CONTENTS
- 1. Accounting Review and Audit Inspection | Definition
- - Accounting Review and Audit Inspection Procedure
- 2. Accounting Review and Audit Inspection | Auditing Standards
- - Components of the Auditing Standards
- 3. Accounting Review and Audit Inspection | Financial Statements
- - Responsibility for Preparing Financial Statements
- - Deadline for Submission of Financial Statements
- 4. Accounting Review and Audit Inspection | Window Dressing
- 5. Accounting Review and Audit Inspection | Response Measures
- - Prompt Assessment of the Situation and Preparation of Materials
- - Advice from Attorneys and Other Specialists
1. Accounting Review and Audit Inspection | Definition
Accounting review and audit inspection is a procedure that examines whether a company's financial statements and the auditor's audit report comply with accounting standards and auditing standards, and that holds the responsible parties accountable accordingly in the event of a violation.
▶ What is an accounting review?
If any irregularity is found, the company is given the opportunity to provide an explanation, and where a violation is recognized, a correction (amendment) of the financial statements is recommended.
▶ What is an accounting audit inspection?
Where a violation is confirmed, the procedure may go beyond a simple correction recommendation to identify where responsibility lies, and sanctions may be imposed.
Accounting Review and Audit Inspection Procedure
The Financial Supervisory Service conducts accounting reviews by carrying out sampling.
Alternatively, an accounting review may be initiated when a complaint or report concerning a suspected violation of accounting standards is received, or when a request for inspection is submitted by a state agency such as the police.
A substantive review of the financial statements is conducted, and where an accounting violation is confirmed, a correction recommendation is made.
The exact procedure for accounting review and audit inspection is as follows.
2. Accounting Review and Audit Inspection | Auditing Standards
Under Article 16 of the 「Act on External Audit of Stock Companies, Etc.」 and Article 22 of its Enforcement Decree, an auditor has a duty to perform audit work in accordance with the auditing standards that are generally recognized as fair and reasonable.
This serves as an institutional mechanism to secure the independence of the audit and to enhance the reliability of the financial statements, and it is a standard that all external auditors must follow.
Components of the Auditing Standards
The auditing standards include the following core matters throughout the entire audit process.
2. Methods for establishing the audit plan and the audit procedures
3. Classification of audit opinions and the methods for determining them
4. Management of audit work, including the preparation of audit documentation
5. Reporting standards for audit results
3. Accounting Review and Audit Inspection | Financial Statements
The most central subject in accounting review and audit inspection is the financial statements prepared by the company.
Financial statements are a set of financial reports prepared to accurately convey a company's management status, performance, cash flows, and other matters to external interested parties, including investors, creditors, and supervisory authorities.
Financial statements are not merely accounting data. They are a core document that transparently discloses a company's financial condition and management performance to external interested parties, and the preparing entity, the time of submission, and the act of preparation are strictly regulated by law.
Under Article 2 of the 「Act on External Audit of Stock Companies, Etc.」 and its Enforcement Decree, financial statements consist of the following documents.
Income statement or statement of comprehensive income
Statement of changes in equity
Statement of cash flows
Notes
Responsibility for Preparing Financial Statements
The company's representative director and the executive in charge of accounting (or, where there is no executive in charge of accounting, the employee who handles accounting work) have the responsibility to prepare the company's financial statements faithfully.
This is a basic principle that applies to all companies subject to external audit.
▶ Prohibition on the external auditor's involvement in preparation
An external auditor and the certified public accountants belonging to it may not engage in the following acts.
• Providing advice on the accounting treatment related to the preparation of financial statements
• Performing, on the company's behalf, the calculations or accounting entries necessary for preparing the financial statements
• Participating in the determination of accounting treatment methods
This serves as an institutional mechanism to secure the independence and objectivity of the audit, and its purpose is to prevent the possibility of collusion between the company and the auditor.
Deadline for Submission of Financial Statements
A company must submit its prepared financial statements to the external auditor within the deadline prescribed by law, and that deadline is differentiated according to factors such as the type of company and whether the accounting standards apply.
▶ Deadlines based on the regular general shareholders' meeting
Up to 6 weeks before the regular general meeting is held
• Consolidated financial statements
- Companies applying the Korean International Financial Reporting Standards: up to 4 weeks before the regular general meeting is held
- Companies not applying the Korean International Financial Reporting Standards: within 90 days after the end of the business year
※ However, companies with total assets of 2 trillion won or more are subject to a 70-day deadline.
▶ Deadlines based on the submission of the business report
• Financial statements
Up to 6 weeks before the deadline for submitting the business report
• Consolidated financial statements
- Companies applying the Korean International Financial Reporting Standards: up to 4 weeks before the deadline for submitting the business report
- Companies not applying the Korean International Financial Reporting Standards: same as above
▶ Deadlines for companies undergoing rehabilitation proceedings
Within 45 days after the end of the business year
• Consolidated financial statements
Within 60 days
4. Accounting Review and Audit Inspection | Window Dressing
If a party becomes implicated in suspected window dressing during the accounting review and audit inspection process, severe punishment may be imposed.
Window dressing refers to the act of intentionally manipulating the information in the accounting books so that the management performance appears better than it actually is.
If the company's accounting books, which are a key resource in the investment process, are manipulated, the following punishment is imposed.
Article 39 of the External Audit Act | Level of punishment |
Where financial statements are falsely prepared and disclosed | Imprisonment for up to 10 years / a fine of 2 to 5 times the amount gained or avoided |
Where the auditor falsely states the audit report |
This may bring not only the impact of criminal punishment but also significant disadvantage to the company's image later, so caution is needed.
5. Accounting Review and Audit Inspection | Response Measures
When a company becomes subject to an accounting review and audit inspection, a prompt and systematic response is very important.
Because the review and inspection procedures of the Financial Supervisory Service are strict, and because sanctions may be imposed if a violation is confirmed, an appropriate response strategy should be developed through professional legal and accounting advice.
Prompt Assessment of the Situation and Preparation of Materials
Upon receiving notice of the commencement of an accounting review and audit inspection, a company should first thoroughly examine the financial statements and related accounting materials for the period subject to review.
The company should promptly identify problem areas and points that may be subject to challenge, and systematically prepare the materials and explanatory materials requested by the Financial Supervisory Service.
Advice from Attorneys and Other Specialists
An accounting review and audit inspection is a complex procedure that requires both a high level of accounting expertise and legal judgment.
Because it goes beyond the stage of simply submitting accounting materials and providing explanations to responding to the in-depth inquiries and challenges raised by the Financial Supervisory Service, professional assistance on both the accounting and legal sides is necessary.
In particular, where errors or violations are found in the financial statements, prompt and accurate corrective measures are required, and improving internal procedures for this purpose and establishing a strategy to prevent future risks are also important.
This firm, drawing on many years of experience with accounting review and audit inspection, provides legal advice tailored to the company's situation and practical response measures.
In addition, because certified public accountants, certified tax accountants, customs specialists, and other specialists from various fields belong to the firm, it can respond comprehensively, including to derivative cases.
If you are facing an accounting review and audit inspection and need legal assistance, you may request assistance at any time from a 🔗financial attorney.
