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PKF Sejong

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Revisions to the Scope of Companies subject to External Audit

31 Oct 2018

1. Introduction

In the April 2018 newsletter, we looked at the major topics covered in the proposed amendment to the Enforcement Decree of the Act on External Audit of Joint Stock Companies (hereinafter the “Enforcement Decree”). The proposed amendment has recently been passed in the national assembly and promulgated to take effect from November 1st, 2018. The amended Enforcement Decree will extend the scope of companies subject to external audit to limited companies (also known as “Yuhan Hoesa”) and set forth revised external audit requirements to determine which companies would be subject to external audit.

Below is the detailed discussion of the revised external audit requirements, which will become effective from the fiscal year starting on or after November 1st, 2019.

 

2. Main contents

Under the amended Enforcement Decree, the scope of companies subject to external audit will be extended to include limited companies, in addition to the joint stock companies, currently the only companies required to undergo external audit.

Moreover, the amended Enforcement Decree will introduce a new revenue threshold as one of the criteria to determine the scope of companies subject to external audit, and for limited companies, new criteria involving the number of members and the “transition period” for companies converting into a limited company have also been added to the existing criteria.

Meanwhile, any joint stock or limited companies with total asset or revenue equal to or greater than KRW 50 billion as of the end of the immediately preceding fiscal year will be required to undergo the external audit.

Below is a table summarizing the criteria to determine the scope of companies subject to external audit, before and after the amendment.

1. Joint Stock Company (Chusik Hoesa)

Before the amendment

After the amendment

i) Total assets of KRW 12 billion or more; or

ii) Total assets and liabilities of KRW 7 billion or more, or at least 300 employees

All companies are subject to external audit in principle, but companies satisfying at least 3 of the following criteria shall not be subject to external audit:

i) Total assets less than KRW 12 billion

ii) Total revenue less than KRW 10 billion

iii) Total liabilities less than KRW 7 billion

iv) Less than 100 employees.

2. Limited Company(Yuhan Hoesa)

<Newly introduced>

All companies are subject to external audit in principle, but companies satisfying at least 3 of the following criteria shall not be subject to external audit:

i) Total assets less than KRW 12 billion

ii) Total revenue less than KRW 10 billion

iii) Total liabilities less than KRW 7 billion

iv) Less than 100 employees.

v) Less than 50 members

3. Large-scale Companies (includes both Chusik Hoesa and Yuhan Hoesa)

Total assets or revenue equal to or greater than KRW 50 billion

For Joint Stock Companies converting into Limited Companies after November 1st, 2019, the criteria for Joint Stock Companies will apply for the next 5 years from the registration of the conversion.

 

3. Concluding remarks

The revised external audit requirements under the Enforcement Decree will become effective from the first fiscal year beginning on or after November 1st, 2019. Thus, companies with a December year-end must determine, on the basis of their 2019 financial figures, whether they will be subject to external audit in 2020, and appoint an external auditor within 45 days from the end of the immediately preceding fiscal year. Therefore, companies in Korea should familiarize themselves with the new revisions to avoid making the mistake of not appointing the external auditors within the requisite time, in which case an external auditor would be designated by the Securities & Futures Commission of South Korea.


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