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Audit Committee: Composition, Powers and Role under Companies Act

Updated 11 October 2026 · Fact-checked

The Audit Committee is a Board committee under Section 177 of the Companies Act, 2013. It has at least three directors, with independent directors forming a majority. It reviews financial statements, auditors, related party transactions, internal controls and vigil mechanism. Solve questions by stating the provision, applying the facts, then concluding.

Understand Audit Committee

The Audit Committee is a committee of the Board. Its job is to give the Board an independent check on financial reporting, auditors, internal controls and risk systems. Think of it as a filter between management and the Board on financial matters.

Under Section 177(1), the Board of every listed public company and such other classes of companies as may be prescribed must constitute it. The 'listed public company' wording was substituted by the 2018 amendment. Which unlisted companies are covered depends on the rules, so state that as 'prescribed classes' unless you recall the exact thresholds.

Under Section 177(2), it must have a minimum of three directors, with independent directors forming a majority. The proviso adds that a majority of members, including the Chairperson, must be able to read and understand financial statements. Do not confuse this with the Nomination and Remuneration Committee, which has three or more non-executive directors, at least one-half independent.

The committee works under written terms of reference set by the Board (Section 177(4)). These cover auditor recommendation and independence, review of financial statements, approval of related party transactions, scrutiny of loans and investments, valuation, internal financial controls and risk management, and end use of funds raised through public offers. It can investigate any matter in these areas, take outside professional advice and have full access to company records (Section 177(6)).

It differs from the Board. The Board manages the company and is accountable for all decisions. The committee is a subset, acts only within its terms of reference, and reports to the Board. The Board's report must disclose its composition and any recommendation the Board did not accept, with reasons (Section 177(8)).

Key rules to remember

Who must constitute it: Every listed public company + prescribed classes of companies; Section 177(1). Say 'prescribed' for unlisted classes.
Composition: Minimum 3 directors; independent directors = majority; Section 177(2). Majority including Chairperson must be able to read and understand financial statements.
Terms of reference: Written terms specified by the Board; Section 177(4). The listed items are 'inter alia', so not exhaustive.
Related party transactions: Audit Committee approves or modifies; omnibus approval allowed on prescribed conditions; Section 177(4)(iv) and its provisos.
Unapproved small transaction: Amount not exceeding ₹1 crore, not ratified within 3 months → voidable at the Committee's option; Applies where a director or officer entered it without approval. Director concerned indemnifies the company if the transaction is with a related party of a director or authorised by another director.
Right to be heard: Auditors and KMP: heard, no vote; Section 177(7), when the committee considers the auditor's report.
Vigil mechanism: Listed companies and prescribed classes; direct access to Audit Committee chairperson in appropriate or exceptional cases; Section 177(9) and (10). Disclose on website, if any, and in Board's report.
Penalty for contravention of Sections 177 and 178: Company: fine ₹1 lakh to ₹5 lakh; officer in default: penalty as stated in Section 178(8); Quote the company fine range; for officers, refer to the penalty in Section 178(8).

How to solve Audit Committee questions

Use this order for any Audit Committee question, whether it is theory or a case.

1Identify what is asked: constitution, composition, functions, powers, approvals or penalty.
2State the provision: Section 177 and the relevant sub-section, in plain words.
3Check whether the company is covered: listed public company or a prescribed class.
4Apply the facts: count total members, independent members and who can read financial statements.
5For transactions, check whether the Committee approved, and whether the ₹1 crore and 3 month proviso applies.
6Conclude clearly: compliant or not, and what the company should do.
7Add a practical point: update terms of reference, disclose in the Board's report, or file or record as needed.

Quickest way: Three-line Audit Committee check

When to use it: Short case questions where you must decide whether a committee is validly constituted.

Count: at least 3 directors?
Independent directors: more than half of members?
Check the Chairperson and majority for financial literacy.
Then state the consequence: contravention of Section 177 attracts the Section 178(8) penalty.

Common mistakes in Audit Committee

Saying independent directors must be two-thirds or at least one-half of the Audit Committee.
Mixing up the Audit Committee with the Nomination and Remuneration Committee.
Fix: Audit Committee: independent directors form a majority. NRC: not less than one-half independent.
Saying the Audit Committee consists of non-executive directors only.
Borrowing wording from Section 178.
Fix: Section 177(2) only says minimum three directors with independent directors in majority.
Treating the list in Section 177(4) as complete.
Memorising the items as a fixed list.
Fix: The terms of reference shall 'inter alia' include these items, so the Board may add more.
Giving the Audit Committee voting rights to auditors and KMP.
Confusing the right to be heard with membership.
Fix: They may be heard when the auditor's report is considered but cannot vote.
Ignoring the ₹1 crore ratification rule for related party transactions.
Students recall only the approval requirement.
Fix: Remember the amount limit, the 3 month ratification window, voidability and the director's indemnity.
Stating the Audit Committee can override the Board.
Assuming independence means final authority.
Fix: It recommends and reviews. If the Board does not accept a recommendation, it must disclose this with reasons in the Board's report.

Worked examples

Example 1

Surya Textiles Ltd, a listed public company, has an Audit Committee of four directors: two independent directors and two executive directors. Is it validly constituted?

Show the solution

Provision: Section 177(2) requires a minimum of three directors with independent directors forming a majority.
Facts: total members are 4, so the minimum number is met.
Majority means more than half. Half of 4 is 2, and independent directors are only 2, so they are not a majority.
Conclusion: composition does not comply.

Answer: The committee has enough members but not an independent majority, so it contravenes Section 177(2). The company should add an independent director or replace an executive director. Contravention attracts the penalty under Section 178(8).

Example 2

An officer of Bharat Foods Ltd enters into a ₹80 lakh transaction with a related party of a director without the Audit Committee's approval. The Committee does not ratify it within three months. What is the position?

Show the solution

Provision: under Section 177(4)(iv), related party transactions need Audit Committee approval.
Third proviso: a transaction not exceeding ₹1 crore, entered into by a director or officer without approval and not ratified within three months, is voidable at the Committee's option.
Facts: ₹80 lakh is within ₹1 crore, and three months have passed without ratification.
Because the transaction is with a related party of a director, the director concerned must indemnify the company against any loss.
Section 188 transactions are treated separately, so check whether it is also covered there.

Answer: The transaction is voidable at the Audit Committee's option. The director concerned must indemnify the company for any loss from it.

Exam tips

Write the section number 177 early; examiners look for provision first.
Always compare Audit Committee composition with NRC composition if asked for differences.
In case questions, count members in numbers before concluding.
For differences between Audit Committee and Board, cover role, accountability, powers, composition and reporting line.
Close with a compliance point such as disclosure of composition in the Board's report.

Practice questions from Board Committees

Audit Committee 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: frequently asked questions

What is the minimum number of members in an Audit Committee?

Section 177(2) requires at least three directors. Independent directors must form a majority of the members.

Which companies must have an Audit Committee?

Every listed public company and such other classes of companies as may be prescribed. Check the rules for unlisted thresholds.

Does the Act fix a quorum for the Audit Committee?

The text supplied for Section 177 does not state a quorum for the committee. Section 174 gives the Board quorum of one-third of total strength or two directors, whichever is higher. Do not apply that to the committee unless the rules or Board's terms say so.

What is the difference between the Audit Committee and the Board?

The Board manages the company and is responsible for all decisions. The Audit Committee is a subset of directors that works within the Board's written terms of reference, reviews financial and control matters and makes recommendations. The Board must disclose any recommendation it does not accept.

Can the Audit Committee take outside advice?

Yes. Section 177(6) lets it investigate matters within its scope, obtain professional advice from external sources and have full access to company records.