committees are.

Who are all required to constitute the Audit Committee?

The following companies are required:

• All Listed Companies
• All Public Company who satisfy the following conditions:
• Paid up capital of Rs. 10 Crores or exceeds Rs. 10 crores;
• Turnover of Rs. 100 Crores or exceeds Rs. 100 Crores;
• Outstanding loads or borrowings or debentures or deposits aggregate of Rs 50 crores or exceeds Rs 50 crores.

The composition of the Audit Committee

The Audit Committee shall be constituted with a minimum number of 3 directors out of which majority directors should be Independent Directors. All the Members of the Committee shall be eligible to read and understand financial Statement.

Meetings of the Audit Committee

The Audit Committee shall hold four meeting in a financial year. All the members of the Audit Committee along with Auditors and Key Managerial Person shall attend the Meeting. The Auditors and KMP would not have any voting right.

Chairman of the Audit Committee shall attend AGM of the Company

Chairman of the Audit Committee on his behalf shall attend the General Meeting of the Company.

What are the functions of the Audit Committee?

The Board shall have terms and reference to Section 177 of the Companies Act 2013 stating the role and duty of the Audit Committees.

Following are some functions of the Audit Committees:

• Shall recommend for appointment, remuneration, and terms of appointment of auditors of the company;
• Shall review and monitor auditor’s independence and performance;
• Shall examine the financial statement and the auditor’s report;
• Shall approve the transaction of the Company with a related party or any subsequent modification;
• Shall scrutinize interoperate loans and investments;
• Shall undertake valuation of undertakings or assets of the Company;
• Shall evaluate internal financial controls and risk management system;
• Shall monitor and use funds raised through public offers and related matters.

What are the Powers of Audit Committee?

Followings are the powers given to the Committees:

• 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 the issues with the internal auditor, statutory auditors and the management of the company.
• To investigate any matter about the items or referred to it by the Board.
• To obtain professional advice from external sources
• To have full access to information contained in the records of the company.

Vigil Mechanism

Vigil Mechanism is constituted to report the concern and grievances of the employee. Every listed Company and Public Company who accept deposits from public or public Company who have borrowed money from Banks and Public Financial Institute exceeds Rs. 50 Crore Shall establish a vigil mechanism. The Audit Committee shall operate the vigil mechanism.

Disclosure under the Board’s Report

Details of the composition of Committee, Meetings of Audit Committee held during the year shall be disclosed in the Board’s Report. Any recommendation by the Audit Committee if not accepted by the Board shall be published in the Report.

Also, the details of the vigil mechanism shall be published on the website of the company and the Board’s Report.

The penalty for non-compliances

If any Company contravene the provisions of Section 177 of the Companies Act 2013^[1], the Company would be liable to pay fine of Rs. 1 Lakh to Rs 5lakh 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.

Read our article:Roles and Responsibilities of the Auditor Under Companies Act 2013