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CMA Intermediate · Corporate Accounting and Auditing · Statutory Audit under the Companies Act, 2013

A listed public company's Audit Committee has six members. Which composition satisfies section 177(2) and its proviso on financial literacy?

Four independent directors out of six, with a majority of members including the Chairperson able to read and understand financial statements, satisfies section 177(2). Independent directors must form a majority, and three of six would not be a majority.

  1. ATwo independent directors, four others; majority including Chairperson able to read financial statements
  2. BFour independent directors, two others; majority including Chairperson able to read and understand financial statementsCorrect
  3. CThree independent directors, three others; all can read financial statements
  4. DFour independent directors, two others; only the two non-independent members can read financial statements

Explanation

Section 177(2) requires at least three directors with independent directors forming a majority. Six members need at least four independent. The proviso requires a majority including the Chairperson to be able to read and understand financial statements. Three of six is not a majority, so the third option fails.

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