The Scope of Companies subject to External Audit

Introduction

The Scope of Companies subject to External Audit

1. Introduction

Under the Act on External Audit of Stock Companies, etc. (hereinafter the “External Audit Act”), stock companies (Chusikhoesa) and limited companies (Yuhanhoesa) that meet certain criteria are required to undergo an external audit of their financial statements. In addition, certain stock companies that meet specific thresholds must also comply with obligations relating to the Internal Accounting Control System (“IACS”).

This note summarizes (i) the criteria for being subject to an external audit of financial statements, and (ii) the criteria for stock companies that are required to establish and operate an IACS.

2. Main contents

2.1 External Audit of Financial Statements

Whether a company is subject to an external audit is determined as of the end of the immediately preceding fiscal year, based on whether the company meets or exceeds certain thresholds for assets, liabilities, revenue, and number of employees. For limited companies, the number of members must also be considered.

Below is a summary of the external audit thresholds applicable to stock companies and limited companies:

Stock company	Limited company
Multi-criteria thresholds
External audit required if 2 or more of the following 4 criteria are met i) Total assets ≥ KRW 12 billion ii) Total revenue ≥ KRW 10 billion iii) Total liabilities ≥ KRW 7 billion iv) Employees ≥ 100	External audit required if 3 or more of the following 5 criteria are met i) Total assets ≥ KRW 12 billion ii) Total revenue ≥ KRW 10 billion iii) Total liabilities ≥ KRW 7 billion iv) Employees ≥ 100 v) Members ≥ 50
Single-criterion thresholds
External audit required if at least 1 of the following 3 criteria is met i) Total assets ≥ KRW 50 billion ii) Total revenue ≥ KRW 50 billion iii) Listed companies or companies preparing for listing	External audit required if at least 1 of the following 2 criteria is met i) Total assets ≥ KRW 50 billion ii) Total revenue ≥ KRW 50 billion

For Stock Companies converting into Limited Companies, the criteria for Stock Companies will apply for the next 5 years from the registration of the conversion.

2.2 Obligation to Establish and Operate an Internal Accounting Control System (IACS)

The obligation to establish and operate an IACS applies only to stock companies whose asset size, as of the end of the immediately preceding fiscal year, meets the relevant thresholds.

However, listed companies must establish and operate an IACS regardless of asset size.

The entities subject to IACS-related obligations can be categorized into listed and unlisted stock companies, as summarized below.

Listed stock company	Unlisted stock company
Must establish and operate an IACS • If Assets ≥ KRW 100 billion: subject to external audit of IACS • If Assets < KRW 100 billion: subject to external review of IACS	Total assets ≥ KRW 500 billion
	Must establish and operate an IACS (subject to external review of IACS)
	Total assets < KRW 500 billion
	Exempt from the obligation

3. Concluding remarks

If a company is subject to external audit, it generally must appoint an external auditor within 45 days from the end of the immediately preceding fiscal year. If the company did not undergo an audit in the immediately preceding fiscal year, it must appoint an external auditor within four (4) months from the fiscal year-end. If an external auditor is not appointed within the statutory period, an auditor may be designated in accordance with applicable laws.

In addition, if the company is subject to IACS-related obligations under the External Audit Act, it should assess the operating status and control deficiencies of its IACS and implement remediation measures in a timely manner to prepare for the external audit/review process. In particular, if a material weakness is identified, related reporting obligations may arise under applicable standards, and failure to comply with the relevant requirements may result in administrative fines or other sanctions; therefore, careful attention is required.