An audit committee consists of non-executive directors, it is set up by and works under the supervision of the board. The audit committee is set up under Section 177 of the companies Act, 2013, and sometimes for the adoption of best practices of good corporate governance.
The member of the audit committee comes from various backgrounds and industries, but it must have at least one member who expertise in finance. This ensures that the member has enough experience and abilities to provide the right advice and control expert team in the right direction.
Members of the audit committee are not allowed to be related to the entity, to ensure that conflict of interest level is minimized to the lowest level.
Mandatory constitution of Audit committee by:
- Listed public companies
- Public companies having paid-up share capital of Rs. 10 crores or more on the last date of the latest audited financial statements.
- Public companies having a turnover of Rs. 100 crore or more on the last date of the latest audited financial statements.
- Public companies that have in aggregate, outstanding loans, debentures, and deposits, exceeding Rs. 50 Crore on the last date of the latest audited financial statements.
Following unlisted public companies are not required to constitute the audit committee:
- A joint venture.
- A wholly-owned subsidiary.
- A dormant company.
Composition of Audit committee:
- Minimum 3 directors are required to constitute an audit committee.
- The majority of members of the audit committee should be independent directors.
- The majority of members including the chairperson of the committee shall be competent to read and understand financial statements.
Functions of Audit committee:
- The Audit Committee shall recommend the auditor for the appointment, his remuneration, and terms of appointment.
- The audit committee shall review the independence and performance of the auditor and the effectiveness of the audit process.
- The audit committee shall examine financial statements and audit reports.
- The audit committee shall scrutinize inter-corporate loans and investment.
- The audit committee shall evaluate the internal financial controls and risk management systems.
- The audit committee shall monitor the use of the fund which was raised by the company.