Criteria and engagement procedures for first year external audit

When a company grows beyond a certain size, it may become subject to a statutory external audit under the Act on External Audit of Stock Companies, etc. (the “External Audit Act”).

 At this stage, the most important procedure is the appointment of an external auditor. If a company fails to meet the appointment deadline or violates the approval process, the Financial Supervisory Service (FSS) may designate an auditor directly. Therefore, careful attention is required.

Criteria for becoming subject to a new external audit (Under the External Audit Act)

A company becomes subject to an external audit if it meets any of the following:

1. A listed company or a company preparing for listing (IPO)
2. Total assets of KRW 50 billion or more as of the end of the immediately preceding fiscal year
3. Annual sales of KRW 50 billion or more as of the end of the immediately preceding fiscal year
4. Companies meeting the size criteria are as follows:
   
   Corporate Companies (Ju-sik Heosa) (if two or more conditions are met)
   • Total assets of KRW 12 billion or more
   • Total liabilities of KRW 7 billion or more
   • Sales of KRW 10 billion or more
   • 100 or more employees
   
   Limited Liability Companies (Yu-han Heosa) (if three or more conditions are met)
   • Total assets of KRW 12 billion or more
   • Total liabilities of KRW 7 billion or more
   • Sales of KRW 10 billion or more
   • 100 or more employees
   • 50 or more members (shareholders)

Deadline for appointment of an auditor in the first year of the external audit

In general, companies that have continuously been audited (continuing audit engagements) must appoint their auditor within 45 days from the beginning of the fiscal year.

However, companies subject to an external audit for the first time (initial audit engagement) must appoint an external auditor within four months from the beginning of the fiscal year. Accordingly, a company with a December 31 fiscal year-end must appoint its external auditor by the end of April.

Auditor appointment procedures

The authority responsible for approving the appointment of an external auditor differs depending on the type of company.

General Unlisted Corporate Companies and Limited Liability Companies

• Approval by the statutory auditor or the audit committee
• For limited liability companies with capital of KRW 1 billion or more and no statutory auditor → approval by the general meeting of members
• For stock companies or general limited liability companies without a statutory auditor → approval by the company (e.g., CEO or management)

Post-appointment reporting requirements

After appointing an external auditor, the company must report the appointment to the Financial Supervisory Service (FSS) within two weeks from the date of execution of the audit contract.

Sanctions for failure to appoint an external auditor

If a company subject to an external audit fails to appoint an auditor within the prescribed period, violates the approval procedure, or fails to report the appointment, the Financial Supervisory Service may:

• Designate an auditor
• Impose administrative fines
• Initiate criminal penalties (fines or imprisonment)

In particular, the designation of an auditor results in the company losing its right to select its own auditor, which is a significant disadvantage and should be carefully avoided.

Conclusion

A first-time external audit is not simply about “undergoing an audit.” It represents a critical transition in aligning the company’s accounting system with external regulatory standards.

Missing the appointment deadline or failing to comply with procedures may result in serious disadvantages, including auditor designation. Therefore, adequate preparation in advance is essential.

The point at which a company first becomes subject to an external audit is also a signal of corporate growth.

With proper understanding and preparation, an external audit can become not a burden, but an opportunity to enhance corporate credibility.