International Convergence of Auditing Standards – Korea May 23, 2006 A Member of Auditing Standards Committee, KICPA Managing Partner, Daemyung Grant Thornton

International Convergence ofAuditing Standards – Korea

May 23, 2006

A Member of Auditing Standards Committee, KICPAManaging Partner, Daemyung Grant Thornton

Moon-Won Choi

Korean Institute Of Certified Public Accountants Page 2

Disclaimer

The views expressed in this presentation are those of the speaker.

Official positions of the KICPA are determined only after extensive due process and deliberation.


Ⅰ. History of Korean Standards on Auditing

Ⅱ. Difference between ISA and KSA

Ⅲ. Application of KSA and compliance with ISA

Ⅳ. Adoption of Non-audit Assurance Standards of IFAC

Ⅴ. Efforts of Keeping Pace with IFAC standards

Ⅵ. Sanction for the Breach of KSA

Ⅶ. Reviews for Quality of the Audit

Ⅷ. Summary

Ⅸ. KICPA’s role as a Standard Setter

TOPICS


History of Korea Standard on Auditing

1. Beginning Stage • Voluntary audit by the request of financial institution, etc..(~1960s) • Statutory audit of public companies (Korea Securities and Exchange

Law, 1963)

• First establishment of standards on auditing by KICPA (1964)

2. Development Stage • Expansion of statutory audit to the IPOs (Capital Market Promotion

Law, 1976)• A corporation with certain size subject to statutory audit (Law on

External Audit of Stock Companies, 1982)• Establishment of KSA and its working rules

(previously KICPA and later Securities and Futures Commission ).


History of Korea Standard on Auditing, Continued

3. Introduction of ISA to Korea, from FX Crisis • Increased demands for non-statutory audit and non-audit

assurance service

• IMF and World Bank require Korea to adopt IFRS and ISA

• Adoption of ISA as working rules of KSA(KICPA/1999.2)

• Re-Establishment of KSA(KICPA, 2005) : •Demolishing the existing KSA •ISA Bold to new KSA and ISA Guidance to Application

Material of KSA


Difference between ISA and KSA

1. Difference in laws, regulations and acc. system • Subject to statutory audit: any company whose total

assets over KRW 7 billion • KSA works as a law or a regulation in the lawsuit• Required of FSC’s approval to establish or amend the

auditing standards• Difference in the approval procedures of the financial

statements • Consolidated F/S is not the PFS in Korea• No formal process for Comfort letter or Consent letter• FSC’s strong intention to include the specific audit

procedures in KSA: for their review and administrative

purpose


Difference between ISA and KSA, Continued

2. Timing difference between issuance of new ISA and its adoption into KSA

• Maintaining the old ISA 310 & 400 structure (risk

approach & conforming changes have not been

reflected)• Difficulty in timely adoption of new ISA 700

(Auditor’s Report) and new ISA 701 (Modification to

the Auditor’s Report) before 2009• Impractical to timely reflection of the revision of or

changes in ISA due to translation, ED Circulation,

KICPA’s internal review and finally FSC’s approval

procedures


Difference between ISA and KSA, Continued

▶ Practical Application of KSA and current ISA

• Current KSA which is based on ISA, was released in

Dec., 2003, following the revised Law on External Audit

of Stock Companies.

• Consequently, Risk approach (ISA 315, ISA 330, ISA

500) and its conforming changes in ISA have not been

reflected.


Application of KSA and compliance with ISA

◆ Statutory Audit : Current KSA

◆ International reporting for the global companies :

• Auditing in accordance with current ISA or PCAOB’s

Standard for the local company listed in NYSE, NASDAQ

and EU market

• Upon request from local subsidiary or principle auditor of

foreign MNC for their consolidated financial statement


Application of KSA and compliance with ISA, Continued

▶ Effort to minimize the difference between KSA and

current ISA

• Seeking to implement Principle based approach rather than

that of the traditional Rule base of government

• Planning to adopt all of New ISA by Clarity Project,

expected to be completed by 2008-9: together with

discussion and cooperation with government


Adoption of Non-audit Assurance Standards of IFAC

◆ ISQC, IFAE, ISAE, etc Other standards than ISA have been adopted as following: -New ISA Ethics translated into Korean Professional

Ethics (currently ED in Korea) -ISQC (2005.12) -Assurance Framework (IFAE) (2006.1) -Review Standards : ISRE 2400 (2006.1) -Related Service Standards : ISRS 4000, 4400 (2006.1) -ISAE 3000, 3400 (2006.1~3)

◆ These Standards are established solely by KICPA - No legal requirement for FSC’s approval unlike ISA - Make it Possible Timely Adoption


Efforts of Keeping Pace with IFAC standards

◆ Annul report of Korean convergence status and

future action on IFAC’s standards including ISA in

response to SMO (Statements of Membership

Obligations)’ requirement

◆ Planning to provide, via KICPA’s on-line system, an

explanation of IFAC’s Framework of Assurance

Engagement• Deepening the understanding of IFAE with enhancing

the concept of professional standard, i.e. ISA • Systematic classification of Engagement with ISA,

Engagement with ISAE and Engagement with ISRS



◆ Our Efforts to following the IFAC’s Clarity Project

• Introduce IFAC’s Clarity Project to the members of

KICPA (2006.2)• Introduce redrafted ISA ED 240, 300, 315, 330, 550 to

members requesting the comments (2006.2) • Circulating ISA ED 600 (The Audit of Group Financial

Statements) requesting the comments by the end of June,

2006 (2006.2)



◆ Prompt Adoption of redrafted Standards of IFAC

• IFAC announced Clarity Project of ISA to be completed by

2008~2009

• Korea will adopt all or at least most of project-completed

ISA at the specific time, expected approximately in 2008~9


Sanction against Breach of KSA

◆ Civil Liability for Damage Compensation• Auditors take responsibility for compensating damages

of the users of the report under the terms of “Law on

External Audit of Stock Companies”, “Korea Securities

and Exchange Law” and “Civil Law”, • Threat to audit firms’ going concern in case of paying

the huge amount of compensation when breaching of

KSA

◆ Criminal Punishment• Imprisonment• Fine


Sanction for Breach of KSA , Continued

◆ Administrative Sanction• Penalty reaching to KRW 2 billion, Restriction or

Suspension of Audit services, other sanction on

individual • Rotation of its audit client

◆ Market • The audit firms which failed to follow KSA will lose

their public trust in the audit engagements • Resulting financial loss


Reviews for Quality of the Audit

◆ QC by Audit Firms

◆ QC by KICPA• Periodic review of compliance with KSQC for the middle

and small audit firms• Review of an individual audit report for private company

and IPO

◆ QC by SFC• Periodic Review of compliance with KSQC for the 20

major audit firms • Review of an individual audit report for public company


Summary

● Recognize national specific condition • Law, regulation, acc,system and economy • Developed, Developing, and Undeveloped countries

● ISA convergence is deeply related to the adopting level of IFRS

• countries fully adopting, partly adopting IFRS and adopting the local GAAP• adopting the whole ISA is not easy in small and simple economies

● Difference between Principle base and Rule base• ISA should define its position on the Rule-based countries

● Translation of ISA• simple and clear wording is required• enhancing communication and applicability of ISA


Contact persons of the KICPA

- Moon, Tack Kon, Vice-president of KICPA and Chairman of Auditing Standards Committee

☎ 82-2-3149-0108 (E) [email protected] • Shim, Yeong Soo, Chief Researcher of KICPA ☎ 82-2-3149-0286 (E) [email protected]

Thank You

Documents

International Convergence of Auditing Standards – Korea May 23, 2006 A Member of Auditing Standards Committee, KICPA Managing Partner, Daemyung Grant Thornton