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    Country by Country Financial Reporting and Auditing Framework

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    Korea – Hanul Choongjung LLC (October 2015)

    Preparation of and Filing of Statutory Financial Statements

    In Korea, the listed companies and the non-listed companies that meet certain criteria are required to prepare and file their annual business report with the Financial Supervisory Commission (FSC) and theKorea Exchange (KRX) within 90 days from the end of the financial year. Other non-listed companies that are subject to statutory external audits are required to file their audit report with the Korea Securities & Futures Commission (SFC) within two weeks after the annual ordinary general meeting of shareholders.


    In the case where a listed company has subsidiaries, the company has to prepare consolidated financial statements and separate financial statements, where the consolidated financial statements become the key elements.


    Financial Reporting Framework

    Listed companies are required to prepare their financial statements in accordance with the Korean International Financial Reporting Standards (K-IFRS). K-IFRS is adopted and issued by the Korea Accounting Standards Board (KASB).


    Non-listed companies are required to conform to Accounting Standards for Non-public Entities or K-IFRS. Non-listed companies may elect to adopt either one.


    A financial reporting framework, Accounting Standards for Small and Medium Sized Entities, has been established by KASB to meet the needs of small and medium-sized entities. Limited companies and private entities may also comply with this framework.


    Audit Requirements for Corporations and LLPs Registered in Korea

    All listed companies and the companies that fall under any of the following criteria shall be subject to annual statutory audit of their financial statements conducted by an independent external auditor:

    • Companies whose prior year end's total assets are 12 billion Korean Won or more;
    • Companies whose prior year end's total assets and total liabilities are 7 billion Korean Won or more;
    • Companies whose prior year end's total assets are 7 billion Korean Won or more and total employees are 300 or more; or
    • Companies that intend to list its stock in the current financial period or the next financial period.

    Audit Exemption

    Certain companies that meet one of the following conditions are qualified for an exception from statutory annual audit to be conducted by an independent external auditor:

    • Non-listed public institution or quasi-government organization;
    • Companies whose ownership of 50% or more is owned by local government;
    • Investment companies under capital market integration act;
    • Corporate restructuring investment companies under corporate restructuring act;
    • Companies that are in M&A progress and will be merged in the current business year;
    • Companies that are liquidating or in cessation of work for 1 year or more;
    • Companies that are in disposition of current account transactions suspension from financial institutions by the banking act;
    • Companies that reported for cessation of work or closure of business to the National Tax Service;
    • Other companies that may be specially designated by laws and regulations.

    Audit Appointment, Rotation and Joint Audits

    All companies that are required to be audited by regulations should conclude a contract with the external auditor within 4 months after the beginning of each financial period. In the case of listed companies, an audit contract should be approved by the audit committee. On the other hand, the audit contract for the non-listed companies should be approved by the internal auditor or audit committee.


    For the companies that meet one of the following conditions, a statutory external auditor is designated by FSC:

    • Company that did not appoint external auditor within the stipulated period;
    • Company that changes an external auditor unreasonably or illegally;
    • Company that violates external auditor appointment process by the regulation;
    • Company that is imposed of penalty as a result of review on the audit report by FSC;
    • Company that FSC determines necessary to have a thorough inspection (e.g., issues for administration);
    • Company that meets all the conditions enumerated below:
      • Its prior year end's debt ratio is 1.5 times or more than industrial average;
      • Its prior year end's debt ratio is 200% or more; and
      • Its prior year end's operating income is less than interest expense.

    The audit contract term for the listed companies is three consecutive years and 1 year for the non-listed companies. The reasons for dismissal of an external auditor are defined in the regulation. When the companies plan to dismiss their external auditor in accordance with the reasons of regulation, the company shall provide the external auditor with an opportunity to express an opinion in front of the audit committee or internal auditor. Furthermore, the opinion expressed to the audit committee or internal auditor must be reported to FSC.


    Korea does not have any rules related to mandatory rotation of audit firms and joint audit. But, an audit partner of an accounting firm assigned for a listed company must be rotated every 3 years and for a non-listed company, every 5 years.


    Auditing Standards

    All audits must be conducted in accordance with Korean Auditing Standards which are consistent with the clarified ISA issued by IAASB.


    Ethical Framework

    An accounting firm is bound by the Code of Ethics for Professional Accountants of KICPA. KICPA adopted the IESBA Code of Ethics for Professional Accountants (IESBA Code) as the ethical requirements for its members. Additional guidance has also been implemented to reflect local or legal requirements in Korea.


    Audit Regulation

    External Monitoring

    Large sized accounting firms that meet any of the following conditions are subject to periodic inspection by the Financial Supervisory Service (FSS) for their monitoring process. Other non-large sized accounting firms are subject to inspection by KICPA:

    • If the number of the listed audit clients of an accounting firm is 1% or more of total listed companies;
    • If an accounting firm has a listed audit client whose total assets are 100 billion Korean Won or more;
    • If an accounting firm has 30 or more of registered CPA; or
    • If an accounting firm has been registered with the PCAOB (U.S.A) or equivalent.

    The inspection cycle generally will be determined based on the number of listed clients audited by the accounting firm as follows:

    • Listed audit clients of 100 or more: Annual basis.
    • Listed audit clients of 20 or more and under 99: Every 3 years.
    • Listed audit clients under 20: Every 3 or 5 years.

    FSS conducts a review of audit reports of listed companies on a sample basis and KICPA reviews audit reports of non-listed companies. If there are any findings that require the filing of an amended audit report as a result of a review of FSS and KICPA, the auditor can be imposed penalties or disciplinary measures by FSC.


    Internal Monitoring

    The internal quality review is an essential element of a quality assurance system. It is required and designed to guarantee that the quality assurance system complies with legal and professional requirements and that, if necessary, adjustments are made on a timely basis.


    Such review shall be based on the checklists and computerized system developed internally in accordance with Clarity ISA. It is aimed to cover the whole spectrum of audit engagements using a risk-oriented approach.


    Transparency Report

    There is no separate transparency report requirement in Korea. When issuing annual reports (or semi-annual/quarterly reports), the CEO and CFO of the listed companies in Korea issue a transparency confirmation letter, which can be considered as the transparency report of the company.

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