CONTENTS
- 1. External Audit | Definition
- - Purpose and Types of Audit Opinions
- 2. External Audit | Companies Subject to Audit
- - Companies Excluded from External Audit
- 3. External Audit | Auditing Standards
- - Structure of the Auditing Standards
- 4. External Audit | Preparation and Submission of Financial Statements
- - Submission Deadline
- - Parties Subject to Submission and Disclosure Obligations
- - Restrictions on the Auditor's Involvement
- 5. External Audit | Response Methods
- - Advance Organization of Accounting Materials
- - Review of the Operating Status of Internal Controls
- - Response Strategy During the Audit
- 6. External Audit | Dispute Prevention and Subsequent Response
1. External Audit | Definition
An external audit is a system under which an external auditor independent from the company objectively verifies and expresses an opinion on whether the financial statements prepared by the company have been prepared appropriately in accordance with generally accepted accounting principles.
By having an external auditor conduct the accounting audit separately from the company's internal auditor, the system helps support the sound management of the company.
It also contributes to protecting interested parties such as shareholders, creditors, and employees by providing them with accurate information.
It mainly confirms whether the financial statements prepared by the company have been prepared accurately in accordance with accounting standards.
Purpose and Types of Audit Opinions
The purpose of an external audit is for an accounting expert independent from the company's management to audit the financial statements and provide reliable accounting information to interested parties such as investors and creditors.
The auditor expresses one of the following opinions.
▪ Unqualified
This means that the financial statements have been prepared appropriately in accordance with corporate accounting standards.
▪ Qualified
This indicates that there is a limitation on the scope of the audit or a violation of accounting standards that may have a material effect on the financial statements.
▪ Adverse
This means that there is a particularly material violation of accounting standards in the financial statements.
▪ Disclaimer of Opinion
This refers to a case in which the auditor cannot express an opinion because the auditor lacks independence or there is a significant limitation on the scope of the audit.
2. External Audit | Companies Subject to Audit
Companies subject to an external audit are prescribed in Article 4 of the「Act on External Audit of Stock Companies, Etc.」
• A company that intends to become a listed stock corporation during the relevant business year or the following business year
• A company with total assets of 50 billion won or more as of the immediately preceding business year
• A company with sales of 50 billion won or more in the immediately preceding business year
• A company that meets two or more of the following criteria
- Total liabilities of 7 billion won or more
- Sales of 10 billion won or more
- 100 or more employees
In addition, in the case of a limited liability company, whether it is subject to an external audit is determined according to the following criteria.
• A limited liability company with sales of 50 billion won or more in the immediately preceding business year
• A limited liability company that meets three or more of the following criteria
- Total liabilities of 7 billion won or more
- Sales of 10 billion won or more
- 100 or more employees
- 50 or more members (members stated in the articles of incorporation under the Commercial Act)
Companies Excluded from External Audit
The companies excluded from an external audit are as follows.
• A company that completed its initial registration of incorporation in the relevant business year
• A corporate restructuring investment company
• A special purpose company for securitization
• A company that has received a suspension-of-transactions disposition from the Korea Financial Telecommunications and Clearings Institute, which was established with the authorization of the Financial Services Commission
• A company whose dissolution, liquidation, or bankruptcy has been registered, or which has been suspended from business for one year or more
• A company undergoing merger procedures that will be extinguished within the relevant business year
• A company that the Financial Services Commission has publicly notified as not requiring an external audit
3. External Audit | Auditing Standards
Auditing standards are the standards an auditor must follow when conducting an audit of financial statements, and they refer to the principles and procedures generally recognized as fair and reasonable.
By conducting audits in accordance with these standards, the auditor should secure the reliability and fairness of the audit.
Auditing standards include detailed matters for maintaining the auditor's independence, securing the reliability of the financial statements, and performing transparent audit procedures.
Specifically, the standards include the following items.
2. Methods of establishing the audit plan and the audit procedures
3. Classification of audit opinions and methods of determining them
4. Management of audit work, including the preparation of audit working papers
5. Standards for reporting audit results
Structure of the Auditing Standards
The auditing standards are established by the Korean Institute of Certified Public Accountants, and any establishment or amendment requires the prior approval of the Financial Services Commission.
At this point, the proposed establishment or amendment must undergo deliberation and resolution by the Auditing Standards Committee, which is composed of no more than eleven members.
4. External Audit | Preparation and Submission of Financial Statements
Financial statements are key materials that report a company's management performance and financial condition to external interested parties, and the responsibility for their preparation lies with the company's representative director and the executive in charge of accounting.
If there is no executive in charge of accounting, the employee who performs the accounting work assumes that responsibility instead.
※ However, the company's auditor and the certified public accountants belonging to that auditor may not directly take part in or provide advice on the preparation of the financial statements.
This is a measure to maintain the auditor's independence and the fairness of the audit.
Submission Deadline
A company must submit its financial statements to the auditor within the deadline prescribed by Presidential Decree after the business year ends.
▶ Financial statements
- Up to six weeks before the regular general meeting
(A company undergoing rehabilitation proceedings: within 45 days after the end of the business year)
▶ Consolidated financial statements
- Where the Korean International Financial Reporting Standards (K-IFRS) apply: four weeks before the regular general meeting
(A company undergoing rehabilitation proceedings: within 60 days after the end of the business year)
- Where the general standards apply: within 90 days after the end of the business year
(However, a corporation with total assets of 2 trillion won or more as of the end of the immediately preceding business year: within 70 days)
Parties Subject to Submission and Disclosure Obligations
The following companies must, immediately after submitting their financial statements to the auditor, submit the financial statements to the Securities and Futures Commission in electronic document form.
• Large unlisted stock corporations
• Financial companies (financial institutions, Nonghyup Bank, and the like)
In addition, if a company among those above is unable to submit within the deadline, it must submit the reason to the Securities and Futures Commission by the day following the relevant deadline, and this is disclosed.
Restrictions on the Auditor's Involvement
To secure the reliability and independence of the financial statements, the company's auditor and the certified public accountants belonging to that auditor are strictly prohibited from the following acts.
• Providing advice on accounting treatment
• Performing accounting journal entries or calculations on the company's behalf
• Taking part in determining the method of accounting treatment
The company must not request such acts from the auditor either, and a violation may make the company subject to sanctions for impairing the independence of the external audit.
5. External Audit | Response Methods
An external audit is a statutory procedure that verifies a company's financial soundness and accounting transparency, and a company should cooperate actively with the auditor's requests while also responding strategically.
Advance Organization of Accounting Materials
A company preparing for an external audit should first systematically organize its financial statements, records of accounting treatment, and records of major transactions.
It is advisable to have the materials prepared so that the company can respond immediately to the auditor's requests.
In particular, it is helpful to prepare explanatory materials in advance for atypical accounting treatment, such as transactions with related parties and the occurrence of one-time revenue.
Review of the Operating Status of Internal Controls
A company subject to an external audit should review whether its internal accounting control system is actually being operated.
It is important to confirm whether approval procedures, the allocation of authority, and the dual-review system function in practice rather than remaining merely formal structures, and to keep records of this.
In addition, if there were any findings noted in the prior audit, it is advisable to organize whether the corrective measures for them have been implemented.
Response Strategy During the Audit
In response to the matters the auditor inquires about, the company should provide a fact-based explanation grounded in objective materials, and if there is a basis for judgment under the accounting standards, it is advisable to document and present this.
For accounting issues that may be subject to dispute, such as the timing of revenue recognition, the establishment of provisions, and the treatment of intangible assets, it is advisable to consult with the auditor in advance or to organize the matters with advice from an outside expert.
6. External Audit | Dispute Prevention and Subsequent Response
The external audit process requires an accurate understanding of and response to complex accounting standards and legal regulations, so it is often difficult for a company to handle every procedure perfectly on its own.
In particular, when a problem arises with the audit opinion or when coordination of opinions with the auditor is needed, the support of a legal expert can make a significant difference.
Our firm provides overall legal advisory on the appointment of an external auditor and the audit procedures, and it supports the minimization of a company's legal risk through a collaboration system of professionals such as certified public accountants and tax accountants.
It helps prevent legal disputes that may arise in complex audit procedures and supports the stable management of a company through a system for responding to derivative cases arising from the audit results and for subsequent management.
If you need legal support during the external audit process, you may request assistance from a 🔗financial attorney at any time.
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