Audit Committee : Introduction, Formation and Its Role

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Audit Committee : Introduction, Formation and Its Role

For companies registered under the Companies Act 2013 or Limited Liability Partnership Act 2008, audits are very important. An audit ensures that a company is being run in an ethical and transparent manner. For conducting an audit, a group of individuals known as the audit committee is required. This committee is formed by the board of directors. In this blog post, we will discuss the formation of an audit committee in the context of India.

What is Audit Committee?

An audit committee refers to a group or committee of the board of directors. The majority of the directors of this committee are independent outside directors. An audit committee cannot include any company members who are involved in management. 

This committee is responsible for overseeing the company’s financial reporting, internal controls, risk management and audit activities. It plays an important role in ensuring good corporate governance since the committee’s directors have no personal interest in the company. It helps in prevention and detection of accounting scandals and fair distribution of finances. 

If you run a public limited company registered under Companies Act and its paid-up capital exceeds Rs. 10 crore or if its turnover exceeds Rs. 100 crore, you require an audit committee to oversee auditors and make other important decisions. An audit committee is also required for certain LLPs. The LLP Act 2008 makes audit mandatory for LLPs with annual turnover exceeding Rs. 40 lakhs or contribution exceeding Rs. 25 lakhs. 

Establishment of Audit Committee

As per Section 177(1) of the Companies Act 2013, the Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.

The following guidelines must be followed for the formation of audit company:

• Have a minimum of three directors, with a majority of independent directors.

• Act in accordance with the written terms of reference of the Board.

• Have the authority to investigate any matter.

• The audit committee's chairman should be an independent director.

To understand audit committees further, let’s dive into audit committee responsibilities and roles.

Role of Audit Committees

Audit committee is crucial for ensuring a company stays compliant with the laws and regulations. For effective corporate governance, an audit committee serves as the central pillar and is in the best position to offer effective oversight on the performance, independence and objectivity of the auditor and the audit’s quality.

Let’s learn about the role of audit committees through the following points:

• Audit committee members must ensure the financial statements of the company are accurate.

• They must keep an eye on the financial reporting process of the company.

• One of the audit committee responsibilities is to establish procedures to receive, retain and treat complaints related to internal accounting controls, accounting or auditing matters.

• They must work with the external auditors.

• The company’s internal controls’ effectiveness must be monitored regularly by the auditing committee.

• To ensure that the financial controls and mechanisms are functioning properly, the audit committee must work with the internal auditors of the organization.

The role of the auditing committee is essential in preventing accounting scandals and promoting transparency in the corporate world.

Conclusion

An Audit Committee must be appointed by the company’s board of directors. This committee oversees the financial reporting and audit activities of the company and ensures they’re accurate and reliable. Since the majority of directors in an audit company are independent outside directors, they fulfill their role and responsibilities in an unbiased manner. This ensures good corporate governance and maintains the integrity of the audit process.

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Frequently Asked Questions (FAQs)

Q1. How many meetings must be held by an audit committee?

A. An audit committee should conduct a minimum of four meetings in a year. Between each meeting, there shouldn’t be a gap of more than 120 days.

Q2. Who appoints the audit committee?

A. The board of directors appoints the audit committee. 

Q3. Can a company’s member be a part of the audit committee?

A. No, a company’s member cannot be an audit committee’s member.

Q4. How does an audit committee ensure good corporate governance?

A. An audit committee ensures good corporate governance by providing unbiased, independent oversight and monitoring of financial reporting, internal controls, risk management and audit activities of a company.

Last Update: 10-10-2024

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