Financial Supervisory Service Provides Guidance on Auditor and Company Precautions for Voluntary Auditor Appointment Contracts

[Asia Economy Reporter Lee Jung-yoon] As the main notifications for auditor designation for the 2023 fiscal year have been completed under the periodic auditor designation system, the Financial Supervisory Service (FSS) on the 28th provided guidance on precautions when entering into contracts with freely appointed auditors if not designated.

The periodic auditor designation system requires listed companies and large unlisted stock companies with separated ownership and management that have freely appointed auditors for six consecutive years to appoint auditors designated by the Securities and Futures Commission under the Financial Services Commission for the following three years. Companies subject to external audit that have not been designated must freely appoint auditors according to the appointment deadlines and procedures stipulated in the Act on External Audit of Stock Companies, etc.

The FSS urged the preparation of reasonable audit contract conditions to ensure that sufficient qualified personnel can be allocated, considering the nature of the work, as a precaution for auditors. It also provided guidance on reviewing threats to auditor independence.

The FSS explained, "Audit input hours should be planned and documented by considering standard audit hours, company characteristics, audit risks, and auditor judgment, and presented to the company. Thorough checks must be conducted not only before accepting the audit but also during the audit period to ensure that auditor independence is not compromised."

Accounting firm A performed a service for establishing the internal control system over financial reporting for company B and entered into an external audit contract for the first year of the internal control audit with company B, resulting in impairment of auditor independence due to self-review threats, among others.

As precautions for companies, the FSS requested that the audit and audit committee document compliance matters related to auditor appointment, such as audit quality, before appointing auditors. It also emphasized the need to review whether there are conflicts of interest such as impairment of independence to prevent deterioration in the reliability of financial statements.

In particular, it stressed that companies should review and document the audit fees, audit hours, audit personnel, audit plans, and audit quality (expertise) proposed by the auditor, and if an audit report is received, verify whether the auditor has complied with the documented matters related to auditor selection.

An FSS official stated, "We plan to continuously provide guidance through explanatory sessions for accounting firms and companies to ensure that auditor appointment procedures comply with the External Audit Act and other regulations when entering into audit contracts."

He added, "After the audit contract is finalized, we will check the auditor appointment procedures and audit contract status to identify any violations of the External Audit Act, and strengthen inspections on the appropriateness of audit engagement, including audit input hours and compliance with independence, through auditor supervision."

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