## Audit Committee – Constitution and Functions [Section 177]

### Which Companies Must Constitute an Audit Committee?

The following public companies must constitute an Audit Committee (including listed public companies):

Criterion	Threshold
Turnover	≥ ₹100 crores
Paid-up capital	≥ ₹10 crores
Outstanding loans/borrowings/debentures/deposits (aggregate)	≥ ₹50 crores

---

### Functions of the Audit Committee

1. Auditor-related:

Making recommendations for appointment, remuneration, and terms of appointment of the auditor.
Reviewing and monitoring auditor independence, performance, and effectiveness of the audit process.

2. Financial Statements:

Examination of financial statements and the auditor's report thereon.

3. Risk and Controls:

Evaluation of internal financial controls and risk management systems.

4. Transactions and Investments:

Scrutiny of inter-corporate loans and investments.
Approval or subsequent modification of transactions of the company with related parties.

5. Assets and Funds:

Valuation of assets of the company.
Monitoring the end-use of funds raised through public offers and related matters.

Worked example

### Example 1

Example: A public company has a paid-up capital of ₹8 crores, turnover of ₹120 crores, and no outstanding borrowings. Must it constitute an Audit Committee?

Answer: Yes. Even though paid-up capital (₹8 crores) is below ₹10 crores, the turnover of ₹120 crores (≥ ₹100 crores) independently triggers the requirement.

### Example 2

Example: The Audit Committee recommends Auditor X. Can the Board reject this recommendation?

Answer: The Board may disagree but must refer the matter back to the Audit Committee with reasons. If the AC still does not reconsider, the Board records its reasons and sends its own recommendation to members in the AGM.

⚠️ Common exam mistakes

Applying the Section 177 thresholds to private companies — Section 177 applies only to public companies (including listed).
Listing functions without explaining the auditor-recommendation flow (AC → Board → AGM), which is separately governed by Rule 3 of CAAR 2014.
Confusing 'scrutiny of inter-corporate loans' (audit committee function) with approval of inter-corporate loans (board/shareholder function under Section 186).

Bare-Act text Section 177 · Companies Act, 2013 · click to expand

The Board of Directors of every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →