In the ever-evolving regulatory landscape, the Audit Committee plays a crucial role in strengthening corporate governance, ensuring transparency, and enhancing stakeholder confidence. If your company falls under the purview of Section 177 of the Companies Act, 2013 or Regulation 18 of the SEBI (LODR) Regulations, 2015, you’re required to establish and maintain a well-functioning Audit Committee.
But are you truly compliant?
This blog provides two separate compliance checklists — one for listed companies under both the Companies Act, 2013 and SEBI LODR Regulations, and another for unlisted public companies under just the Companies Act, including the requirement to establish a vigil mechanism, a crucial component for ethical corporate behaviour.
Section A: Audit Committee Checklist for Listed Companies
Governing Laws:
- Section 177 of the Companies Act, 2013
- Regulation 18 read with Schedule II Part C of the SEBI (LODR) Regulations, 2015
- Terms of Reference of Audit Committee
1. Applicability
| Requirement | Status |
|---|---|
| Entity is listed on any recognized stock exchange | ☐ |
2. Composition of Committee
| Requirement | Compliance |
|---|---|
| Minimum 3 directors | ☐ |
| At least 2/3rd Independent Directors | ☐ |
| All members are financially literate | ☐ |
| At least 1 member has financial/accounting expertise | ☐ |
| Chairperson is an Independent Director | ☐ |
| Company Secretary acts as secretary to the committee | ☐ |
3. Meetings
| Requirement | Compliance |
|---|---|
| Minimum 4 meetings per year | ☐ |
| Gap between two meetings ≤ 120 days | ☐ |
| Quorum: 2 members or 1/3rd of total strength (whichever is greater), with at least 2 Independent Directors | ☐ |
| Chairperson should attend the AGM to answer shareholder queries | ☐ |
4. Responsibilities
| Core Duties | Compliance |
|---|---|
| Review quarterly & annual financial statements and auditor’s report thereon | ☐ |
| Recommend appointment, remuneration & terms of appointment of auditors | ☐ |
| Approval of payment to statutory auditors for any other services rendered by them | ☐ |
| Review performance of statutory and internal auditors | ☐ |
| Evaluate auditor’s independence | ☐ |
| Make omnibus approval for Related Party Transactions | ☐ |
| Approve/modify/ratify Related Party Transactions | ☐ |
| Oversee internal audit and evaluate internal controls | ☐ |
| Review the whistle-blower mechanism | ☐ |
| Scrutinize inter-corporate loans/investments | ☐ |
| Valuation of assets/undertakings when required | ☐ |
| Review risk management systems | ☐ |
| Approval of appointment of CFO | ☐ |
| Review management discussion & analysis | ☐ |
| Review management letters / letters of internal control weaknesses issued by the statutory auditors | ☐ |
| Review statement of deviations from fund utilization | ☐ |
5. Disclosures
| Item | Status |
|---|---|
| Disclosure in Annual Report | ☐ |
| Vigil mechanism disclosure on website | ☐ |
| Composition of Audit Committee on website | ☐ |
| Disclosure of recommendation of Audit Committee not accepted by Board along with reasons in Board Report | ☐ |
| Brief description of Terms of Reference along with composition and details of Meetings in Corporate Governance Report | ☐ |
Section B: Audit Committee Checklist for Unlisted Public Companies
Governing Law:
- Section 177 of the Companies Act, 2013
1. Applicability
| Requirement | Status |
|---|---|
| Paid-up capital ≥ ₹10 crore | ☐ |
| Turnover ≥ ₹100 crore | ☐ |
| Outstanding loans/debentures/deposits ≥ ₹50 crore | ☐ |
If any one of the above is true, an Audit Committee is mandatory.
Exemption: Wholly owned subsidiary
2. Composition of Committee
| Requirement | Compliance |
|---|---|
| Minimum 3 directors | ☐ |
| Majority are Independent Directors | ☐ |
| Majority of members of Audit Committee including its Chairperson should be financially literate | ☐ |
3. Meetings
| Requirement | Compliance |
|---|---|
| No minimum frequency specified (recommended: 4 per year) | ☐ |
| Quorum: Nothing specified but minimum 2 members required to conduct a meeting | ☐ |
4. Responsibilities
| Core Duties | Compliance |
|---|---|
| Review financial statements before Board approval | ☐ |
| Recommend appointment, remuneration & terms of appointment of auditors | ☐ |
| Ensure auditor independence and audit quality | ☐ |
| Make omnibus approval for Related Party Transactions | ☐ |
| Approve/modify/ratify Related Party Transactions | ☐ |
| Scrutinize inter-corporate loans and investments | ☐ |
| Monitor internal control and risk management systems | ☐ |
| Valuation of assets/undertakings when required | ☐ |
| Oversee functioning of the vigil mechanism | ☐ |
| Monitor fund usage if raised through public means | ☐ |
5. Disclosures
| Item | Status |
|---|---|
| Disclosure in Board Report | ☐ |
| Disclosure of recommendation of Audit Committee not accepted by Board along with reasons in Board Report | ☐ |
| Vigil mechanism disclosure on website, if any | ☐ |
Section C: Vigil Mechanism
| Type of Company | Vigil Mechanism Required? |
|---|
| Listed Company | ✅ Yes |
| Unlisted Public Co. (which accept deposit from public or which have borrowed money from banks and public financial institutions>50 Cr. | ✅ Yes |
FAQs
1. Is a private company required to form an Audit Committee?
No, there is no mandatory requirement for private companies under the Companies Act, 2013 to constitute an Audit Committee. However, they may choose to do so as a governance best practice.
2. Can an Executive Director be part of the Audit Committee?
Yes, but the majority of members must be Independent Directors. Executive Directors can be part of the committee if the composition requirements are met.
3. What happens if a company fails to comply with Audit Committee provisions?
Non-compliance can result in:
- Penalties under the Companies Act and/or SEBI LODR
- Regulatory scrutiny
- Investor distrust and reputational damage. It’s always advisable to comply to avoid legal and financial consequences.
4. Can Related Party Transactions (RPTs) be ratified after they have already been executed?
Only under specific circumstances. RPTs should ideally be approved in advance by the Audit Committee. If executed without prior approval, they must be ratified within 3 months, or else they become voidable at the option of the Audit Committee.
5. What if the Audit Committee doesn’t have enough independent directors due to a vacancy?
This can lead to non-compliance, especially for listed entities. The company must fill the vacancy in the Audit Committee within 3 months as per SEBI LODR.
6. Is it mandatory to record minutes of Audit Committee meetings separately from Board meetings?
Absolutely. Audit Committee meetings must have their own set of minutes, which should be signed by the Chairperson and placed before the Board for noting. Combining them with Board minutes would be a compliance lapse.
7. Can the same independent director serve on Audit Committees of multiple companies?
Yes, but per SEBI and corporate governance norms, it must not compromise their availability, objectivity, or independence. Listed companies must ensure compliance with Regulation 26(1) of LODR regarding the number of committee positions.
Final Takeaway
Whether your company is listed or unlisted, the role of the Audit Committee remains vital to corporate accountability. While listed entities face tighter regulatory scrutiny, unlisted companies, too, must prioritize governance to maintain investor and stakeholder trust.
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