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CA Final · Advanced Auditing, Assurance and Professional Ethics · Internal Audit

Arjun Industries Ltd. is a listed public company. Its audit committee has three directors, of whom one is independent. The internal auditor reports to this committee. A chartered accountant reviewing governance observes this composition. What is the correct conclusion under section 177 of the Companies Act, 2013?

The composition is non-compliant. Section 177(2) requires an audit committee of at least three directors with independent directors in a majority. One independent director out of three is not a majority, and neither the internal auditor's reporting line nor the committee size cures this.

  1. ACompliant, since a minimum of three directors is the only requirement
  2. BCompliant, because the internal auditor's reporting line substitutes for independence
  3. CNon-compliant, because independent directors must form a majority of the audit committeeCorrect
  4. DNon-compliant, because the committee must have at least five directors

Explanation

Section 177(2) requires at least three directors with independent directors forming a majority. Here one of three is independent, so there is no majority. The minimum size is three, not five. The internal auditor's reporting line has no bearing on the composition requirement.

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