Corporate and Economic Laws · Accounts and Audit

Secretarial Audit and Audit Committee Aspects (Sections 204 and 177)

Updated 11 October 2026 · Fact-checked

Secretarial audit (Section 204) is an audit of a company's secretarial and related records by a company secretary in practice. Its report is annexed to the Board's report. The audit committee (Section 177) is a board committee of at least three directors, with independent directors in the majority, that oversees auditors, financial statements and related party transactions.

Understand Secretarial Audit and Audit Committee Aspects

A statutory audit checks whether the financial statements give a true and fair view. A secretarial audit checks something different: whether the company has complied with the laws and procedures that apply to it. It is done by a company secretary in practice, not by the statutory auditor.

Section 204 applies to every listed company and to other classes of companies as may be prescribed. The report is given in the prescribed form and is annexed to the Board's report made under Section 134(3). The company must give all assistance and facilities to the company secretary for auditing the secretarial and related records.

The Board must explain in full any qualification, observation or other remark made by the secretary in the report. If the company, any officer, or the company secretary in practice contravenes Section 204, each one in default is liable to a penalty of two lakh rupees.

The audit committee works inside the company. Section 177 requires the Board of every listed public company, and other prescribed classes, to constitute it. It must have at least three directors, with independent directors forming a majority. Most members, including the Chairperson, must be able to read and understand financial statements.

Its job is to act on written terms of reference set by the Board. These cover auditor appointment and remuneration, auditor independence and performance, examination of financial statements, approval of related party transactions, scrutiny of inter-corporate loans and investments, valuation, internal financial controls and risk management, and monitoring end use of public offer funds. The committee can investigate any matter and take outside professional advice.

Key rules to remember

Who must get secretarial audit (Section 204(1)): Every listed company + other prescribed classes → secretarial audit report by a company secretary in practice, annexed to the Board's report; The thresholds for other classes are in the Rules, not in the section text. Do not quote figures unless you are sure of them.
Penalty under Section 204(4): Company, every officer in default, or the company secretary in practice → penalty of ₹2,00,000; It applies to the company secretary in practice too, not only to the company.
Audit committee composition (Section 177(2)): Minimum 3 directors; independent directors form a majority; Majority of members including the Chairperson must be able to read and understand financial statements.
Who must constitute it (Section 177(1)): Every listed public company + prescribed classes; The words 'listed public company' replaced 'listed company' with effect from 7-5-2018.
Terms of reference (Section 177(4)): Auditor recommendation; auditor independence and performance; financial statements; related party approvals; inter-corporate loans and investments; valuation; internal financial controls and risk management; end use of public funds; The list is 'inter alia', so the Board can add more.
Voidable small transaction (third proviso to Section 177(4)(iv)): Transaction up to ₹1 crore entered into by a director or officer without approval and not ratified within 3 months → voidable at the Audit Committee's option; If it is with a related party of a director or authorised by another director, the director concerned indemnifies the company against loss.
Right to be heard (Section 177(7)): Auditors and KMP: right to be heard when the committee considers the auditor's report; no right to vote; Do not say they can attend every meeting as of right.
Vigil mechanism (Section 177(9)-(10)): Listed companies + prescribed classes → vigil mechanism with safeguards against victimisation and direct access to the Audit Committee Chairperson in appropriate cases; Details must be disclosed on the website, if any, and in the Board's report.

How to solve Secretarial Audit and Audit Committee Aspects questions

Questions on this topic are usually short cases. Decide first which provision is tested, then match the facts to its exact conditions.

1Identify the issue: secretarial audit (Section 204), audit committee (Section 177), or a comparison with statutory audit.
2Note the company type from the facts: listed or unlisted, public or private. Section 177(1) says listed public company; Section 204(1) says listed company.
3Check whether the facts bring in a 'prescribed class'. If thresholds are not given in the question, say the Rules prescribe them rather than guess.
4Apply the rule: who gives the report, where it is annexed, and the Board's duty to explain qualifications.
5For committees, count members and independent directors. Test minimum three and independent majority.
6For related party transactions, check approval, omnibus approval and the ₹1 crore voidable proviso.
7State the consequence: penalty of ₹2,00,000 under Section 204(4), or voidability and indemnity under Section 177.
8Close with a one-line conclusion that answers the question asked.

Quickest way: Three-check shortcut

When to use it: Use this for MCQs and for the opening lines of a descriptive answer.

Who: company secretary in practice for secretarial audit; Board-appointed committee for Section 177.
Where: secretarial audit report goes with the Board's report; Board explains every qualification.
Numbers: three directors, independent majority, ₹2,00,000 penalty, ₹1 crore and three months for unratified transactions.

Common mistakes in Secretarial Audit and Audit Committee Aspects

Saying the statutory auditor does the secretarial audit.
Both are called audits and both are annexed to the annual report.
Fix: Secretarial audit is by a company secretary in practice. The statutory auditor audits financial statements.
Saying audit committee is needed for every company.
Students remember the committee as general good governance.
Fix: Section 177(1) covers every listed public company and prescribed classes only.
Writing that the committee needs a majority of independent directors without the minimum of three.
Only half of Section 177(2) is remembered.
Fix: Write both: a minimum of three directors, with independent directors forming a majority.
Allowing auditors and KMP to vote in the committee.
Students confuse right to be heard with membership.
Fix: They have a right to be heard when the auditor's report is considered, but no vote.
Applying the penalty only to the company.
Penalty sections are usually remembered as company liability.
Fix: Section 204(4) also reaches every officer in default and the company secretary in practice.
Treating the ₹1 crore proviso as exempting small transactions from approval.
The amount limit looks like a threshold for exemption.
Fix: Approval is still needed. The proviso only says that an unratified transaction not exceeding ₹1 crore becomes voidable after three months.

Worked examples

Example 1

Ganga Textiles Ltd is a listed company. The Board's report for the year was approved without any secretarial audit report. Advise the company on the legal position and the consequence.

Show the solution

Section 204(1) applies to every listed company, so Ganga Textiles Ltd must have a secretarial audit.
The report must be given by a company secretary in practice in the prescribed form.
It must be annexed to the Board's report made under Section 134(3). Here it is missing, so this is a contravention.
Under Section 204(4), the company and every officer in default are liable to a penalty of ₹2,00,000.

Answer: Ganga Textiles Ltd has contravened Section 204. The company and every officer in default are each liable to a penalty of ₹2,00,000, and the company should get the report from a company secretary in practice and annex it.

Example 2

The Board of Narmada Power Ltd, a listed public company, has an audit committee of four directors, of whom two are independent. Is it validly constituted? Also, a director entered into a ₹60 lakh transaction without committee approval, and the committee did not ratify it for four months. What is the position?

Show the solution

Section 177(2) needs at least three directors, so four satisfies the minimum.
Independent directors must form a majority. Two of four is exactly half, not a majority.
So the committee is not validly constituted. At least three independent directors would be needed.
On the transaction, the amount of ₹60 lakh is within ₹1 crore, and it was entered into without approval.
It was not ratified within three months, so it is voidable at the option of the Audit Committee.
If it is with a related party of a director or authorised by another director, that director must indemnify the company against any loss.

Answer: The committee does not comply with Section 177(2) because independent directors are not a majority. The ₹60 lakh transaction is voidable at the committee's option, with the concerned director indemnifying the company in the cases stated.

Exam tips

Write the section number with the rule in the first line, and use only section numbers you are sure of.
In comparison questions, use points such as who does it, what is checked, and where it is reported.
For MCQs, watch the words 'listed company' versus 'listed public company', and 'majority' versus 'half'.
In case questions, count directors and independent directors before concluding.
Link to the Board's report: composition of the audit committee and unaccepted recommendations with reasons are disclosed there under Section 177(8).

Practice questions from Accounts and Audit

Secretarial Audit and Audit Committee Aspects in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Secretarial Audit and Audit Committee Aspects: frequently asked questions

Who needs to get a secretarial audit done?

Under Section 204(1), every listed company and other classes of companies as may be prescribed. The prescribed classes are set out in the Rules, so check them before answering a case on an unlisted company.

What is the difference between secretarial audit and statutory audit?

Secretarial audit is done by a company secretary in practice and looks at secretarial and related records and compliance. Statutory audit is done by the appointed auditor and reports on the financial statements. Both reports go with the annual reporting of the company.

What is the minimum size and composition of the audit committee?

Section 177(2) requires at least three directors, with independent directors forming a majority. Most members, including the Chairperson, must be able to read and understand financial statements.

Does the Board have to respond to the secretarial auditor's remarks?

Yes. Under Section 204(3), the Board must explain in full any qualification, observation or other remark in its report under Section 134(3).

Can the audit committee approve related party transactions in bulk?

Yes, a proviso to Section 177(4)(iv) allows omnibus approval for proposed related party transactions, subject to prescribed conditions.