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Audit Committee and Corporate Governance – CA Final

Audit Question Bank
March 25, 2023 / CA Final / By Raju

Audit Committee and Corporate Governance – CA Final Audit Question Bank is designed strictly as per
the latest syllabus and exam pattern.

Audit Committee and Corporate Governance – CA Final Audit

Question Bank
Corporate Governance

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Question 1.
Answer:
Corporate Governance:
Corporate Governance is the system by which companies are directed and governed by the
management in the best interests of the stakeholders and others ensuring better management, greater
transparency and timely financial reporting.

Responsibility to ensure corporate Governance rests with the Board of Directors.

In India, the legal framework of Corporate Governance is contained in Sec. 177 of the Companies Act,
2013 (relating to Audit Committee) and Chapter IV (Regulation 17 to Regulation 27) of SEBI (LODR)
Regulations, 2015.

SEBI (LODR) Regulations,2015,issuedbySEBIwiththeobjectiveofstreamliningandconsolidating the

provisions of various listing agreements in operation for different segments of the capital markets, such
as equity shares, preference shares, debt instruments, units of mutual funds, Indian depository
receipts, securitised debt instruments and any other securities that the SEBI may specify.

These Regulations are divided into 2 parts – the substantive provisions are incorporated in the main
body while the procedural requirements are incorporated in the form of schedules.

It may be noted that the LODR Regulations deal with only post-listing requirements and exclude all pre-
listing requirements.

Question 2.
Write short note on: Matters addressed in SEBI (LODR) Regulations, 2015 regarding Corporate
Governance. [Nov. 15 (4 Marks)]
Or
Enumerate the issues addressed in the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 regarding Corporate Governance.
Answer:
Corporate Governance:

Corporate Governance can be defined as “the formal system of accountability and control for
ethical and socially responsible organisational decisions and use of resources”.
Corporate Governance is the system by which companies are directed and governed by the
management in the best interests of the stakeholders and others ensuring better management,
greater transparency and timely financial reporting.
Responsibility to ensure corporate Governance rests with the Board of Directors.
In India, the legal framework of Corporate Governance is contained in Sec. 177 of the Companies
Act, 2013 (relatingto Audit Committee) and Chapter IV (Regulation 17 to Regulation 27) of SEBI
(LODR) Regulations, 2015.
Chapter IV of SEBI (LODR) Regulations, 2015 deals with the below mentioned matters so as to
ensure corporate governance framework more effective –
(a) Board of Director including its composition, independent director, non-executive director
etc.;
(b) Provisions regarding composition and functioning of Audit Committee (Regulation 18).
(c) Provisions regarding setting ug and role of Nomination and Remuneration Committee.
(d) Provisions regarding setting up and-role of Stakeholder Relationship Committee.
(e) Provisions regarding setting up and role of Risk Management Committee.
(f) Vigil Mechanism.
(g) Related party Transaction;
(h) Management of subsidiary companies; Obligations w.r.t. Independent Directors.
(i) Obligations w.r.t. directors and senior management.
(j) Others as specified in Part E of Schedule II (Discretionary).

ICAI Examiner Comments

Most of the examinees did not highlight the matters addressed in Clause 49 (Now SEBI (LODR)
Regulations regarding Corporate Governance, instead they wrote general answers on Corporate
Governance. Also some examinees explained about audit committee.

Audit Committee (Sec. 177 of Companies Act, 2013)

Question 3.
Explain the Constitution and Functions of Audit Committee u/s 177 of Companies Act, 2013.
Or
Write short note on: Requirement for Audit Committee as per Companies Act, 2013. [Nov. 17 (4 Marks)]
Answer:
Constitution of Audit Committee:
Section 177(1) of Companies Act, 2013 read with Rule 6 of Companies (Meetings of Board and its
Powers) Rules, 2014 requires Board of Directors of every listed Public company and below mentioned
class of companies to constitute an Audit Committee —

1. all public companies with a paid-up capital of ₹ 10 Cr. or more;

2. all public companies having turnover of ₹ 100 Cr. or more;
3. all public companies, having in aggregate, outstanding loans and debentures and deposits
exceeding fifty crore rupees or more.

Explanation to Rule 6 provides that the paid-up share capital or turnover or outstanding loans,
debentures and deposits, as the case may be, as existing on the date of last audited Financial
Statements shall be taken into account.

Functions of Audit Committee:

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the
Board which shall, inter alia, include:

1. the recommendation for appointment, remuneration and terms of appointment of auditors;

2. review and monitor the auditor’s independence and performance, and effectiveness of audit
process;
3. examination of the financial statement and the auditors’ report thereon;
4. approval or any subsequent modification of transactions of the company with related parties;
5. scrutiny of inter-corporate loans and investments;
6. valuation of undertakings or assets of the company, wherever it is necessary;
7. evaluation of internal financial controls and risk management systems;
8. monitoring the end use of funds raised through public offers and related matters.

Audit Committee (Regulation of SFBl (LODR) Regulations, 2015)

Question 4.
Slate the main features of the qualified and independent Audit Committee set up under regulation 18 of
SEBI (LODR) Regulations, 2015. [Nov. 08 (4 Marks), MTP-April 18)
Or
Every listed company shall constitute a qualified & Independent audit committee in accordance with
the terms of reference subject to a few conditions. Explain. [MTP-Aug. 18]
Answer:
Features of Qualified and Independent Audit Committee:
(a) The audit committee shall have minimum 3 directors as members. Two-thirds of the members of
audit committee shall be independent directors.

In case of a listed entity having outstanding Superior Rights (SR) equity shares, the audit committee
shall only comprise of independent directors.

(b) All members of audit committee shall be financially literate and at least one member shall have
accounting or related financial management expertise. –
(c) The Chairperson of the Audit Committee shall be an independent director.
(d) The Chairperson of the Audit Committee shall be present at AGM to answer shareholder queries.

(e) The audit committee at its discretion shall invite the finance director or head of the finance function,
head of internal audit and a representative of the statutory auditor and any other such executives, to be
present at the meetings of the committee.

(f) The Company Secretary shall act as the secretary to the committee.

Question 5.
The audit committee has been granted several roles under SEBI (LODR) regulations, 2015. Oversight of
the company’s financial reporting process; recommendation for appointment of auditors; approval of
payment to statutory auditors etc. are some of the roles that an audit committee perform. State the role
of Audit Committee as provided under SEBI (LODR) Regulations.
Answer:
Role of Audit Committee under SEBI (LODR) Regulations, 2015:
1. Oversight 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;

2. Recommendation for appointment, remuneration and terms of appointment of auditors;

3. Approval of payment to statutory auditors for any other services rendered by them;

4. Reviewing with management the annual financial statements before submission to the Board,
focusing primarily on:
(a) Matters required to be included in the Director’s Responsibility Statement to be included in the
Board’s report in terms of Sec. 134(3)(c) of the Companies Act, 2013.
(b) Changes, if any, in accounting policies and practices and reasons for the same.
(c) Major accounting entries involving estimates based on the exercise of judgment by management.
(d) Significant adjustments made in the financial statements arising out of audit findings.
(e) Compliance with listing and other legal requirements relating to financial statements.
(f) Disclosure of any related party transactions.
(g) Qualifications in the draft audit report.

5. Reviewing, with the management, the quarterly financial statements before submission to the board
for approval;

6. Reviewing, with the management, the-statement of uses/application of funds raised through an issue
(public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other
than those stated in the offer document/prospectus/notice and the report submitted by the monitoring
agency monitoring the utilisation of proceeds of a public or rights issue, and making appropriate
recommendations to the Board to take up steps in this matter;

7. Review and monitor the auditor’s independence and performance, and effectiveness of audit
process;
8. Approval or any subsequent modification of transactions of the company with related parties;
9. Scrutiny of inter-corporate loans and investments; ,
10. Valuation of undertakings or assets of the company, wherever it is necessary;
11. Evaluation of internal financial controls and risk management systems;
12. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the
internal control systems;
13. Reviewing the adequacy of internal audit function;
14. Discussion with internal auditors of any significant findings and follow up there on;

15. Reviewing the findings of any internal investigations by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control systems of a material nature and
reporting the matter to the board;

16. Discussion with statutory auditors before the audit commences, about the nature and scope of
audit as well as post-audit discussion to ascertain any area of concern;

17. To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of non-payment of declared dividends) and creditors;

18. To review the functioning of the Whistle Blower mechanism;

19. Approval of appointment of CFO after assessing the qualifications, experience and background, etc.
of the candidate;
20. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee

21. Reviewing the utilization of loans and/or advances from/investment by the holding company in the
subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower
including existing loans/advances/investments existing as on 01.04.2019.

Question 6.
State the mandatory Review areas of the audit committee. [May 12 (4 Marks), RTP-May 20]
Or
List few documents that require mandatory review by Audit Committee. [Nov. 18-New Syllabus (5
Marks)]
Answer:
Mandatory Review Area of Audit Committee:

1. Management discussion and analysis of financial condition and results of operations.

2. Statement of significant related party transactions submitted by management.
3. Management letters/letters of internal control weaknesses issued by the statutory auditors.
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief Internal Auditor.
6. Statement of deviations:
(a) Quarterly statement of deviation (s) including report of monitoring agency, if applicable
submitted to stock exchange.
(b) Annual statement of funds utilised for purposes other than those stated in offer document/
prospectus.

Question 7.
D Ltd., a company incorporated in India has six members in its Audit Committee. Due to recessionary
conditions in India the revenue of the company is going down and there is slow down in other activities
of the company. Therefore, it is expected that there would not be significant work for members of the
Audit Committee.

Considering the overall recession in the company and the economy, the members of the Committee
decided unanimously to meet only once at the year end. They reviewed monthly information system of
the company and found no errors.

As an auditor of D Limited would you consider the decision taken by the Audit Committee to hold the
meeting once in a year, is complying with Listing Obligation and Disclosure Requirements (LODR)? Also
state the quorum requirements for such meetings. [Nov. 13 (4 Marks), RTP-Nov. 18., Nov. 19 – New
Syllabus (5 Marks)]
Answer:
Validity of Audit committee decisions w.r.t. meetings and review area:
Regulation 18 of SEBI (LODR) Regulations, 2015, among other things, requires the followings:

1. The audit committee should meet at least 4 times in a year and not more than 120 days shall
elapse between two meetings.
2. Audit committee should mandatorily review certain areas like management discussion and
analysis, statement of significant related party transactions, letters of internal control
weaknesses, internal audit reports etc.

In the present case, members of audit committee decided to meet only once in a year and review only
the monthly information system which does not meet the requirement of regulation 18 of SEBI (LODR)
Regulations, 2015 as stated above.

Conclusion: Decision taken by audit committee to conduct meeting once in a year and review of only
monthly information system is not in line with the requirements of Regulation 18 of SEBI (LODR)
Regulations, 2015.

Quorum requirements of meetings of audit committee: The quorum shall be either 2 members or 1 /3 of
the members of the audit committee whichever is greater, but there should be a minimum of two
independent members present.

Question 8.
Mr. ‘U’, a respectable Chartered Accountant of international repute was requested by one of the major
corporate in India to join its Board and also as a Chairman of Audit Committee. He expressed his
apprehensions that he is not having the requisite experience. Mr. ‘U’ seeks your view on the
responsibility of Audit Committees vis-a-vis the review of Financial Statements. [May 14 (4 Marks)]
Answer:
Responsibility of Audit Committee vis-a-vis the review of Financial statement:
As per Regulation 18 of SEBI [LODR] Regulations, 2015, audit committee is required to review with
management the annual financial statements before submission to the Board, focusing primarily on:

1. Matters required to be included in the Director’s Responsibility Statement to be included in the

Board’s report in terms of Sec. 134(3)(c) of the Companies Act, 2013.
2. Changes, if any, in accounting policies and practices and reasons for the same.
3. Major accounting entries involving estimates based on the exercise of judgment by
management.
4. Significant adjustments made in the financial statements arising out of audit findings.
5. Compliance with listing and other legal requirements relating to financial statements.
6. Disclosure of any related party transactions.
7. Qualifications in the draft audit report.

Question 9.
Write short notes on: Power of Audit Committee as stipulated under SEBI (Listing Obligations and
Disclosure Requirements) Regulations.
Answer:
Power of Audit Committee:
As per SEBI (LODR) Regulations, 2015, the audit committee may exercise following powers, in addition
to others:

1. To investigate any activity within its terms of reference.

2. To seek information from any employee.
3. To obtain outside legal or other professional advice.
4. To secure attendance of outsiders with relevant expertise.

Question 10.
Comment on the following in the light of certificate of compliance of conditions of Corporate
Governance to be issued for a listed company where the Board consists of 10 directors including a non-
executive director as its chairman and further:

1. There were 5 audit committee meetings held during the year as follows: 01/04/2020,
01/06/2020,01/09/2020, 03/01/2021, 25/03/2021.
2. There are 4 independent directors. One of them resigned on 25/05/2020. A new independent
director was appointed on 01/09/2020.
3. The Chairman of Audit Committee did not attend the Annual General meeting held on
14/09/2020.
4. The internal audit reports were obtained by Audit Committee on quarterly basis. Quarter 1
internal audit report commented on certain serious irregularities as regards electronic online
auction of scrap. The agenda of Audit Committee did not deliberate or take note of the issue.
[Nov. 18-Old Syllabus (4 Marks), RTP-Nov. 19]

Answer:
Compliance of conditions as to Corporate Governance:
Regulation 18 of SEBI (LODR) Regulations, 2018, among other things provides the followings:
(a) The Audit Committee shall have minimum 3 directors as members. Two-thirds of the members of
Audit Committee shall be independent directors.

(b) The Chairperson of the Audit Committee shall be an independent director. The Chairperson of the
Audit Committee shall be present at AGM to answer shareholder queries.

(c) The Audit Committee should meet at least 4 times in a year and not more than 120 days shall elapse
between two meetings.

(d) Audit Committee must mandatorily review certain aspects including therein is the Internal audit
reports relating to internal control weaknesses.

Regulation 17(1) of the SEBI (LODR) Regulations, 2015 provides the following:
(a) The Board of Directors of the company shall have an optimum combination of executive and non-
executive directors with at least one woman director and not less than 50% of the Board of Directors
comprising non-executive directors.

(b) Where the Chairperson of the Board is a non-executive director, at least 1/3rd of the Board should
comprise independent directors and in case the company does not have a regular non-executive
Chairman, at least half of the Board should comprise independent directors.

Further Sec. 149(4) of the Companies Act, 2013 read with Rule 4 of Companies (Appointment and
Qualifications of Directors) Rules, 2014 provides that any intermittent vacancy of an independent
director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting
or 3 months from the date of such vacancy, whichever is later.

Accordingly, while issuing certificate of Corporate Governance, auditor is required to make the
following modifications:

1. Gap between meetings held on 01.09.2020 and 03.01.2021 is more than 120 days; .
2. Casual vacancy in the office is independent director was filled up after the period prescribed u/s
149 (4) read with Rule 4 of Companies (Appointment and Qualifications of Directors) Rules,
2014;
3. Chairman was mandatorily required to attend AGM, which he did not;
4. Internal audit report was not reviewed by the Audit Committee.

Question 11.
Section 177 of the Companies Act, 2013 provides that every listed company and other class of
companies as prescribed shall constitute a committee of the Board known as “audit Committee”. Briefly
discuss the additional requirements as per Sec. 177 which are silent in Regulation 18 of SEBI (LODR)
Regulations, 2015.
Answer:
Additional requirement of Sec. 177 which are silent in Regulation 18:
(a) Every Audit Committee shall act in accordance with terms of reference to be specified in writing by
the Board.

(b) The Board’s report u/s 134(3) shall disclose the composition of an Audit Committee and where the
Board had not accepted any recommendation of the Audit Committee, the same shall be disclosed in
such report along with the reasons therefor.

(c) The auditors of a company and the key managerial personnel shall have a right to be heard in the
meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to
vote.

Question 12.
Briefly explain the role of auditor in audit committee and certification of compliance of conditions of
Corporate Governance.
Answer:
Role of Auditor in Audit Committee and certification of compliance of conditions of corporate
governance:
Regulation 18 of SEBI (LODR) Regulations, 2015 requires a representative of the statutory auditor, when
required, shall be invited to the meetings of the Audit Committee.

Sec. 177 of Companies Act, 2013 requires that auditors of a company and the key managerial personnel
has a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report
but they shall not have the right to vote.

In relation to audit committee and certification of compliance of conditions of corporate governance,

auditor is required:
(a) To ensure that he communicates frequently with the Audit Committee on key accounting or auditing
issues that, in his judgment, give rise to a greater risk of material misstatement of the financial
statements.

(b) To ensure that he addresses any questions or concerns voiced by the Audit Committee.

(c) To assist and advise the Audit Committee on improving corporate governance, oversight of financial
reporting process, implementation of accounting policies and practices, compliance with accounting
standards, strengthening of the internal control systems in regard to financial reporting and reporting
processes.

(d) To assist the management and the Audit Committee to enable them to discharge their functions
effectively and in certification of the requirements of corporate governance.

Note: Auditor role is not to drive corporate governance directly. It is the management’s responsibility to
do so and in the process, auditor may play a significant role in assisting management to ensure better
standards of corporate governance.

Matters covered by SEBI (LODR) Regulations, 2015

Question 13.
Elaborate under SEBI (LODR) Regulations, 2015, who is an independent director.
Answer:
Independent Director under SEBI (LODR) Regulations, 2015:
As per Regulation 16(1) ofSEBI (LODR) Regulations, 2015, independent director shall mean a non-
executive director, other than a nominee director of the company:
a. who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;

b. who is or was not a promoter of the company or its holding, subsidiary or associate company; and
not related to promoters or directors in the company, its holding, subsidiary or associate company or
member of the promoter group of the listed entity;

c. apart from receiving director’s remuneration, has or had no material pecuniary relationship with the
company, its holding, subsidiary or associate company, or their promoters, or directors, during the two
immediately preceding financial years or during the current financial year;

d. none of whose relatives has or had pecuniary relationship or transaction with the company, its
holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or more of
its gross turnover or total income or ? 50 Lacs or such higher amount as may be prescribed, whichever
is lower, during the two immediately preceding financial years or during the current financial year;

e. who, neither himself nor any of his relatives

1. holds or has held the position of a key managerial personnel or is or has been employee of the
company or its holding, subsidiary or associate company in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed;

2. is or has been an employee or proprietor or a partner, in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed, of;

a firm of auditors or CS in practice or cost auditors of the company or its holding, subsidiary or
associate company; or
any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;

3. holds together with his relatives 2% or more of the total voting power of the company; or

4. is a Chief Executive or director, by whatever name called, of any non-profit organisation that .
receives 25% or more of its receipts from the company, any of its promoters, directors or its holding,
subsidiary or associate company or that holds 2% or more of the total voting power of the company;

5. is a material supplier, service provider or customer or a lessor or lessee of the company.

f. who is not less than 21 years of age.

g. who is not a non-independent director of another company on the board of which any non-
independent director of the listed entity is an independent director.

Question 14.
P Limited is a listed Company in which no code of conduct is laid down for its board members and
senior members. As an auditor of P Limited:
(a) Briefly explain the compliance requirements with respect to Code of Conduct as per Listing Order
Disclosure Requirement (LODR) Regulations.
(b) What will be your role in compliance of above-mentioned Code of Conduct as per LODR
Regulations?
Answer:
Requirements of Code of Conduct in SEBI (LODR) Regulations, 2015:
(a) Compliance Requirements w.r.t. Code of Conduct:

1. Regulation 17(5): The board of directors shall lay down a code of conduct for all members of
board of directors and senior management of the listed entity. The code of conduct shall suitably
incorporate the duties of independent directors as laid down in the Companies Act, 2013.
2. Regulation 26(3): All members of the Board and senior management shall affirm compliance with
the code of conduct on an annual basis.
3. Regulation 46(2): Listed entity shall disseminate code of conduct on its website.
4. Part D of Schedule V: Annual Report of the company shall contain a declaration signed by the
CEO stating that the members of board and senior management have affirmed compliance with
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