What is Audit Committee and its Functions?

Audit Committee: Requirements, Composition, and Functions

The Audit Committee plays a vital role in overseeing the Financial Reporting Process and related matters. Below, you will find the requirements, composition, and functions of the Audit Committee.

1. Requirement of Audit Committee

The following types of companies are required to constitute an Audit Committee:

Listed Public Companies
Public Companies with a paid-up share capital of Rs. 10 crore or more
Public Companies with a Turnover of Rs. 100 crore or more
Public Companies with aggregate outstanding loans, debentures, and deposits exceeding Rs. 50 crore.

2. Composition of Committee

The Audit Committee should consist of a minimum of three Directors.The majority of the committee members should be Independent Directors. Additionally, the majority of members should possess the ability to read and understand the Financial Statements.

3. Terms of Reference of the Audit Committee

The Audit Committee should fulfill the following terms of reference:

Recommend the appointment, remuneration, and terms of appointment of auditors for the company.
Review and monitor the independence, performance, and effectiveness of the auditors and the audit process.
Examine the financial statements and the auditors’ report.
Approve or modify transactions between the company and related parties.
Scrutinize inter-corporate loans and investments.
Evaluate the valuation of undertakings or assets when necessary.
Assess internal financial controls and risk management systems.
Monitor the utilization of funds raised through public offers and related matters.

4. Criteria for Approval of Related Party Transactions

The Audit Committee may provide omnibus approval for related party transactions proposed by the company. Each omnibus approval remains valid for one financial year. However, it should not be granted for transactions involving the sale or disposal of the company’s undertaking.

In cases where the need for a related party transaction is unforeseen and details are unavailable, the audit committee may grant omnibus approval for such transactions, provided the value does not exceed Rs. 1 crore per transaction.

Criteria for granting omnibus approval include:

The maximum aggregate value of transactions allowed under the omnibus route in a year.
The maximum value per transaction allowed.
The extent and manner of disclosures to be made to the Committee when seeking omnibus approval.
Regular review of related party transactions undertaken by the company, as deemed fit by the Audit Committee.
Transactions exempted from omnibus approval by the Committee.

Contents of omnibus approval should include:

Names of the related parties involved.
Nature and duration of the transaction.
Maximum amount of the transaction.
Indicative base price or current contracted price and any applicable formula for price variation.
Any other relevant information important for the Audit Committee’s decision on the proposed transaction.

5. Disclosure in Board Report

The Board report should disclose the composition of the Audit Committee. Additionally, the report should provide reasons for not accepting the recommendations made by the Committee.

By ensuring compliance with these guidelines, companies can establish effective Audit Committees that contribute to transparent financial reporting and corporate governance.

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