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

Korean Institute Of Certified Public AccountantsPage 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.

Korean Institute Of Certified Public AccountantsPage 3 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

Korean Institute Of Certified Public AccountantsPage 4 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 ).

Korean Institute Of Certified Public AccountantsPage 5 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

Korean Institute Of Certified Public AccountantsPage 6 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

Korean Institute Of Certified Public AccountantsPage 7 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

Korean Institute Of Certified Public AccountantsPage 8 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.

Korean Institute Of Certified Public AccountantsPage 9 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

Korean Institute Of Certified Public AccountantsPage 10 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 : together with discussion and cooperation with government

Korean Institute Of Certified Public AccountantsPage 11 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 ( ) -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

Korean Institute Of Certified Public AccountantsPage 12 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

Korean Institute Of Certified Public AccountantsPage 13 Efforts of Keeping Pace with IFAC standards ◆ 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)

Korean Institute Of Certified Public AccountantsPage 14 Efforts of Keeping Pace with IFAC standards ◆ 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

Korean Institute Of Certified Public AccountantsPage 15 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

Korean Institute Of Certified Public AccountantsPage 16 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

Korean Institute Of Certified Public AccountantsPage 17 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

Korean Institute Of Certified Public AccountantsPage 18 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

Korean Institute Of Certified Public AccountantsPage 19 Contact persons of the KICPA -Moon, Tack Kon, Vice-president of KICPA and Chairman of Auditing Standards Committee ☎ (E) Shim, Yeong Soo, Chief Researcher of KICPA ☎ (E) Thank You