The current Korean Standards on Auditing (KSAs) have been adopted to be in accordance with International Standards on Auditing (ISAs) issued by the International Federation of Accountants in 2004. The KICPA published an exposure draft on the revised KSAs that reflect new ISAs, which will be effective from the reporting period on or after 1, January 2014.
KSAs promote the convergence with ISAs, which results in guaranteeing the high-quality of audit services on the international stage.
Auditing & Assurance Standards Setter
Delegated by the Financial Services Commission, the Korean Auditing & Assurance Standards Board within the KICPA is responsible for the establishment and revision of auditing and assurance standards.
External Audit System
Joint stock companies, prescribed as stock companies in the Act on External Audit of Stock Companies, having total assets and liabilities, or registered employees above thresholds, are subject to external audits in accordance with the Act. As at 2012, more than 20,000 joint stock companies are subject to external audit
Furthermore, public institutions, organizations or groups having a substantial impact on the public interest are also subject to external audits or reviews conducted by CPAs, in accordance with relevant regulations. The objective of which is to improve financial transparency and safeguard stakeholders’ interests.
Review of Audit Reports
The Securities and Futures Commission under the auspices of the Financial Services Commission is responsible for reviewing audit procedures, conducted by external auditors, and the Financial Supervisory Service (FSS) and the KICPA provides oversight. The FSS is tasked with reviewing audit reports of listed entities and financial institutions, and the KICPA with reviewing audit reports of entities not included in the above including non-listed entities.
Where the FSS or the KICPA as a result of their reviews, detect evidence of fraudulent reporting activities, willful errors or violations in applying accounting principles, such non-compliance may be faced with disciplinary measures depending on the magnitude and severity of the activity. Disciplinary measures include but are not limited to financial penalties, suspension on issuance of securities and criminal prosecution.
Review of Quality Control of Accounting Firms
The FSC is responsible for reviewing quality control of accounting firms to ensure that they maintain high-quality audit services, and delegates the FSS to provide oversight on quality control of large-sized accounting firms, while the KICPA is delegated with providing oversight on small-and-medium-sized accounting firms. Accounting firms, registered with the Public Company Accounting Oversight Board (PCAOB), are subject to PCAOB quality control inspections with support and cooperation from the FSS.
Auditor independence and the adequacy thereof are upheld by the following laws and regulations: the CPA Act, KSAs, and the Code of Ethics.
The Act on External Audit of Stock Companies provides for rules governing auditor independence, requirements for auditors to provide services and perform work in compliance with KSAs, and rules on mandatory audit partner rotation. With respect to mandatory partner rotation, engagement partners providing audit services to listed entities for three consecutive years are subject to a three-year cooling-off period, and engagement partners providing audit services to non-listed entities for five consecutive years are subject to a one-year cooling off period.
The Certified Public Accountant Act
No CPAs shall provide audit services to entities in which they hold a financial interest in, or is involved in an employment relationship with. Under the CPA Act, CPAs refer to accounting firms, engagement partners and their immediate family members, and engagement team members and their immediate family members. The CPA Act defines financial interests as follows: (i) holding stocks or securities in the entity; (ii) holding assets or liabilities not less than KRW 30 million in the entity (KRW 100 million for accounting firms); (iii) receiving remuneration during the engagement period for what is not considered usual accounting services. Lastly, employment relationship is characterized as a CPA serving as an executive member of the entity’s management or board of directors, or an equivalent position, including a position to direct financial matters within one calendar year of providing audit services. The employment relationship also covers immediate family members.
KSAs as enacted by the CPA Act set out the provisions of the Code of Ethics to be observed by all CPAs in professional practice.
Code of Ethics for Professional Accountants
The provisions of the international Code of Ethics promulgated by the International Ethics Standards Board for Accountants have been adopted into the Code of Ethics in 2005.
The Ethics Standards Board of the KICPA issued an exposure draft to adopt the provisions of the 2009 international Code of Ethics and received comments from various stakeholders. The Ethics Standards Board has been assessing the new proposals on accounting and auditing practices.
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