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Compliance Management, Audit and Due Diligence · Concepts of Various Audits

Audit Committee and Audit Standards: Composition, Role and SAs

Updated 11 October 2026 · Fact-checked

The audit committee is a board committee that oversees financial reporting, auditors, internal controls and related party dealings. Section 177 and SEBI LODR set its composition and role. Standards on Auditing (SAs) and Secretarial Standards (SS) set the minimum professional practice. To answer, state the provision, apply it to the facts, then conclude.

Understand Audit Committee and Audit Standards

An audit committee is a committee of the board. It acts as a watchdog on financial reporting and audit. It gives the board an independent check on management, so the board does not rely only on executives and auditors.

Under the Companies Act, 2013, Section 177 requires the audit committee for listed companies and for prescribed classes of public companies. Under Section 177(2), the committee must have a minimum of three directors, with independent directors forming a majority. The majority of the members, including the chairperson, must be able to read and understand financial statements. The Act does not require the chairperson to be an independent director. The committee works under a written terms of reference, and it oversees the vigil mechanism through which directors and employees report concerns.

For listed companies, SEBI LODR (Regulation 18 and Part C of Schedule II) adds more detail. The committee has at least three directors, with two-thirds of the members being independent directors (Regulation 18(1)(b)). All members must be financially literate, that is, able to read and understand financial statements, and at least one member must have accounting or related financial management expertise (Regulation 18(1)(c)). The chairperson must be an independent director and must be present at the annual general meeting to answer shareholder queries (Regulation 18(1)(d)). The quorum is two members or one-third of members, whichever is higher, with at least two independent directors present (Regulation 18(2)(b)). The committee must meet at least four times a year, with no more than 120 days between two meetings (Regulation 18(2)(a)). Its role covers financial statements, auditor appointment and fees, related party transactions, internal control review, and whistle blower mechanism. Check the latest text before you write numbers in the exam.

Standards on Auditing (SAs) are issued by ICAI and set the basic principles and procedures an auditor must follow. Section 143(10) of the Companies Act makes it mandatory to follow the SAs. They are grouped in series, such as 200 series on general principles and responsibilities, 300 series on risk assessment, 500 series on audit evidence, 700 series on reporting. Secretarial Standards (SS-1 on board meetings and SS-2 on general meetings) are issued by ICSI. Section 118(10) requires companies to observe them. Secretarial auditors report on this observance.

Together, these give a layered system. The audit committee supervises the process, the SAs govern how auditors work, and the SS govern how the board and members' meetings are run and recorded.

Key rules to remember

Composition under Section 177
Minimum 3 directors; independent directors form the majority; majority of members, including the chairperson, able to read and understand financial statements (Section 177(2))
Applies to listed companies and prescribed public companies. Chairperson is not fixed as independent in the Act text itself, while LODR requires it.
Composition under SEBI LODR (Reg. 18)
Minimum 3 directors; ⅔ of members independent (Reg. 18(1)(b)); all members financially literate and at least one with accounting or financial management expertise (Reg. 18(1)(c)); chair independent and present at the AGM (Reg. 18(1)(d))
Applies to listed entities. Two-thirds is a stricter test than a simple majority. Financially literate means able to read and understand financial statements.
Quorum under LODR
Higher of 2 members or ⅓ of members, with at least 2 independent directors (Reg. 18(2)(b))
Both parts of the test must be met.
Meeting frequency under LODR
At least 4 meetings a year; gap between two meetings not more than 120 days (Reg. 18(2)(a))
Compare with the Companies Act, which leaves frequency to the terms of reference.
Mandatory standards
SA: Section 143(10); SS: Section 118(10)
SAs bind the auditor; SS bind the company and its board.
Key audit committee roles
Recommend auditor; review financials; approve related party transactions; scrutinise inter-corporate loans; review internal control; evaluate valuation; oversee vigil mechanism
Use as a checklist when listing the role in an answer.

How to solve Audit Committee and Audit Standards questions

Use this method for a case or theory question on the audit committee, SAs or Secretarial Standards.

  1. 1Identify what is asked: composition, role, meetings, or standards.
  2. 2Decide whether the company is listed. If yes, apply both Section 177 and SEBI LODR; the stricter rule governs.
  3. 3State the provision in plain words with the exact numbers.
  4. 4Apply it to the facts: count directors, count independent directors, check quorum and gaps between meetings.
  5. 5Spot the breach or the right action, such as reconstituting the committee.
  6. 6Link to the relevant SA or SS if the facts involve an audit procedure or meeting.
  7. 7Conclude clearly and add the practical step: board resolution, filing, disclosure or minutes.

Quickest way: Count, compare, conclude

When to use it: For short case questions on composition or quorum when time is short.

  1. Write the total number of members and the number of independent directors.
  2. Compare with the rule: 3 minimum, majority independent (Act), two-thirds independent (LODR).
  3. Check quorum: higher of 2 or one-third, with 2 independent.
  4. Write the verdict in one line, then the remedy.

Common mistakes in Audit Committee and Audit Standards

  • Applying only the Companies Act rule to a listed company.

    Students remember Section 177 and forget LODR.

    Fix: For a listed company always give both. State that LODR's two-thirds independence is stricter than a majority.

  • Writing that the quorum is simply two members.

    Half of the rule is remembered.

    Fix: Write: higher of two members or one-third, with at least two independent directors present.

  • Mixing up the 120-day gap with a 120-day total period.

    The wording is read quickly.

    Fix: Say at least four meetings a year, and not more than 120 days between any two.

  • Treating SAs as optional guidance.

    The word standard feels like a suggestion.

    Fix: Cite Section 143(10): the auditor must follow the SAs. Departures must be justified.

  • Confusing who issues SAs and SS.

    Both are called standards.

    Fix: SAs are issued by ICAI for auditors. SS are issued by ICSI for board and general meetings.

  • Listing the role of the committee without applying it to the facts.

    Memorised lists feel safe.

    Fix: Pick the roles that match the facts, such as related party approval, and apply them.

Worked examples

Example 1

Sundaram Textiles Ltd, a listed company, has an audit committee of four directors: two independent and two executive. The chair is an independent director. Is the committee properly constituted? Advise.

Show the solution
  1. The company is listed, so both Section 177 and SEBI LODR apply.
  2. Section 177 needs at least three directors with independent directors in the majority. Two of four is not a majority.
  3. LODR needs at least two-thirds independent. Two-thirds of four is 2.67, so at least three of the four members must be independent.
  4. The committee has only two independent directors, so it fails both tests.
  5. The chair being independent satisfies only one requirement.

Answer: The committee is not properly constituted. The board should reconstitute it so that at least three of the four members are independent, for example by replacing one executive director with an independent director, and make the required disclosure.

Example 2

The audit committee of Kaveri Pharma Ltd, a listed company, has six members. At a meeting, three members attended, of whom one was an independent director. Was the quorum met?

Show the solution
  1. Quorum under LODR is the higher of two members or one-third of six members.
  2. One-third of six is two. So the higher figure is two.
  3. Attendance of three satisfies the count test.
  4. The second test needs at least two independent directors present. Only one attended.
  5. Both tests must be met, so the second fails.

Answer: The quorum was not met because fewer than two independent directors were present. The meeting did not have a valid quorum. The matters should be placed before a duly constituted meeting with proper attendance.

Exam tips

  • For listed companies give both the Act and LODR rules, then say which is stricter.
  • Write exact numbers: three members, two-thirds, four meetings, 120 days.
  • In case questions count directors first, then conclude.
  • Mention SA and SS only with the right issuer and section.
  • Close answers with the practical step the board or CS should take.

Practice questions from Concepts of Various Audits

Audit Committee and Audit Standards in other exams

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

Audit Committee and Audit Standards: frequently asked questions

What is the minimum size of an audit committee?

It must have at least three directors. Under the Companies Act, independent directors form the majority. Under SEBI LODR for listed entities, two-thirds of the members must be independent.

Who should chair the audit committee of a listed company?

An independent director must chair it under Regulation 18(1)(d) of SEBI LODR. The same regulation requires the chairperson to be present at the annual general meeting to answer shareholder queries.

Are Standards on Auditing mandatory?

Yes. Section 143(10) of the Companies Act requires auditors to follow the SAs. They are issued by ICAI.

What is the difference between SAs and Secretarial Standards?

SAs are ICAI standards that guide how auditors conduct an audit. Secretarial Standards are ICSI standards on board and general meetings that companies must observe.