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Statutory Audit Requirements under the Act on External Audit of Stock Companies

31 Aug 2017

Overview

The Act on External Audit of Stock Companies (the “Act”) prescribes that stock companies that meet the statutory audit requirements must have their financial statements audited by intendent auditors. In this article, we will review the statutory audit requirements for stock companies and look into the concerned matters of the Act.

 Main Contents

A. Stock companies subjected to statutory audit

If a stock company (i.e. Chusik Hoesa) meets one of the following requirements, such a stock company must have its financial statements audited in accordance with the Act.

  • The value of gross assets at the end of the prior financial year is 12 billion won or more (in case of a new company established by a spin-off or merger, the value of gross assets at the time of the establishment is 12 billion won or more); or
  • Listed companies or any companies intend to list its shares at the Korea Stock Exchange or equivalent stock exchange under the relevant law in the current financial year or the following financial year (including a stock company intending to list shares by a merger with a listed company or all-inclusive exchange of shares) ; or
  • The values of gross liabilities and gross assets at the end of the prior financial year are 7 billion won or more (in case of a new company established by a spin-off or merger, the values of gross liabilities and gross assets at the time of establishment are 7 billion won or more); or
  • The number of total employees, excluding casual employees or short-term employees, at the end of the prior financial year is 300 or more, and the value of gross assets at the end of the prior financial year is 7 billion won or more (in case of a new company established by a spin-off or merger, the number of total employees excluding causal employees at the time of the establishment is 300 or more, and the value of gross assets at the time of the establishment is 7 billion or more).

 

In contradiction to a stock company, a limited company (i.e. Yuhan Hoesa) is not required to have financial statements audited by an independent auditor at present, but there is discussion about adopting statutory audit for a limited company to protect suppliers, creditors and consumers by way of producing more reliable accounting information.

B. Statutory audit exemptions

The following stock companies are exempted from having statutory audit even if such companies meet one of the audit requirements stated above.

  • Public corporations (i.e. stated owned enterprises) established in accordance with the Act on the Management of Public Institutions or companies that are regarded as quasi-governmental agencies, provided that shares of such companies are not listed.
  • Companies at least 50% share capital of which are contributed by local governments.
  • Investment companies established under the Financial Investment Services and Capital Market Act.
  • Corporation restructuring investment companies established under the Corporate Restructuring Investment Companies Act.
  • Stock companies whose credit facilities are suspended by banks under the Banking Act. However, this rule does not apply to stock companies under current rehabilitation proceedings in accordance with the Debtor Rehabilitation and Bankruptcy Act.
  • Stock companies are in the liquidation process or dormant for one year or more.
  • Stock companies are in the merger progress and are to be dissolved within the current financial year.
  • Any stock companies deemed equivalent to the companies stated above or determined to be exempted from statutory audit by the Securities and Futures Commission.

C. Prescribed requirements in relation to statutory audit

Audit engagement

Companies subjected to statutory audit must appoint their independent auditors by the end of April, and report the auditor’s appointment to the Financial Supervisory Service (FSS) by filing the report on paper together with the prescribed documents or electronically through the authority’s electronic filing system (http://filer.fss.or.kr/).

Further, unlisted companies must appoint their auditors by the end of April each year, whilst listed companies must appoint their auditors for three consecutive years within four months from the commencement of the first financial year for the three years cycle.

In addition, companies must have their financial statements and consolidated financial statements audited by the same auditor.

Public disclosure of financial statements and auditor reports

In order to strengthen the sense of obligation for companies subjected to statutory audit, listed companies or unlisted companies having assets of 100 billion won or more must submit their financial statements to Financial Services Commission (FSC) as well as to their auditors. In such case, listed companies must submit their financial statements to the authority through the KRX disclosure system (http://filing.krx.co.kr/), whilst unlisted companies must do so through the FSS disclosure system (http://dart.fss.or.kr/). In this regard, in case of a company having its financial year-end on 31st December, annual meeting of shareholders must be held by the end of March. Further, the due date for submitting statutory consolidated financial statements is as follows:

 

Type

Due Date

1.     K-IFRS adopted companies

Due date for submitting audit reports

2.     Companies having assets of 200 billion won or more

Within 90 days after year-end

3.     Other companies

Within 120 days after year-end

 

 Conclusion

Potential investors are mindful of reviewing the statutory audit requirements to see if their invested companies would be subject to statutory audit. In case that their invested companies are subject to statutory audit, they should take the time to familiarize themselves with the rules and regulations concerned with statutory audit and are advised to seek professional advice from qualified accountants and advisers.


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