Every corporation must form an audit committee. An audit committee is an operating committee of a company's board of directors that is in charge of overseeing financial reporting and disclosure.
All publicly-traded companies must maintain a qualified audit committee in order to be listed on a stock exchange.
Corporate Governance rules given by Securities and Exchange Commission gives the following guidelines for audit committee.
(i) The company shall have an Audit Committee as a sub-committee of the Board of Directors.
(ii) The Audit Committee shall assist the Board of Directors in ensuring that the financial statements reflect true and fair view of the state of affairs of the company and in ensuring a good monitoring system within the business.
(iii) The Audit Committee shall be responsible to the Board of Directors. The duties of the Audit Committee shall be clearly set forth in writing.
Constitution of the Audit Committee
(i) The Audit Committee shall be composed of at least 3 (three) members.
(ii) The Board of Directors shall appoint members of the Audit Committee who shall be directors of the company and shall include at least 1 (one) independent director.
(iii) All members of the audit committee should be “financially literate” and at least 1 (one) member shall have accounting or related financial management experience.
Explanation: The term “financially literate” means the ability to read and understand the financial statements like Balance Sheet, Income Statement and Cash Flow Statement and a person will be considered to have accounting or related financial management expertise if (s)he possesses professional qualification or Accounting/ Finance graduate with at least 12 (twelve) years of corporate management/professional experiences.
(iv) When the term of service of the Committee members expires or there is any circumstance causing any Committee member to be unable to hold office until expiration of the term of service, thus making the number of the Committee members to be lower than the prescribed number of 3 (three) persons, the Board of Directors shall appoint the new Committee member(s) to fill up the vacancy(ies) immediately or not later than 1 (one) month from the date of vacancy(ies) in the Committee to ensure continuity of the performance of work of the Audit Committee.
(v) The company secretary shall act as the secretary of the Committee.
(vi) The quorum of the Audit Committee meeting shall not constitute without at least 1 (one) independent director.
Chairman of the Audit Committee
(i) The Board of Directors shall select 1 (one) member of the Audit Committee to be Chairman of the Audit Committee, who shall be an independent director.
(ii) Chairman of the audit committee shall remain present in the Annual General Meeting (AGM).
Role of Audit Committee
Role of audit committee shall include the following:-
(i) Oversee the financial reporting process.
(ii) Monitor choice of accounting policies and principles.
(iii) Monitor Internal Control Risk management process.
(iv) Oversee hiring and performance of external auditors.
(v) Review along with the management, the annual financial statements before submission to the board for approval.
(vi) Review along with the management, the quarterly and half yearly financial statements before submission to the board for approval.
(vii) Review the adequacy of internal audit function.
(viii) Review statement of significant related party transactions submitted by the management.
(ix) Review Management Letters/ Letter of Internal Control weakness issued by statutory auditors.
(x) When money is raised through Initial Public Offering (IPO)/Repeat Public
Offering (RPO)/Rights Issue the company shall disclose to the Audit Committee about the uses/applications of funds by major category (capital expenditure, sales and marketing expenses, working capital, etc), on a quarterly basis, as a part of their quarterly declaration of financial results. Further, on an annual basis, thecompany shall prepare a statement of funds utilized for the purposes other than those stated in the offer document/prospectus.
Reporting of the Audit Committee
1 Reporting to the Board of Directors
(i) The Audit Committee shall report on its activities to the Board of Directors.
(ii) The Audit Committee shall immediately report to the Board of Directors on the following findings, if any:-
a) report on conflicts of interests;
b) suspected or presumed fraud or irregularity or material defect in the internal control system;
c) suspected infringement of laws, including securities related laws, rules and
d) any other matter which shall be disclosed to the Board of Directors
2 Reporting to the Authorities
If the Audit Committee has reported to the Board of Directors about anything
which has material impact on the financial condition and results of operation and has discussed with the Board of Directors and the management that any
rectification is necessary and if the Audit Committee finds that such rectification has been unreasonably ignored, the Audit Committee shall report such finding to the Commission, upon reporting of such matters to the Board of Directors for three times or completion of a period of 6 (six) months from the date of first reporting to the Board of Directors, whichever is earlier.
Reporting to the Shareholders and General Investors
Report on activities carried out by the Audit Committee, including any report made to the Board of Directors under condition 1 (ii) above during the year, shall be signed by the Chairman of the Audit Committee and disclosed in the annual report of the issuer company.
The issuer company should not engage its external/statutory auditors to perform the following services of the company; namely:-
(i) Appraisal or valuation services or fairness opinions.
(ii) Financial information systems design and implementation.
(iii) Book-keeping or other services related to the accounting records or financial statements.
(iv) Broker-dealer services.
(v) Actuarial services.
(vi) Internal audit services.
(vii) Any other service that the Audit Committee determines.
(viii) No partner or employees of the external audit firms shall possess any share of the company they audit at least during the tenure of their audit assignment of that company.