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Audit Committee

An Audit Committee is a committee of the Board of Directors responsible for overseeing financial reporting, internal controls, audit processes, and related disclosures. In simple words, it acts as an independent watchdog for a company’s financial governance.

Last updated: 21 May 2026

Understanding Audit Committee🔗

The Audit Committee: Corporate India's Financial Guardian

Corporate governance is built on trust, and the Audit Committee is one of the key mechanisms that protects that trust. It oversees financial reporting, internal controls, audit oversight, and related party matters with a strong focus on independence. In India, its legal framework mainly comes from Section 177 of the Companies Act, 2013 and, for listed entities, Regulation 18 of the SEBI (LODR) Regulations, 2015.

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Key Mandate: Independence & Oversight

The defining characteristic of a robust Audit Committee is its independence from management. Its primary role is to provide an objective, independent review of the company's financial reporting process, internal control systems, and the audit function, ensuring that the interests of shareholders and stakeholders are protected against financial mismanagement.

Executive Summary: The 3 Pillars of the Audit Committee

1. Financial Integrity

Reviewing quarterly and annual financial statements before submission to the Board to ensure accuracy and fairness.

2. Auditor Oversight

Recommending appointment and remuneration of statutory and internal auditors, and monitoring their independence and performance.

3. Governance Controls

Scrutinizing Related Party Transactions (RPTs), evaluating internal financial controls, and overseeing the whistleblower mechanism.

⚖️ Section 1 — The Legal Framework and Applicability

1.1 Meaning and Definition

While the Companies Act, 2013 does not provide a single, concise definition of an "Audit Committee," Section 177(1) mandates that the Board of Directors of every listed company and such other classes of companies, as may be prescribed, shall constitute an Audit Committee. Conceptually, it is a specialized committee of the Board, composed primarily of non-executive and independent directors, established to oversee the company's financial reporting process, internal controls, and audit functions, thereby acting as a bridge between the Board, the auditors, and the shareholders.

1.2 Applicability

The requirement to constitute an Audit Committee is not universal. It applies to companies that have a significant public interest element, determined by their listing status or size.

Who Must Constitute an Audit Committee?

MANDATORY 1. All Listed Companies

Every listed company must constitute an Audit Committee in compliance with Section 177 of the Act and Regulation 18 of SEBI LODR.

CONDITIONAL 2. Certain Unlisted Public Companies

Certain unlisted public companies meeting any one of the following criteria based on the last audited financial statements:

  • Paid-up Share Capital of ₹10 Crores or more; OR
  • Turnover of ₹100 Crores or more; OR
  • Aggregate outstanding loans, debentures, and deposits exceeding ₹50 Crores.

*As a general rule, the statutory requirement applies to listed companies and specified public companies under Section 177; private companies are generally outside this provision.

👥 Section 2 — Composition and Qualifications

The composition of the Audit Committee is designed to ensure independence and financial expertise. The requirements under SEBI LODR for listed entities are stricter than those for unlisted companies under the Companies Act.

RequirementCompanies Act, 2013 (Sec 177)SEBI LODR (Reg 18)
(For Listed Entities)
Minimum MembersMinimum 3 Directors.Minimum 3 Directors.
Independent Directors (ID) CompositionMajority of members must be IDs.At least 2/3rds of members must be IDs.
ChairpersonThe members elect the Chairperson from among themselves.The Chairperson must be an Independent Director.
Financial Literacy / ExpertiseThe majority of members of the Audit Committee, including its Chairperson, should be able to read and understand financial statements.All members shall be financially literate. At least one member must have accounting or related financial management expertise.
Appointment & RemovalMembers are appointed and removed by the Board of Directors.

Why Financial Literacy Matters

The requirement for financial expertise is not merely procedural. Committee members must be capable of analyzing complex financial data, understanding accounting policies, and challenging the statutory auditors and management on assumptions made in financial statements. A committee without financial expertise is a watchdog without teeth.

🗓️ Section 3 — Meetings and Procedures

The Audit Committee must meet regularly to discharge its duties effectively. The procedures for these meetings, particularly for listed companies, are clearly defined to ensure active participation and rigor.

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Frequency & Gap

  • Frequency (LODR): Must meet at least 4 times a year.
  • Maximum Gap (LODR): Not more than 120 days between two consecutive meetings.
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Quorum Requirements

SEBI LODR (Listed Entities):

  • Greater of: 2 members OR 1/3rd of total members; AND
  • Mandatory Presence: At least 2 Independent Directors must be present.

Companies Act, 2013: The Act does not explicitly specify quorum for the Audit Committee. General principles of board meeting quorum or provisions in Articles of Association would apply.

3.1 Notice, Agenda, and Notes to Agenda

  • Notice: The law does not prescribe a detailed standalone notice period for every Audit Committee meeting in the same way as general Board meeting procedure. As a governance practice, reasonable written notice along with agenda and supporting papers should be circulated sufficiently in advance so members can participate effectively.
  • Agenda & Circulation: The agenda, notes on agenda, and supporting papers should be circulated well in advance so that members can study the proposal and participate meaningfully.
  • Importance: Providing the agenda and notes in advance is crucial for members, especially Independent Directors, to study the proposals, seek clarifications, and come prepared for meaningful deliberation, rather than just rubber-stamping decisions.

Attendees, Minutes, and Reporting

  • Mandatory Invitees: Statutory auditors, internal auditors, and relevant Key Managerial Personnel such as the CFO may be invited to attend when required. They may be heard on relevant matters but do not have voting rights.
  • Minutes: Minutes of Audit Committee meetings should be properly recorded, signed, and maintained in accordance with the company’s governance framework and applicable legal requirements.
  • Reporting to Board: The Audit Committee’s observations and recommendations should be placed before the Board. If the Board does not accept a recommendation, the company should disclose the fact and reasons where required under the applicable governance framework.

🛠️ Section 4 — Key Functions, Powers, and Roles

The terms of reference for the Audit Committee are expansive, covering financial reporting, audit oversight, and ethical compliance. These are detailed in Section 177(4) and Part C of Schedule II of SEBI LODR.

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1. Financial Oversight

Reviewing quarterly and annual financial statements before submission to the Board, focusing on:

  • Changes in accounting policies and practices.
  • Major accounting entries based on exercise of judgment.
  • Significant adjustments arising from audit.
  • Going concern assumptions.
  • For Listed Companies: Reviewing quarterly financial results.
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2. Auditor Oversight

Serving as the primary interface between the auditors and the management:

  • Recommending appointment, remuneration, and terms of auditors, including statutory and internal auditors where applicable.
  • Reviewing and monitoring the auditor's independence and performance.
  • Discussing scope of audit and significant findings with auditors.
  • Reviewing the internal audit function, including its scope, staffing, and effectiveness.
  • Reviewing the financial statements and the auditor’s report before submission to the Board.
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3. Governance, Risk & Controls

Critical oversight roles regarding internal processes:

  • RPTs: Approval or subsequent modification of related party transactions, in accordance with applicable law.
  • Evaluation of internal financial controls and review of broader control and governance systems, including risk-related oversight where applicable.
  • Scrutiny of inter-corporate loans and investments.
  • Oversight of the vigil mechanism / whistleblower policy.
  • Reviewing internal financial control systems and related compliance mechanisms.
  • Reviewing inter-corporate loans and investments, where applicable.
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4. Fraud & Investigation

The committee plays a key role in detecting and addressing irregularities:

  • Reviewing findings of internal investigations into matters where there is suspected fraud or irregularity.
  • Looking into the reasons for substantial defaults in payment to depositors, debenture holders, shareholders, and creditors, where relevant.

4.1 Powers of the Committee under Law

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Authority to Seek External Advice & Investigation Powers

To effectively execute its functions, the Audit Committee is vested with significant statutory powers under Section 177(5) and (6) of the Companies Act, 2013:

  • Power to Investigate: Authority to investigate any activity within its terms of reference.
  • Access to Information: Power to seek information from any employee of the company.
  • External Advice: Authority to obtain outside legal or other professional advice.
  • Attendance of Outsiders: Power to secure the attendance of outsiders with relevant expertise, if considered necessary.

🔄 Section 5 — Distinguishing Roles

It is crucial to understand how the Audit Committee differs from other key players in the corporate governance ecosystem.

EntityNature of RoleRelationship with Audit Committee
Board of DirectorsSupreme executive authority, responsible for overall strategic direction and management.The Audit Committee is a sub-committee of the Board. It reviews matters in detail and makes recommendations or observations to the Board, while also exercising specific oversight and scrutiny powers under law.
Statutory AuditorExternal, independent entity that audits financial statements to express an opinion on their truth and fairness.The Audit Committee recommends appointment and remuneration, reviews the audit plan, monitors independence, and discusses significant findings. The auditor expresses opinion; the Committee oversees the process.
Internal AuditorEmployee or external firm reviewing internal controls, processes, and compliances on an ongoing basis.The Audit Committee reviews the scope, functioning, and reports of the internal audit function, especially on internal control weaknesses and suspected fraud. Internal auditor performs the audit; Committee reviews and oversees.

💡 Section 6 — Practical Insights and Pitfalls

Practical Importance

A proactive Audit Committee is not just a compliance checkbox. It enhances the credibility of financial statements, supports investor confidence, and acts as an important barrier against weak controls, biased reporting, and corporate fraud.

Common Compliance Pitfalls

  • Treating meetings as a formality ("rubber-stamping").
  • Lack of genuine financial literacy among members.
  • Failure to challenge the management or statutory auditors on critical accounting assumptions.
  • Inadequate review of Related Party Transactions (RPTs).

📝 The Bottom Line

The Audit Committee is a cornerstone of financial governance in modern corporations. By bridging the gap between the Board, the auditors, and management, it strengthens transparency, accountability, and control. For listed entities in particular, proper compliance with SEBI LODR requirements is important not only for legal compliance, but also for credibility and long-term value creation.

Frequently Asked Questions (FAQs)🔗

Q1. What is an Audit Committee?▼
An Audit Committee is a committee of the Board that oversees financial reporting, internal controls, audit matters, and related party transactions.
Q2. What is the main purpose of the Audit Committee?▼
Its main purpose is to ensure transparency, accountability, and independent oversight of a company’s financial and audit processes.
Q3. Under which law is the Audit Committee formed in India?▼
It is mainly governed by Section 177 of the Companies Act, 2013, and for listed companies, Regulation 18 of SEBI (LODR) Regulations, 2015.
Q4. Which companies must constitute an Audit Committee?▼
All listed companies must constitute an Audit Committee, and certain unlisted public companies also come under the requirement if they cross prescribed thresholds.
Q5. Are private companies required to form an Audit Committee?▼
Generally, private companies are not required to constitute an Audit Committee unless covered under a separate regulatory framework.
Q6. How many members should the Audit Committee have?▼
It should have at least three directors.
Q7. Who should be the members of the Audit Committee?▼
The committee should mainly consist of non-executive directors, with a majority of independent directors, and for listed entities, at least two-thirds should be independent.
Q8. Who can be the Chairperson of the Audit Committee?▼
In listed companies, the Chairperson must be an independent director.
Q9. Why is independence important in the Audit Committee?▼
Independence ensures that the committee can review matters objectively without management influence.
Q10. How often should the Audit Committee meet?▼
For listed entities, it should meet at least four times a year.
Q11. What is the maximum gap allowed between two Audit Committee meetings?▼
The maximum gap should not be more than 120 days.
Q12. What is quorum for an Audit Committee meeting?▼
For listed entities, quorum is the greater of two members or one-third of the total members, with at least two independent directors present.
Q13. Is quorum different for non-listed companies?▼
Yes, the exact quorum may depend on the applicable legal framework, committee constitution, and governance documents.
Q14. Does the Audit Committee need advance notice for meetings?▼
Yes, agenda and supporting papers should be circulated well in advance so members can review matters properly.
Q15. Can auditors attend Audit Committee meetings?▼
Yes, statutory auditors and internal auditors may be invited when required.
Q16. Can the CFO attend Audit Committee meetings?▼
Yes, the CFO may attend when required and may be heard on relevant matters.
Q17. Do invitees to the Audit Committee have voting rights?▼
No, invitees such as auditors and the CFO do not have voting rights.
Q18. What are the main functions of the Audit Committee?▼
Its main functions include reviewing financial statements, oversight of auditors, reviewing internal controls, and monitoring related party transactions.
Q19. Does the Audit Committee approve financial statements?▼
No, it reviews financial statements and recommends them to the Board, but final approval rests with the Board.
Q20. What financial statements does the Audit Committee review?▼
It reviews quarterly, half-yearly, and annual financial statements before they are placed before the Board.
Q21. What is the Audit Committee’s role in auditor appointment?▼
It recommends the appointment, remuneration, and terms of auditors.
Q22. Does the Audit Committee monitor auditor independence?▼
Yes, it reviews and monitors the independence and performance of auditors.
Q23. What is the Audit Committee’s role in internal audit?▼
It reviews the scope, functioning, and reports of internal audit and checks for weaknesses in internal controls.
Q24. What is a related party transaction?▼
It is a transaction between the company and a related party, such as a director, promoter, or associated entity, that needs special scrutiny.
Q25. Why are related party transactions important for the Audit Committee?▼
Because they can create conflicts of interest, so the committee ensures they are fair, transparent, and legally compliant.
Q26. Can the Audit Committee investigate fraud or irregularities?▼
Yes, it can review findings of investigations and examine suspected fraud or irregularities.
Q27. Does the Audit Committee deal with whistleblower complaints?▼
Yes, it oversees the vigil mechanism or whistleblower policy.
Q28. What is the role of the Audit Committee in internal financial controls?▼
It evaluates whether the company has strong internal financial control systems and whether they are working effectively.
Q29. Does the Audit Committee look into defaults in payments?▼
Yes, it may look into substantial defaults in payment to creditors, debenture holders, shareholders, or depositors where relevant.
Q30. Can the Audit Committee seek outside advice?▼
Yes, it can obtain legal or professional advice and can seek information from employees or outside experts.
Q31. Can the Audit Committee investigate matters on its own?▼
Yes, it has the power to investigate activities within its terms of reference.
Q32. What happens if the Board does not accept the Audit Committee’s recommendation?▼
The company should disclose the fact and reasons where required under the applicable governance framework.
Q33. Why is the Audit Committee important in corporate governance?▼
It strengthens trust, improves accountability, and acts as a safeguard against weak controls and financial misreporting.
Q34. What is the difference between the Audit Committee and the Board?▼
The Audit Committee is a sub-committee that handles detailed oversight, while the Board takes final company-level decisions.
Q35. What is the difference between the Audit Committee and the statutory auditor?▼
The statutory auditor audits the accounts and gives an opinion, while the Audit Committee oversees the audit process and reviews key findings.
Q36. What is the difference between the Audit Committee and the internal auditor?▼
The internal auditor performs internal checks and reviews, while the Audit Committee supervises and reviews their work.
Q37. Should the Audit Committee Chairperson attend the AGM?▼
Yes, as a good governance practice, the Chairperson should attend the AGM to answer shareholder queries on audit and financial matters.
Q38. What are common mistakes companies make with the Audit Committee?▼
Common mistakes include treating it as a formality, not ensuring true independence, and not properly reviewing RPTs or audit findings.
Q39. Is financial literacy important for Audit Committee members?▼
Yes, members should understand financial statements and accounting matters to perform effective oversight.
Q40. What is the best summary of an Audit Committee in one line?▼
It is the Board’s independent watchdog for financial reporting, audit quality, and internal control oversight.

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