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CGVE/U2 Topic 2 Audit Committee

An Audit Committee may be defined as a committee or sub-group of the full Board of Directors formed for overseeing and monitoring, on behalf of the board, preparation of meaningful financial state­ments and reports, relying on senior finan­cial management, internal and external auditors.

Composition of an audit committee depends on relevant provisions, if any, of Statute(s) or requirements of stock exchanges and/or regulatory authorities like SEBI.

Functions of Audit Committee:

An audit committee’s basic function is to act as a catalyst for efficient and trans­parent financial reporting and as a bridge between the board, the internal auditors and the statutory (external) auditors.

The major detailed functions of an audit committee include overseeing the process of financial reporting and disclosure of finan­cial information to ensure correct, adequate and reliable financial statements; reviewing draft annual financial statements with ref­erence, inter alia, to changes in accounting policies and practices, compliance with going concern assumption, accounting standards, legal and stock exchange requirements, quali­fications in draft auditor’s report, if any, before submission to the board; discussing with management, internal and/or external auditors the adequacy or otherwise of inter­nal control and internal audit systems, im­portant findings of internal auditors (includ­ing irregularities) and follow-up thereon; checking material defaults, statutory or oth­erwise.

Statutory Obligations of Audit Committee:

The new Section 292A introduced by the Companies (Amendment) Act, 2000, contains detailed provisions relating to audit committee, which are summarised below:

(a) Every public company having a paid-up capital of Rs. 5 crore or more must constitute an audit committee.

(b) The committee shall comprise a mini­mum of 3 (three) directors and such other number of directors as the Board may determine; two-thirds of the total number of members of such a committee must be directors other than the man­aging or whole-time directors. The mem­bers shall elect a Chairman of the com­mittee from among themselves.

(c) The committee shall act according to the terms of reference set in writing by the Board. The auditor, the internal auditor, if any, and the director-in-charge of fi­nance, must attend and participate at meetings of the committee without any voting rights. The committee should in­teract periodically with the auditors about internal control systems, scope of audit including observations of auditors, re­view half-yearly and annual financial statements before submission to the Board and also ensure compliance with internal control systems.

(d) The committee is empowered and au­thorised to probe any matter specified in the terms of reference and, for that purpose, to have full access to informa­tion contained in the company’s records and, if required, external professional expert advice.

(e) The audit committee’s recommendations on financial management and audit report shall be binding on the Board. The Board must record reasons for non- acceptance of such recommendation, if any, and communicate the same to share­holders.

(f) The annual report of the company must disclose the composition of the audit committee.

(g) The Chairman of the committee must attend the company’s annual general meeting to provide any clarifications on matters re: audit.

SEBI Requirements for Audit Committee:

The Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities and Exchange Board of India (SEBI) has made extensive recommendations on audit committee vide paragraphs 9.1 to 9.10 of its report, which are mandatory for com­panies whose shares are listed on stock exchange(s).

The major aspects of these recommendations are enumerated below:

(a) Audit committee is one of the essential tools of corporate governance, which promotes an hierarchy of sound ac­countability and credibility in financial reporting and fosters confidence of share­holders and investors.

(b) Audit committee is widely recognised as an effective instrument for overseeing the financial reporting system.

(c) A qualified and independent audit com­mittee should be constituted by the Board of Directors of a company. Independence is determined or influenced by the de­gree of economic or financial relation­ships of a director with the company, its management or any other director ex­cept right to remuneration for attending board meetings.

(d) Having regard to expertise and inde­pendence, an audit committee should have at least 3 (three) members, being non-executive directors, majority being independent, with at least one director possessing financial and accounting knowledge. Executives considered ap­propriate, finance director and, if re­quired, a representative of the external auditor should be invited to meetings of the committee. The Company Secretary should be the Secretary to the commit­tee.

(e) The audit committee should meet at least thrice every year, once every six months and once before finalisation of annual accounts. The quorum should be a minimum of 2 (two) members or one- third of the members, whichever is higher, with two independent members.

(f) The powers of the audit committee, which emanate from the Board’s au­thorisation, include power to investigate any matter within the terms of reference, to obtain information from the records or any employee(s) of the company, to secure legal or other professional or expert advice, if required.

(g) The role and functions of an audit com­mittee should include the following major aspects:

(i) Overseeing and monitoring the proc­ess of financial reporting and disclo­sure of financial information to ensure accurate, adequate and reli­able financial statements.

(ii) Recommending appointment or re­moval of auditor and fixation of fees for audit and other services, if any.

(iii) Reviewing draft financial statements before submission to the Board with reference to going concern assump­tion; company’s financial and man­agement policies; changes in ac­counting policies and practices; major accounting entries based on judgment exercised by management; compliance with accounting stand­ards, legal and stock exchange re­quirements re : financial statements, if any; material transactions of the company, if any, with promoters, their subsidiaries or relatives con­flicting with the company’s inter­ests; reviewing with management, internal and external auditors the adequacy of internal control sys­tems and internal audit functions (including coverage, frequency and reporting structure and discussions on any significant findings thereof and follow-up thereon); discussion with external auditors about nature and scope of audit before commence­ment of audit, important adjust­ments arising out of audit and quali­fications in draft audit report; check­ing substantial defaults in payments to depositors, share-/debenture- holders, creditors.

The directors and management of every concerned company should effectively com­ply with the statutory provisions (Section 292A) and rules of relevant regulatory agen­cies like SEBI, which has accepted the rec­ommendations of the Kumar Mangalam Birla Committee.

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