CORPORATE GOVERNANCE PROJECT

AUDIT COMMITTEE

NAME: YASH HIRANANDANI

ROLL NO: 13
CLASS: TYBFM

INDEX

1. Introduction
2. Eligibility to Join Committee
3. Meeting of Committee
4. Powers and Role of Audit Committee
5. Composition of Audit Committee
6. Clause 177
7. Important Points
8. Top Issues Faced by Audit Committee

Introduction
An audit committee is a selected number of members of a company's board
of directors whose responsibilities include helping auditors remain
independent of management. Most audit committees are made up of three
to five or sometimes as many as seven directors who are not a part of
company management.
An Audit Committee is a key element in the Corporate Governance process
of any organization. The emergence of corporate governance, which refers to
the establishment of a structural framework or reforming the existing
framework to ensure the governing of the company to best serve interests of
all stakeholders, is a vital concept which has become indispensable in the
present capital market state of affairs so as to safeguard the interest of
stakeholders.

In the United States, the New York Stock Exchange has required all listed
Companies to have audit committees composed solely of independent
directors. In India, the 1992 stock market scams had stunned the investors by
shaking their confidence and that paved the way for emergence of Corporate
Governance & Audit Committee. Recommendations by various committees
on the code of corporate governance starting for the Cadbury Committee for
Corporate governance constituted in the United Kingdom to the Committee on
Corporate governance constituted by the Securities Exchange Board of India
under the Chairmanship of Kumar Mangalam Birla have all recommended the
setting up of an Audit Committee in companies to safeguard the interest of
investors and restore their faith.

The Board of Directors of a company is responsible and accountable for

sound financial reporting. The Audit Committee being a sub-group of the full
board is enshrined with the responsibility of monitoring the process supporting
responsible financial disclosure to ensure better corporate governance. It is
not the role of the audit committee to prepare financial statements or engage
in the myriad of decisions relating to the preparation of these statements. The
Audit Committee is formed to regularly review processes and procedures to
ensure the efficacy of internal control systems so that the accuracy and
competence of the reporting of financial results is maintained at high level at
all times. It is imperative for the members of Audit Committee to have formal
knowledge of accounting and financial management or experience of
interpreting financial statements. The Committees function is clearly one of
supervising and monitoring, and in carrying out this function it relies on the
senior financial management of the company and the outside auditors. Thus,
the role of the Audit Committee is to perform as a catalyst for effective and
transparent financial reporting.

Section 292A of the Companies Act, 1956

Section 292A requires that every public company having paid-up capital of not
less than Rs. 5 crore shall constitute an Audit Committee of the Board. The
other requirements are given as under:

1.It will consist of not less than three directors; two thirds of its total strength
shall be of director other than managing and whole-time directors.

2.The members of the Audit Committee shall exercise such powers and
perform such functions as may be specified by the Board.

3.The members will elect one amongst themselves as chairman.

4.The Auditors of the company, the internal Auditor, if any, and the director in
charge of finance will participate in the meetings and shall not have right to
vote.

5.The Audit Committee shall have discussions with the Auditor periodically
about internal control systems, the scope of audit etc. and review the halfyearly and annual accounts before submission to the Board.

6. The Audit Committee shall have authority to investigate any matter above
stated and shall have access to records of the company.

7.The composition of the Audit Committee shall be mentioned in the annual

directors' report.

8. The recommendations of the Audit Committee relating to financial

management, an audit report shall be binding on the Board.

9.If the Board does not accept the recommendations of the Audit Committee,
it shall record the reasons therefor and communicate such reasons to the
shareholders.

10.The Chairman of the Committee shall attend the annual general meetings
of the company to provide clarification on any matter relating to audit.

Audit Committee under Sub-clause II of Clause 49 of Listing

Agreement

II

Audit Committee.

A. Qualified and Independent Audit Committee

A qualified and independent audit committee shall be set up and shall comply
with the following:

(i) The audit committee shall have minimum three directors as members. Twothirds of the members of audit committee shall be independent directors.

(ii) All members of audit committee shall be financially literate and at least one
member shall have accounting or related financial management expertise.

Explanation(i): The term financially literate means the ability to read and
understand basic financial statements i.e. balance sheet, profit and loss
account, and statement of cash flows.

Explanation(ii): A member will be considered to have accounting or related

financial management expertise if he or she possesses experience in finance
or accounting, or requisite professional certification in accounting, or any other
comparable experience or background which results in the individuals

financial sophistication, including being or having been a chief executive

officer, chief financial officer, or other senior officer with financial oversight
responsibilities.

(iii) The Chairman of the Committee shall be an independent director;

(iv) The Chairman shall be present at Annual General Meeting to answer

shareholder queries;

(v) The audit committee should invite such of the executives, as it considers
appropriate (and particularly the head of the finance function) to be present at
the meetings of the committee, but on occasions it may also meet without the
presence of any executives of the company. The finance director, head of
internal audit and when required, a representative of the external auditor shall
be present as invitees for the meetings of the audit committee;

(vi) The Company Secretary shall act as the secretary to the committee.

(B) Meeting of Audit Committee

The audit committee should meet at least four times in a year and not more
than four months shall elapse between two meetings. The quorum shall be
either two members or one third of the members of the audit committee
whichever is greater, but there should be a minimum of two independent
members present.

(C) Powers of Audit Committee

The audit committee shall have powers which should include the following:

1. To investigate any activity within its terms of reference.

2. To seek information from any employee.

3. To obtain outside legal or other professional advice.

4.To secure attendance of outsiders with relevant expertise, if it considers

necessary.

(D) Role of Audit Committee

(i) The role of the audit committee shall include the following:

1.Oversight of the companys financial reporting process and the disclosure of

its financial information to ensure that the financial statement is correct,
sufficient and credible.

2.Recommending the appointment and removal of external auditor, fixation of

audit fee and also approval for payment for any other services.

3.Reviewing with management the annual financial statements before

submission to the board, focusing primarily on;

(a) Any changes in accounting policies and practices.

(b) Major accounting entries based on exercise of judgment by management.

(c) Qualifications in draft audit report.

(d) Significant adjustments arising out of audit.

(e) The going concern assumption.

(f) Compliance with accounting standards.

(g) Compliance with stock exchange and legal requirements concerning

financial statements

(h) Any related party transactions

4. Reviewing with the management, external and internal auditors, the

adequacy of internal control systems.

5.Reviewing the adequacy of internal audit function, including the structure of

the internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.

6. Discussion with internal auditors any significant findings and follow up there
on.

7.Reviewing the findings of any internal investigations by the internal auditors

into matters where there is suspected fraud or irregularity or a failure of
internal control systems of a material nature and reporting the matter to the
board.

8. Discussion with external auditors before the audit commences about nature
and scope of audit as well as post-audit discussion to ascertain any area of
concern.

9. Reviewing the companys financial and risk management policies.

10.To look into the reasons for substantial defaults in the payment to the
depositors, debenture holders, shareholders (in case of non payment of
declared dividends) and creditors.

Explanation(i): The term related party transactions shall have the same
meaning as contained in the Accounting Standard 18, Related Party
Transactions, issued by The Institute of Chartered Accountants of India.

Explanation(ii): If the company has set up an audit committee pursuant to

provision of the Companies Act, the company agrees that the said audit
committee shall have such additional functions / features as is contained in
the Listing Agreement.

(E) Review of information by Audit Committee

(i) The Audit Committee shall mandatorily review the following information:

1.Financial statements and draft audit report, including quarterly / half-yearly

financial information;

2.Management discussion and analysis of financial condition and results of

operations;

3.Reports relating to compliance with laws and to risk management;

4.Management letters / letters of internal control weaknesses issued by

statutory / internal auditors; and

5.Records of related party transactions

6.The appointment, removal and terms of remuneration of the Chief internal

auditor shall be subject to review by the Audit Committee.

Section 292A of the Companies Act, 1956 Vs. Clause 49 of

Listing Agreement A Synopsis

Applicability
Applicable to all listed companies with a paid-up capital of not less than Rs 3
Crore or Net Worth greater than Rs 25 Crore at anytime in the history of the
company and for companies seeking listing.
Section 292A is applicable to every public company having paid-up share
capital of rupees 5 Crore or more.

Composition

Clause 49 requires that the Audit Committee shall have minimum three
directors as members and two-thirds of the member of Audit Committee shall
be independent directors. All members shall be financially literate and at least

one member shall have accounting or related financial management

expertise.
Section 292A requires that the Audit Committee shall consist of not less than
three directors and such number of other directors as the board may
determine. Two-thirds of the total no of the Audit Committee shall be directors
other than the managing and whole-time directors.

Chairman
The Chairman of Audit Committee shall be an independent director.
Any member of the Audit Committee can Chairman.

Secretary
Company Secretary shall act as secretary to the committee.
No such requirement under section 292A.

Meeting of Audit Committee

The Audit Committee Shall meet at least four times in a year and not more
than four months shall elapse between two meetings.
No such requirement under section 292A.

Role and Powers of the Audit Committee

Section 292A gives the audit committee the authority to investigate into any
matter in relation to the items specified in this section or referred to it by the
board. The audit committee has full access to information contained in the
records of the company and may take external professional advice, if it deems
necessary.
Clause 49 gives specific powers to the audit committee to investigate any
activity within its terms of reference, seek information from any employee, and
obtain outside legal or professional advice. The role of audit committee has
also been clearly defined under the clause 49.

Audit Committee under The Companies Bill, 2011

Clause 177 of The Companies Bill, 2011 will deal with the Audit Committee.

177.

(1) The Board of Directors of every listed company and such other class or
classes of companies, as may be prescribed, shall constitute an Audit
Committee.

(2) The Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority:

Provided that majority of members of Audit Committee including its

Chairperson shall be persons with ability to read and understand, the financial
statement.

(3) Every Audit Committee of a company existing immediately before the

commencement of this Act shall, within one year of such commencement, be
reconstituted in accordance with sub-section (2).

(4) Every Audit Committee shall act in accordance with the terms of reference
specified in writing by the Board which shallinter alia, include,

(I) the recommendation for appointment, remuneration and terms of

appointment of auditors of the company;

(ii) review and monitor the auditors independence and performance, and
effectiveness of audit process;

(iii) examination of the financial statement and the auditors report thereon;

(iv) approval or any subsequent modification of transactions of the company

with related parties;

(v) scrutiny of inter-corporate loans and investments;

(vi) valuation of undertakings or assets of the company, wherever it is

necessary;

(vii) evaluation of internal financial controls and risk management systems;

(viii) monitoring the end use of funds raised through public offers and related
matters.

(5) The Audit Committee may call for the comments of the auditors about
internal control systems, the scope of audit, including the observations of the
auditors and review of financial statement before their submission to the
Board and may also discuss any related issues with the internal and statutory
auditors and the management of the company.

(6) The Audit Committee shall have authority to investigate into any matter in
relation to the items specified in sub-section (4) or referred to it by the Board
and for this purpose shall have power to obtain professional advice from
external sources and have full access to information contained in the records
of the company.

(7) The auditors of a company and the key managerial personnel shall have a
right to be heard in the meetings of the Audit Committee when it considers the
auditors report but shall not have the right to vote.

(8) The Boards report under sub-section (3) of section 134 shall disclose the
composition of an Audit Committee and where the Board had not accepted
any recommendation of the Audit Committee, the same shall be disclosed in
such report along with the reasons therefor.

(9) Every listed company or such class or classes of companies, as may be

prescribed, shall establish a vigil mechanism for directors and employees to
report genuine concerns in such manner as may be prescribed.

(10) The vigil mechanism under sub-section (9) shall provide for adequate
safeguards against victimisation of persons who use such mechanism and
make provision for direct access to the chairperson of the Audit Committee in
appropriate or exceptional cases: Provided that the details of establishment of
such mechanism shall be disclosed by the company on its website, if any, and
in the Boards report.

Important Points:

1) Audit Committee can be constituted both in terms of requirements of

section 292A of the Companies Act, 1956 and in terms of requirements of
clause 49 of Listing Agreement. Provisions of section 292A, also covers non
listed companies and therefore those companies need not comply with
requirements of clause 49 of Listing Agreement. When a company falls within
the ambit of provisions of both section 292A and clause 49, requirements of
both the provisions has to be complied with.

2) Independent Director has not been defined anywhere in the Companies

Act, 1956 and as a result section 292A does not put much stress on the
requirement of Independent Directors in the constitution of Audit Committees.
It only contains provision regarding presence of Non-Executive Directors,
whereas clause 49 of the Listing Agreement compulsorily requires the
presence of Independent Directors in the Audit Committee which shall not be
less than 2/3 of the members of Audit Committee.

3) Clause 49 of Listing Agreement also provides the definition of Independent

Director. The definition of Independent Director has also been given in subclause (5) of Clause 149 of The Companies Bill, 2011.

4) The Companies Bill, 2011 contains the provision regarding Audit Committee
which is almost (not in entirety) a replica of the provisions of Clause 49 of
Listing Agreement.

5) Definition of Independent Director as contained in Clause 49 of the Listing

Agreement---

For the purpose of the sub-clause (ii), the expression independent director
shall mean a non-executive director of the company who:

a. apart from receiving directors remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
directors, its senior management or its holding company, its subsidiaries and
associates which may affect independence of the director;

b. Is not related to promoters or persons occupying management positions at

the board level or at one level below the board;

c. Has not been an executive of the company in the immediately preceding

three financial years;

d. Is not a partner or an executive or was not partner or an executive during

the preceding three years, of any of the following:

i. The statutory audit firm or the internal audit firm that is associated with the
company, and

ii. The legal firm(s) and consulting firm(s) that have a material association with
the company.

e. Is not a material supplier, service provider or customer or a lessor or lessee

of the company, which may affect independence of the director;

f. Is not a substantial shareholder of the company i.e. owning two percent or

more of the block of voting shares.

g. Is not less than 21 years of age.

6) As per Sub-clause (5) of Clause 149 of The Companies Bill, 2011 an

independent director in relation to a company, means a director other than a
managing director or a whole-time director or a nominee director

(a) Who, in the opinion of the Board, is a person of integrity and possesses
relevant expertise and experience;

(b)(i) Who is or was not a promoter of the company or its holding, subsidiary
or associate company;
(ii) Who is not related to promoters or directors in the company, its holding,
subsidiary or associate company;

(c) Who has or had no pecuniary relationship with the company, its holding,
subsidiary or associate company, or their promoters, or directors, during the
two immediately preceding financial years or during the current financial year;

(d) None of whose relatives has or had pecuniary relationship or transaction

with the company, its holding, subsidiary or associate company, or their
promoters, or directors, amounting to two per cent. or more of its gross
turnover or total income or fifty lakh rupees or such higher amount as may be
prescribed, whichever is lower, during the two immediately preceding financial
years or during the current financial year;

(e) Who, neither himself nor any of his relatives

(i) Holds or has held the position of a key managerial personnel or is or has
been employee of the company or its holding, subsidiary or associate
company in any of the three financial years immediately preceding the
financial year in which he is proposed to be appointed;

(ii) Is or has been an employee or proprietor or a partner, in any of the three

financial years immediately preceding the financial year in which he is
proposed to be appointed, of

(A) A firm of auditors or company secretaries in practice or cost auditor of the

company or its holding, subsidiary or associate company; or

(B) Any legal or a consulting firm that has or had any transaction with the
company, its holding, subsidiary or associate company amounting to ten per
cent. or more of the gross turnover of such firm;

(iii) Holds together with his relatives two per cent. or more of the total voting
power of the company; or

(iv) Is a Chief Executive or director, by whatever name called, of any nonprofit

organisation that receives twenty-five per cent. or more of its receipts from the
company, any of its promoters, directors or its holding, subsidiary or associate
company or that holds two per cent. or more of the total voting power of the
company; or

(f) Who possesses such other qualifications as may be prescribed.

(caclubindia)

Top Issues for Audit Committees in 2014

The demands on audit committees are expanding. At the same time, their
primary responsibility to oversee managements activities, including financial
reporting and compliance, remains fundamental to corporate governance. It
can be challenging for audit committees to focus on their traditional core
duties while staying up to date on emerging issues such as cybersecurity,
proposed regulatory changes, and international developments. Following are
several issues audit committees may wish to focus on in 2014 and questions
to consider, excerpted from Deloittes November-December 2013 Audit
Committee Brief.

Updated COSO Framework

The Committee of Sponsoring Organizations of the Treadway Commission
(COSO) recently released an updated version of its Internal Control
Integrated Framework .The 2013 update will soon supersede the original
framework, issued in 1992,The transition period for implementation extends
through December 15, 2014. Companies that provide their annual ICFR
assessment in accordance with Sarbanes-Oxley Section 404 during the
transition period should disclose which COSO framework was used in
performing the assessment.

Questions for audit committees to consider:

 Is the company using the framework for internal control over financial
reporting only, or for operations and regulatory compliance as well?
Have company controls been mapped to the new framework?
Has the new framework revealed any gaps in current processes, control
activities, or documentation, and if so, how are these being addressed?
Is the company educating leadership, risk management, and control
owners regarding the content in the updated COSO framework?
What policies are in place and who is responsible for communicating
internal control considerations to external parties (e.g., third-party service
providers)?
Does the company use information technology and data analytics to help
continuously monitor internal control systems?

Cybersecurity
Cybersecurity is often at the top of agendas for audit committees and
management at companies of all sizes and industries, since the
pervasiveness of cyber issues connects them to financial concerns and
internal controls. The audit committee plays a vital role in monitoring
managements preparation for and response to cyber threats.

Questions for audit committees to consider:

What are the organizations critical assets to be secured, and how are
vulnerabilities identified? How are risks disclosed?
How are critical infrastructure and regulatory requirements met?
What is the overall strategy and plan for protecting assets from cyber
attacks? How robust are the organizations incident response and
communications plans?

Proposed Auditors Reporting Model

The PCAOB recently proposed auditing standards on the auditors reporting
model and the auditors responsibility for other information in annual SEC
filings. These standards, proposed in August 2013, could significantly change
the external auditors report and necessitate expanded audit procedures.
The significant proposed changes include:
A new section in the auditors report on critical audit matters specific to the
audit:
Critical audit matters are defined as those matters the auditor addressed
during the audit of the financial statements that:
(1) involved the most difficult, subjective, or complex auditor judgments;
(2) posed the most difficulty to the auditor in obtaining sufficient appropriate
audit evidence; or
(3) posed the most difficulty to the auditor in forming an opinion on the
financial statements

The PCAOBs proposal could potentially change the long-standing reporting

model of management being responsible for the companys financial
statements and disclosures and the auditor attesting to that information; some
of the illustrative examples of reporting on critical audit matters provided in the
proposal disclose what appears to be original information about the company
that is not otherwise disclosed by management
Enhanced language in the auditors report on auditor responsibilities
New statements in the auditors report providing more information on areas
such as auditor independence and tenure
Increased auditor responsibility for other information in the companys
annual report (including information incorporated by reference), and
disclosure about this responsibility in the auditors report.

The proposal containing the proposed standards and related conforming

amendments indicates the effective date would be for audits of financial
statements for fiscal years beginning on or after December 15, 2015;
however, this date will depend on the nature and extent of revisions the
PCAOB determines are necessary based on comments and other input on the
proposal, as well as approval by the PCAOB and SEC of any final standards
and related conforming amendments and the associated timing.
PCAOB Auditing Standard No. 16, Communications with Audit Committees
PCAOB Auditing Standard No. 16 (AS 16), Communications with Audit
Committees, is effective for audits and quarterly reviews of fiscal years
beginning on or after December 15, 2012. The PCAOBs primary objectives in
issuing AS 16 are to (1) enhance communications between auditors and audit
committees and (2) improve audits by fostering constructive dialogue between
the auditor and the audit committee.
The audit committee should keep the following auditors responsibilities in
mind with respect to year-end communications.

Foreign Corrupt Practices Act

Foreign Corrupt Practices Act (FCPA) enforcement actions have recently
been increasing, and will likely continue to be a hot topic in 2014. Companies
with strong anti-corruption compliance programs will likelybe better positioned
to prevent and detect potential violations, and to reduce or even avoid criminal
and civil liability should a violation occur. The audit committee should consider
assessing important components such as:
The overall compliance structure
The thoroughness of the anti-corruption risk assessment
Policies and procedures covering riskier activities
Training protocols
Protocols for third-party and distributor due diligence
The substance and frequency of senior management and regional
compliance officer anti-corruption communications
The whistleblower reporting systems for employees and third parties
Monitoring and audit processes
Disciplinary and incentive procedures for violations of anti-corruption
policies and procedures
Anti-corruption merger and acquisition due diligence procedures.

Questions for audit committees to consider:

Are we conducting periodic anti-corruption risk assessments to
continuously evaluate and manage our corruption risk profile?
How does management communicate its continued commitment to
compliance (i.e., the tone at the top)?
Can we provide evidence that our compliance program is well designed,
effectively overseen, and tailored to our size, structure, and risk profile?
Do we provide country-by-country FCPA reinforcement training tailored to
geography- and business specific risks?
Are we doing enough anti-corruption due diligence during pre-acquisition
and post acquisition integration?

Tax Reform and Regulatory Authority Spotlight

Tax reform is expected to remain a priority in Congress for at least the next
year as lawmakers struggle to agree on fundamental questions such as
whether a tax code overhaul should be revenue-neutral or raise revenue for
deficit reduction, and which corporate tax expenditures should be modified or
eliminated to pay for a lower corporate tax rate. That ongoing debate, together
with the inevitable transition issues that will arise as proposals move through
the legislative process and are enacted into law, means that tax reform will
likely be an important boardroom topic over the next several years.
In addition, base erosion and profit shifting continues to be a focus of the
Organisation for Economic Cooperation and Development (OECD).
Regulatory authorities also continue to emphasize the importance of greater
transparency in financial statement reporting, with a focus on income tax
accounting and reporting. The SEC has increased scrutiny in areas such as
the tax accounting for investments in foreign entities, including the indefinite
reinvestment of foreign earnings, due to the significant judgment involved.

Questions for audit committees to consider:

How does the tax department stay current on tax laws, regulations, and
leading practices? How is the
department assessing the potential effect of tax reform and OECD actions?
What are the companys most significant risks related to tax positions, and
what internal controls are in
place to address those risks?
What judgments are involved in the companys tax planning strategies and
transfer pricing policies?
What does the company rely on to support those positions?
What key judgments are made in connection with assertions regarding the
indefinite reinvestment of
foreign earnings? What documentation does the company maintain to support
those assertions?
Do recent regulatory audits and actions raise concerns about how the tax
function operates and
evaluates the recognition and measurement of tax positions?

Risk Oversight
Risk oversight has taken on increased importance for boards and audit
committees. Many boards are evaluating their risk governance structure and
which committees have the skills and knowledge to oversee particular risks.
The SEC considers risk oversight a key responsibility of the board and
requires this role to be disclosed to improve investors understanding of board
activities.
Although it is the responsibility of senior management to assess and manage
the companys risks, the audit committee should focus on areas of major
financial risk and discuss the guidelines and policies for addressing them.
Financial risks often arise from other sources of risk, such as strategy,
operations, and compliance with environmental, health, safety, legal and
regulatory requirements. Therefore, audit committees may want to consider
widening the lens and adopting a more proactive approach to avoid reactive
situations. They also should consider placing risk oversight high on the list of
agenda items for their meetings. The audit committee sets the tone for the
meeting, notes Greg Weaver, CEO of Deloitte & Touche LLP, and it should
make clear that if theres something the committee needs to know, its the
responsibility of attendees to provide that information directly and concisely.

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