Audit Committee-Its formation and

roles
[Corporate Social Responsibility. Assignment-
1]
Vivek Shukla
Roll no. 09 PGDM-1
Date: 13-02-09

Concerned Faculty : Prof. V.V Ravikumar

Corporate Governance Through Audit Committees
The Audit Committee of the Board is today seen as a key fulcrum of any company. Being mandatory
under Clause 49 and section 292A of the Companies Act -1956, the Audit Committee can be of great
help to Board in implementing, monitoring and continuing good corporate governance practices to the
benefit of the company and its stakeholders.
The Audit Committee is formed to regularly review processes and procedures to ensure the
effectiveness of internal control systems so that the accuracy and adequacy of the reporting of financial
results is maintained at high level at all times. It is important for the members of Audit Committee to
have formal knowledge of accounting and financial management or experience of interpreting financial
statements.

Provisions of Audit Committees and Its Formation

As required by section 292A of the Companies Act, 1956, every public limited company (listed or
unlisted) having a paid-up capital of at least Rs. 5 crore shall constitute a Committee of the Board to be
known as Audit Committee. The Audit Committee is formed by the members of the Board’s of Director.
The provisions in respect of the same are as follows:
1) Committee members are drawn from members of the Company's board of directors, with a
Chairperson selected from among the members.
2) The Chairperson should be an independent Director.
3) The Committee shall have at least three (3) members (directors).
4) Two-third (2/3) of the members shall be non-executive directors.
5) The Board of Directors shall prescribe the Committee’s terms of reference in writing.
6) Auditors—internal and external—and Director (Finance) shall attend the meeting but not have
right to vote.
7) The Chairman of the Audit Committee shall attend the annual general meeting to provide
clarifications on matters relating to audit.
8) The constitution and composition of the Audit Committee is to be disclosed in the annual
report of the Company.
9) Any default in complying with the provision of section 292A may attract imprisonment up to
one year or fine up to Rs. 50000 or both. The prosecution lies against the company and every
officer of the company who is in default. The offence is compoundable under section 621A.
10)The Listing Agreement requires at least one director having financial management and
accounting knowledge expertise to be a member of Audit Committee while other members
should be financially literate. Section 292A(5).
Functions of Audit Committee under Section 292A

The Audit Committee constituted under this section shall act in accordance with terms of reference to
be specified in writing by the Board. The Audit Committee should have periodic discussions with the
auditors about the following matters:
(a) Internal Control System.
(b) Scope of audit including the observation of auditors.
(c) Review the half-yearly and annual financial statement before submission to the Board.
(d) Compliance of internal control system.

The Audit Committee shall also have authority to investigate into the matters in relation to the items
specified in this section or matters referred to it by the Board of Directors. To carry out such
investigation the Audit Committee will have full access to information contained in the records of
the Company and external professional advice, if necessary.
The recommendations of the Audit Committee on any matters relating to financial
management including the audit report shall be binding on the Board. In case the Board does not
agree with the recommendations made by the Audit Committee, the Board shall record the reasons
for disagreement and communicate the same to the shareholders to be reported in Annual General
Meeting.

Functions of Audit Committee under Clause 49

Revised clause 49 of the listing agreement provides for specific requirements of an Audit Committee.
The companies shall be required to comply with the requirements of clause 49 in relation to Audit
Committees, viz:

Audit Committee stands upon four fundamental pillars to discharge its functionsl
• Financial Management including responsibility, integrity, objectivity of information of
financial reports and transparency in disclosures.
• Auditing –
- Internal
- External
• Legal compliance to ensure –
- Legal compliance
- Charter compliance
- Audit independence
- Review and assessment of financial implications of litigations and claims against the
Company
- Ensuring security of assets accounting standards and going concern.
• Communication and quality assurance –
- With shareholders
- Presentation of Board of Directors
- Quarterly reviews
- Compliance of Accounting Standards
- Preparation and improvement in the Audit Committee charter
- Selection of members of the Audit Committee
- Appraisal and performance review
Generally the major Functions of Audit Committee are as follows:

* overseeing the Company’s financial reporting process and disclosure of financial information to
ensure that the financial statements are correct, sufficient and credible,

* recommending the appointment and removal of external auditor, fixation of audit fee and approval
for payment of any other services,

* reviewing with the Management the annual financial statements before submission to the Board,

* reviewing with the Management the annual financial statements of the subsidiary companies,

* reviewing with the Management and the external and internal auditors, the adequacy of internal
control systems,

* reviewing the adequacy of internal audit function,

* discussing with internal auditors any significant finding and follow up on such issues,

* reviewing the findings of any internal investigations by the internal auditors in matters where there
is suspected fraud or irregularity, or a failure of internal control systems of a material nature, and then
reporting such matters to the Board,

* discussing with external auditors before the audit commences on the nature and scope of audit, as
well as having post-audit discussion to ascertain any area of concern,

* reviewing the Company’s financial and risk management policies; and

* examining reasons for substantial default in the payment to depositors, debenture holders,
shareholders (in case of non-payment of declared dividends) and creditors, if any.

In addition to the areas noted above, the Audit Committee looks into the controls and security of the
Company’s critical IT applications, internal and control assurance audit reports of all the major
divisions and deviations from the Code of Business Principles, if any.