Audit Committee under Section 177 of the Companies Act 2013
In the Indian Corporate Sector, Audit Committee acts as one of the main pillars of the Corporate Governance System. The main objective of an Audit Committee is to improve the integrity in the Financial Statements. It is also responsible for monitoring the internal control process and risk management systems. Further, an audit committee is governed by section 177 of the Companies Act 2013.
This article will provide you with a thorough knowledge of an Audit Committee.
The Concept of Audit Committee
An Audit Committee acts as the operating committee for the Board of Directors of a company. It is responsible for seeing the financial reporting, internal process and board disclosures.
Further, the working of an Audit Committee prescribed under the Companies Act, 2013 is significantly different from the Companies Act, 1956. According to the Companies Act, 2013  , every listed company needs to constitute an Audit Committee.
Regulatory Framework for Audit Committee
The legal provisions exclusively regulating an Audit Committee are as follows:
- Section 177 of the Companies Act 2013;
- Rule 6 and 7 of the Companies (Meetings of Board and its Powers) Amendment Rules, 2020;
- SEBI Advisory in India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Applicability of Section 177 of the Companies Act 2013
The Applicability of section 177 of the Companies Act 2013, can be summarised as:
- Every Listed Company (added by the Companies (Amendment) Act, 2017);
- Public companies specified under the Companies (Meetings of Board and its Powers) Amendment Rules, 2020. The term “Public Companies  ” include the following:
- Paid-up Capital of Rs 10 crores or more;
- Turnover of Rs 100 crores or more;
- Outstanding loans, borrowings or deposits of Rs 50 crore or more.
Benefits of the Audit Committee
In India, the benefits of an Audit Committee can be summarised as:
- Compliance with the Laws and Regulations;
- Supports the Board of Directors in the accomplishment of the Planned Objectives of the company;
- Enhances the Integrity of the Financial Reporting of the Company;
- Enables Better management;
- In-depth Scrutiny and Focused Attention on the Internal Control.
Composition of Audit Committee as per Section 177 of the Companies Act 2013
In India, the composition of an Audit Committee can be summarised as:
- A Minimum of Three Directors as Members;
- 2/3rd of the Members need to be the Independent Directors;
- The Chairperson shall be an Independent Director;
- The Company Secretary (CS) needs to act as the ‘Secretary’ to the Audit Committee.
Further, all the members, including the chairman, must be Financially Literate. Out of all, at least one member needs to have Accounting or Financial Management Expertise.
Meetings of an Audit Committee
The concept of Meetings of an Audit Committee under the provisions of the Companies Act, 2013 can be summarised as:
- The Audit Committee needs to meet at least four times a year;
- The time gap between the two meetings must not be not more than 120 days;
- The quorum for the meeting shall either be two members or 1/3rd of the members, whichever is more;
- The quorum of the meeting shall have at least two independent directors.
Furthermore, the auditors and the management of the company will have a Right to be Heard in the Audit Committee Meetings. However, they cannot cast a vote when the committee is considering the Auditor’s Report.
Functions of an Audit Committee as per Section 177 of the Companies Act 2013
In India, the functions of an Audit Committee can be summarised as:
- Appointment of the Auditor;
- Fixation of the salary for the Auditors of the Company;
- Valuation of the assets of the company;
- Evaluation of any RPT (Related Party Transaction);
- Evaluation the Internal financial control and risk management;
- Examination of the Financial Statements;
- Scrutiny of the Inter Corporate Loans and Investments;
- Assessment of the use of the funds rose by public offers;
- Evaluation of the performance of the statutory and internal auditors.
Powers of an Audit Committee as per Section 177 of the Companies Act 2013
In India, the powers of an Audit Committee as per section 177 of the Companies Act 2013 can be summarised as:
- To Call for Comments of the Auditor concerning the Internal Control Systems, the Scope of Audit, including the Observations of the Auditors;
- To Read and Understand the Financial Statements before their submission to the Board;
- The Power to discuss any issue with the Internal and Statutory Auditor of the Company;
- The Power to discuss any matter concerning the Financial Statements with the Management of the company;
- The Power to obtain Professional advice from External Sources;
- The Power to have full access to the details and information contained in the records.
Disclosure in the Board’s Report
As per section 134(3), the Board’s Reports hall disclose about the composition of an Audit Committee. If in case, the Board has not accepted any recommendation made by the Audit Committee, the same needs to be disclosed in the Board’s report together with the reasons.
Penalty for the Violation of Provisions
The company shall be liable to pay a fine of Rs 1 Lakh to Rs 5 Lakhs. Every defaulting officer shall be punishable with imprisonment up to one year or with a fine of Rs 25000 to Rs 1 Lakh, or with both.
Over the period, the focus of an Audit Committee has shifted precisely on new committee dynamics, risk management, financial reporting, etc. They also oversight and evaluate the performance of the audit process; observation of auditors and review of financial statements; and rotation of the statutory auditor. Therefore, an Audit Committee plays a significant role in the company.
Further, to carry out the roles of an Audit Committee, the members would need to be up-to-date with the regulatory requirements and must have explicit knowledge of what is expected from them.