The Government of India and the economic scenario have made audit committee applicability necessary.
The financial downfall of large as well as small companies in India has witnessed greater instability, which is very well known to the public of India.
The control structures of a company internally have also caused a downfall in various sectors.
In addition, newly introduced startups have also faced many unique challenges due to unstable internal audit procedures.
As a result, both old companies, as well as new companies in India require independent audit committee applicability.
One of the principal and main pillars for corporate companies and corporate systems in any kind of business is the audit committee.
It plays a key role in supporting the board of audit committees by keeping the corporate governance system in check.
In addition, it also keeps the responsibilities of various areas in a company or business stable.
It helps to enhance the processes of risk management as well as procedures. In addition, it also helps to speed up the internal control process and a company's Finance reporting process.
Appointment of the Audit Committee
The provisions for the applicability of an audit committee in a company are mentioned in section 177 with rule 6 of the Companies Act.
These rules state that every listed company, as well as other companies mentioned below, are required to have an audit committee concerning the board:
- All public companies and entities that have an annual turnover of 100 crore rupees or more than 100 crore rupees.
- All public companies and entities that have already paid annual capital of 10 crore rupees or more than 10 crore rupees.
- All the public companies that have deposit borrowing outstanding loans and other such financials which exceed more than 50 crore rupees or more than 50 crore rupees.
Composition of the audit committee
The composition or applicability of the audit committee of the board in a company is as follows:
- As per the Companies Act of 2013, a company's audit committee should consist of independent directors and a minimum of 3 directors to form a majority.
- As per the Companies Act of 2013, the majority of the board audit committee and its members should be able to not only read but also understand a company's financial transactions and statements. In addition, it should definitely include the chairman of the company.
- According to the regulations of SEBI 2015, there should be at least three directors on the committee of an audit.
- According to the regulations of SEBI 2015, all the members of the audit committee should be aware of financial terms. In addition, at least one audit committee member should have experience in financial management or related accounting management expertise.
- According to the regulations of SEBI 2015, the members of the audit committee, which form two-thirds, should be independent directors. Also, the independent director of the audit committee should be the chairperson.
- According to the regulations of SEBI 2015, the secretary of the company should also act as the secretary of the audit committee.
The provisions mentioned in the Companies Act of 2013 do not include the necessity of frequency for the conduction of audit committee meetings.
However, a provision related to the conduction of an audit committee meeting is mentioned in secretarial standard 1. These provisions state that the audit committee meetings should be conducted as often as possible concerning the requirements and necessities they are subjected to.
Also, a provision in the SEBI regulation of 2015 states that the audit committee meetings should be conducted a minimum of 4 times a year.
However, audit committee meetings should not be conducted later than 120 days. The meetings should also have two independent directors at minimum.
Why is the audit committee of the board of a company appointed?
A few responsibilities of the audit committee of a company are mentioned below:
- The audit committee of a company's board helps to examine internal control and financial reporting ensuring its reliability.
- The audit committee of a company's board is a pillar for communication between the independent auditor and the board, in addition to the internal, alter, and management. It also helps for smoother communication between affected individuals.
- The audit committee of the board of a company helps to examine the independence and competence of a company. In addition, it also helps to smooth the process between Internal Audit and independent auditors.
- The audit committee of a company's board acts as a company's advisory committee. It is fully responsible for the necessary obligations concerning the company and its shareholders. They are also responsible for conducting and authorizing inquiries for all the issues that fall within the responsibility of the company.
Powers of the audit committee of the board of a company
The powers of the audit committee of the board of a company are given below:
- According to the Companies Act of 2013, a company's audit committee has the power to give their opinions to the auditors for the internal control system in a company. They are also responsible for examining and finding errors in financial statements, if any, in a company. They recheck all the financial statements in a company before they are finally submitted to the board. They also have the power to discuss relevant problems and issues faced by internal auditors and the company's management system.
- According to the Companies Act of 2013, a company's audit committee also has the authority to overview and examine problems and issues related to specific orders and guidelines given by the board. Due to this purpose, the board's audit committee also has the right to seek professional advice from external sources of the company. The audit committee also has powers to conduct investigations to access financial statements and business documents fully in the company.
- According to the Companies Act of 2013 also has the right to attend to listen to the auditors as well as top employees of the company. These sessions are considered when the reports of auditors are disclosed. However, these employees and auditors may not have the right to vote.
- According to the regulations of SEBI LODR, the audit committee of the board of a company has the power to seek any financial information or document from any concerned employee in a company.
- According to the regulations of SEBI LODR, the audit committee of the board of a company has the power to look and get into any financial activity or concerning activity that is mentioned in terms of the audit.
- According to the regulations of SEBI LODR, the audit committee of the board of a company has the power to get in touch with outside parties that have relevant executives if considered necessary by the board of auditors.
- According to the regulations of SEBI LODR, the audit committee of the board of a company has the power to get external or legal professional advice.
Mechanism of the audit committee of the board of a company
- The audit committee of a company's board is considered one of the major and significant mechanisms in a corporate governance company. With the help of an audit company, risk management procedures and internal financial control procedures become easier and more convenient. Without the board's audit committee in a company, it can become financially unstable.
- The board of the audit committee provides a report. The audit committee mentions some recommendations in this report. If the board does not accept these recommendations from the audit committee, then it is required for respected parties of the board to mention the reason in the given report.
- Rule 7 of the Companies (Meetings of the Board and its Powers) Rules, 2014, as well as Subsections (9), (10) of section 177 of the Companies Act, 2013, state that the listed companies and the companies that belong to a certain class must create a mechanism for not only directors that also employees then serving their grievances. These provisions are related to the companies that can accept a public deposit in the future as well as the companies that have already borrowed money from public Financial institutions or other banks. The limitation of this money should exceed more than 50 crore rupees.
- The companies that established the mechanism mentioned above should also oversee the managing mechanism of the committee of audit members. Necessary safeguards should accompany the mechanism for these procedures to prevent exploitation using any kind of instrument. In addition, it should also provide direct communication between the chairperson of the audit committee and the company's required members. The details conserving for the mechanism as mentioned above must be available publicly on the portal of the company as well as in the report of the board.
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Conclusion
The rules and regulations concerning the audit committee are mentioned in section 177 of the Companies Act 2013 and rules 6 and 7 of companies rules 2014.
Every listed company and a public company that has either paid capital of 10 crores and more or companies with an annual turnover of 100 crores or more should have an audit committee. There is a minimum of three directors and some independent directors on the audit committee.
The majority of members of the audit committee, including the chairperson, should have experience in reading financial statements.
A company's audit committee makes financial and risk management procedures much simpler and easier.
They are responsible for recommendation, review, monitoring, examination, approval, valuation, evaluation, and other such management of internal financial controls in a company.
Faqs related to Audit committee applicability
1. What are the limits for the applicability of an audit committee in a company?
There are a few limitations to the applicability of the audit committee. For example, all the publicly listed companies that have already paid up some capital of rupees 10 crores or more than 10 crores should have an audit committee. In addition, a public company whose turnover is 100 crore rupees or more than 100 crore rupees should also have an audit committee. Meanwhile, public companies with borrowing and outstanding loans of more than 50 crore rupees are also recommended to have audit committees.
2. Why should a company have an audit committee?
There are various responsibilities and duties of an audit committee in a company. The primary purpose of an audit committee in a company is to overview financial as well as reporting processes. They have oversight of the system of a company and internal controls. They ensure that a company's internal management and financial procedures are working as per rules and regulations.
3. What are some rules of the audit committee in a company?
Approval for audit work papers and auditors' opinions should be given to a corporate officer or director. A meeting conducted for the audit committee should be attended by corporate officers as well as the director if any issue or matter is to be explained by the audit committee
4. What are some guidelines for audit committees given by SEBI?
The guidelines given by SEBI for the audit committee include that at least two third of the total members of the audit committee should include independent directors. In addition, independent directors, as well asnon-executivee directors, should not be involved in day-to-day procedures or management in the affairs of a company
5. How many times should an audit committee in a company conduct a meeting?
A meeting should be conducted by the audit committee in a company at least four times a year. The chairman must attend this meeting.
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