Audit Committee and their Function and Responsibility

A Project of BECG
Submitted in partial fulfillment of the
Requirements for the award of the

Post-Graduate Diploma in Business Management

Submitted By:-
Sneha Kapoor, Roll No: 09209,
Riya Ghosh, Roll No: 09301,
Amritanshu, Roll No: 09253,
Ashutosh Sarkar, Roll No: 09260,
Rahul Bhatia,Roll No:09278,
Samit Sinha,Roll no:09282
(Batch: 2009-10)

Submitted to:-
Dr. S.R Dash
(Prof.of IMS GZB)
 Introduction
In today's complex world, the Audit Committee can contribute tremendously
to a 'no surprise' environment. An effective Audit Committee should be a
key feature in a strong, effective governance culture and bring significant
benefits to the Company. Carefully designed practices can also help the
Audit Committee to maximise its contribution to the ABC Company.
Developing practices which are based on robust principles - whether terms
of reference, recruiting the right members, or focused agendas and rigorous
processes - is fundamental in fulfilling the Audit Committee's
responsibilities. This handbook articulates the principles underlying the role
of the Audit Committee. It provides guidance to help Audit Committee
members to gain a better understanding of the processes and issues that drive
effective oversight of risk management, control and governance, and of
economy, efficiency and effectiveness. The main focus of the Audit
Committee’s work is related to internal control matters, such as the
safeguarding of assets, the maintenance of proper accounting records and the
reliability of financial information. Today, the Audit Committee’s primary
role is to conclude upon the adequacy and effective operation of the ABC
Company’s overall internal control system. In performing that role the Audit
Committee’s work will predominantly focus upon the framework of risks,
controls and related assurances that underpin the delivery of the Company’s
objectives (the Assurance Framework). As a result, the Audit Committee has
a pivotal role to play in reviewing the disclosure statements that flow from
the Company’s assurance processes. In particular these cover the Statement
on Internal Control, included in the Annual Financial Statements. Both of
these documents should come to the Audit Committee before being
submitted for approval to the Board. It is the responsibility of the Board of
Directors to establish and maintain processes for governance. The Audit
Committee independently monitors, reviews and reports to the Board of
Directors on the processes of governance and, where appropriate, facilitates
and supports, through its independence, the attainment of effective
processes. THE INVOLVEMENT of audit committees in overseeing the
audit function, as well as in the implementation of audit recommendations,
needs to undergo a significant change, highlights the Ernst and Young
India Internal Audit Survey2009. The survey captures views of audit
committee members, heads of finance and internal audit functions
representing a hundred companies on challenges faced and how they are
meeting evolving and diverse expectation
In the context of turbulent times facing world economies, rapidly changing
business environment and increasing incidents of corporate wrongdoings,
Ernst & Young conducted this survey with an aim to identify emerging
trends in the Indian internal audit profession and to gain better understanding
of governance issues concerning companies. The survey finding underscores
the role of governance in preventing distressing corporate incidents and calls
for the function of internal audit to evolve in order to meet today's dynamic
assurance needs.Survey findings showcase that while 78 per cent of the
companies confirmed that the audit committee approves the scope of the
audit plan, only about a half (53 per cent) affirmed that it was involved in
monitoring the resolution of audit issues and the implementation of
recommendations.Leading practices now suggest that the head of internal
audit should report to the audit committee functionally. Survey findings
indicate that the head of internal audit reports to the audit committee in less
than half of the companies (44 per cent) surveyed and a significant 57 per
cent report to the CEO or the CFO instead.

Ram Sarvepalli, partner and national director, Business Risk Services, Ernst
& Young stated, "The audit committee is one of the key pillars of corporate
governance and the oversight it provides is an important driver in the
reservation of shareholder value. Deeper involvement of audit committees is
essential to improve the perception of the importance and quality of work
delivered by the internal audit function. The agreement and involvement
of audit committees in setting the scope of the internal audit function and
other assurance functions is critical to ensure that there are no unaddressed
assuranceneeds." Less than 30 per cent of the companies affirmed that
their audit committees meet their internal auditors at every audit committee
meeting. While 90 per cent of the companies that responded confirmed that
their internal audit function does interact with their statutory audit and other
internal risk management functions, a significant number of organisations do
not have a structured schedule for internal and external audit to liaise with
eachother.Despite the increased focus on risk assessments, the report
highlights that fraud risk assessments are not taken into account to create the
annual audit plan in roughly half of the respondent companies. Findings
show that 51 per cent of the companies that responded stated that a fraud
risk assessment was not taken into account while creating their audit plan
and 44 per cent confirmed that fraud-detection procedures are not included
in the work plan for most audits.An area of concern, however, is that despite
the increasing dependence of organisations on IT systems in today's world,
over a third (36 per cent) of the companies indicated that an IT risk
assessment is not taken into account while creating their audit plan.
Sophisticated IT systems now form the backbone of operations in most
companies, yet the survey clearly shows a dearth of IT auditors and a low
percentage of companies performing an IT risk assessment before finalising
their internal audit plans.A significant proportion of the organisations
surveyed indicated that the internal audit charters covering their mission,
objectives and scope have not been finalised while only 25 per cent of
companies confirmed that they have standard audit plans for all the
processes reviewed in their organisations, highlighting a cause for concern
as it could impact the consistency in the quality of audits.

Despite current economic realities, we found that almost 48 per cent of the
companies surveyed confirmed that their internal audit budgets have
increased. These results are encouraging, as they indicate that assurance
activities are not being reduced despite the slowdown in growth. The
slowdown, as well as the current focus on governance, has also added more
items to the already full agenda of internal audit, which is now expected to
assist in cost reduction activities in over half (54 per cent) the companies
surveyed. Working capital management, counter party risk and CAPEX
reassessments are other key areas that have been added to the focus areas of
internal audit this year.

"Internal audit functions across the world are facing new challenges.
Consistent and high quality audit work is a driving factor for internal audit
to be seen as a value-adding function within organisations. The strategy,
objectives and plans of the internal audit function need to be aligned to an
organisation's business objectives, overall approach to risk management and
the expectations of the audit committee and executive management.
Corporate Governance Through Audit Committees
The Audit Committee of the Board is today seen as a key fulcrum of any
company. Being mandatory under Clause 49 and section 292A of the
Companies Act -1956, the Audit Committee can be of great help to Board in
implementing, monitoring and continuing good corporate governance
practices to the benefit of the company and its stakeholders.
The Audit Committee is formed to regularly review processes
and procedures to ensure the effectiveness of internal control systems so that
the accuracy and adequacy of the reporting of financial results is maintained
at high level at all times. It is important for the members of Audit
Committee to have formal knowledge of accounting and financial
management or experience of interpreting financial statements.

Provisions of Audit Committees and Its Formation

As required by section 292A of the Companies Act, 1956, every public
limited company (listed or unlisted) having a paid-up capital of at least Rs. 5
crore shall constitute a Committee of the Board to be known as Audit
Committee. The Audit Committee is formed by the members of the Board’s
of Director.
The provisions in respect of the same are as follows:
1) Committee members are drawn from members of the Company's board of
directors, with a Chairperson selected from among the members.
2) The Chairperson should be an independent Director.
3) The Committee shall have at least three (3) members (directors).
4) Two-third (2/3) of the members shall be non-executive directors.
5) The Board of Directors shall prescribe the Committee’s terms of reference
in writing.
6) Auditors—internal and external—and Director (Finance) shall attend the
meeting but not have right to vote.
7) The Chairman of the Audit Committee shall attend the annual general
meeting to provide clarifications on matters relating to audit.
8) The constitution and composition of the Audit Committee is to be
disclosed in the annual report of the Company.
9) Any default in complying with the provision of section 292A may attract
imprisonment up to one year or fine up to Rs. 50000 or both. The
prosecution lies against the company and every officer of the company who
is in default. The offence is compoundable under section 621A.
10)The Listing Agreement requires at least one director having financial
management and accounting knowledge expertise to be a member of Audit
Committee while other members should be financially literate. Section
292A(5).
Functions of Audit Committee under Section 292A
The Audit Committee constituted under this section shall act in accordance
with terms of reference to be specified in writing by the Board. The Audit
Committee should have periodic discussions with the auditors about the
following matters:
(a) Internal Control System.
(b) Scope of audit including the observation of auditors.
(c) Review the half-yearly and annual financial statement before submission
to the Board.
(d) Compliance of internal control system.
The Audit Committee shall also have authority to investigate into the
matters in relation to the items specified in this section or matters referred to
it by the Board of Directors. To carry out such investigation the Audit
Committee will have full access to information contained in the records of
the Company and external professional advice, if necessary. The
recommendations of the Audit Committee on any matters relating to
financial management including the audit report shall be binding on the
Board. In case the Board does not agree with the recommendations made by
the Audit Committee, the Board shall record the reasons for disagreement
and communicate the same to the shareholders to be reported in Annual
General Meeting.
Functions of Audit Committee under Clause 49

Revised clause 49 of the listing agreement provides for specific

requirements of an Audit Committee. The companies shall be required to
comply with the requirements of clause 49 in relation to Audit Committees,
viz:
Audit Committee stands upon four fundamental pillars to discharge its
functionsl
• Financial Management including responsibility, integrity, objectivity of
information of financial reports and transparency in disclosures.
• Auditing –
- Internal
- External
• Legal compliance to ensure –
- Legal compliance
- Charter compliance
- Audit independence
- Review and assessment of financial implications of litigations and claims
against the Company Ensuring security of assets accounting standards and
going concern.
Communication and quality assurance –
- With shareholders
- Presentation of Board of Directors
- Quarterly reviews
- Compliance of Accounting Standards
- Preparation and improvement in the Audit Committee charter
- Selection of members of the Audit Committee
- Appraisal and performance review

Generally the major Functions of Audit Committee are as follows:

* overseeing the Company’s financial reporting process and disclosure of
financial information to ensure that the financial statements are correct,
sufficient and credible,
* recommending the appointment and removal of external auditor, fixation
of audit fee and approval for payment of any other services,
* reviewing with the Management the annual financial statements before
submission to the Board,
* reviewing with the Management the annual financial statements of the
subsidiary companies,
* reviewing with the Management and the external and internal auditors, the
adequacy of internal control systems,
* reviewing the adequacy of internal audit function,
* discussing with internal auditors any significant finding and follow up on
such issues,
* reviewing the findings of any internal investigations by the internal
auditors in matters where there is suspected fraud or irregularity, or a failure
of internal control systems of a material nature, and then reporting such
matters to the Board,
 Role and Responsibilities of the Audit Committee
The Audit Committee shall support the Board of Directors and the
Managing Director by reviewing the comprehensiveness of assurances in
meeting the Board of Directors and Managing Director’s assurance needs,
and reviewing the reliability and integrity of these assurances.

2. Membership, Independence, Objectivity and Understanding

The Audit Committee shall be independent and objective; in addition each
member shall have a good understanding of the objectives and priorities of
the organisation and of their role as the Audit Committee member.

3. Skills
The Audit Committee shall corporately own appropriate skills to allow it to
carry out its overall function. The role of the Audit Committee in relation to
Internal Audit shall include advising the Board of Directors and Managing
Director on:

• The Audit Strategy and periodic Audit Plans, forming a view on how well
they support the Chief Audit Executive’s responsibility to provide an annual
opinion on the overall adequacy and effectiveness of the Company’s risk
management, control and governance processes.

• The results of Internal Audit work, and management response to issues

raised by that work.
• The resourcing of Internal Audit.
• The Terms of Reference (or equivalent) for Internal Audit.
Whilst the work of the External Auditor is not primarily conducted for the
benefit of the Company or its Audit Committee, the Audit Committee shall
nevertheless engage with the activity of the External Auditor. As well as
considering the results of external audit work, they shall enquire about and
consider the External Auditor’s planned approach and the way in which the
External Auditor is co-operating with Internal Audit to maximise overall
audit efficiency, capture opportunities to derive a greater level of assurance
and minimise unnecessary duplication of work.

The role of the audit committee shall include the following:

Failure to notice of the company’s financial reporting process and the

disclosure of its financial information to ensure that the financial statement
is correct, sufficient and credible. Recommending to the Board, the
appointment, re-appointment and, if required, the replacement or removal of
the statutory auditor and the fixation of audit fees. Approval of payment to
statutory auditors for any other services rendered by the statutory auditors.
Reviewing, with the management, the annual financial statements before
submission to the board for approval, with particular reference to:

Matters required being included in the Director’s Responsibility Statement

to be included in the Board’s report in terms of Clause 2AA of Section 217
of the Companies Act, 1956.The term “related party transactions” shall have
the same meaning as contained in the Accounting Standard 18, Related
Party Transactions, issued by the Institute of Chartered Accountants of
India. If the company has set up an audit committee pursuant to provision of
the Companies Act, the said audit committee shall have such additional
functions/ features as is contained in this clause.

The Audit Committee should have discussions with the auditors periodically
about internal control systems, the scope of audit including the observations
of the auditors and review the half-yearly and annual financial statements
before submission to the Board and also ensure compliance of internal
control systems. The Audit Committee shall have authority to investigate
into any matter in relation to the items specified in this section or referred to
it by the Board and for this purpose, shall have full access to information
contained in the records of the company and external professional advice, if
necessary
 Conclusion:

From the above discussions made, it is felt that, corporate governance is

about commitment to values and about ethical business conduct. This
includes company in culture, policies, timely and accurate disclosure of
financial information. Hence the corporate sector needs resource persons to
act as independent director on who shoulder lies the responsibility to take
the company in the right path. Independence is a quality that a person
nurtures from the beginning of his life and as it is very difficult to acquire it
by training. Moreover the compensation package is a pittance to the
independent directors considering the draconic attendant responsibilities and
liabilities under various statues. Needless to say that good corporate
governance starts from the top to percolate to the bottom. The best
example is Mr. N.R. Narayana Murthy, Former Chairman and Chief Mentor,
Infosys Technology Limited. In a nutshell, The Auditors should act as the
monitor to the whole system to ensure adherence to ethical value, which is
the backbone of the corporate governance.
 BIBLIOGRAPHY
Links:-
content.dell.com/in/en/.../leadership-audit-committee-charter.aspx

www.articlesbase.com/.../role-of-audit-committee-on-corporate-governance

Books:-

 The audit committee handbook by Louis Braiotta ja.(4th edition)

 Principles of Auditing and Assurance Services by Ray Whittington