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    Country by Country Financial Reporting and Auditing Framework

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    Japan – YUSEI Audit & Co. (prepared June 2014)

    Preparation of and Filing of Statutory Financial Statements

    All corporations and Limited Liability Partnerships ("LLPs") are required to prepare annual financial statements. All corporations are required to file their tax returns to the National Tax Agency ("NTA") within 2 months from the financial year end but a one month extension is allowed with prior notice. Financial statements of corporations are required to obtain the approval of its shareholders within 3 months from the financial year end. LLPs are required to prepare two types of annual financial statements within 2 months after the financial year end. One is for each of the partners, and the other one is for the partnership itself as total of all partners' financial income. LLPs are required to file its financial statements to NTA by January 31 every year. The income generated by LLPs is not taxable at the entity level, while it is taxable at partners' level, which included the distribution made from the LLPs to partner itself. The personal income tax return shall be filed within the tax filing period from mid-February until mid-March annually.

    Listed companies are required to file the audited financial statements to the Financial Service Agency ("FSA") within 3 months from the financial year end and it will be further published on the internet through Electronic Disclosure for Investors' Network system (generally called as "EDINET"). In addition, they are required to file the reviewed quarterly reports to FSA within 45 days from the end date of the period.

    Among corporations, joint-stock companies; Kabushiki Kaisha ("KK") are required to make a public notice for their financial results either by publication in an official gazette, daily newspaper or electronic public notice immediately after the shareholders meeting. The shareholders meeting shall be held within 3 months from the financial year end.

    There is no mandatory year end date for Japan corporations, but March 31 is the common date.


    Financial Reporting Framework

    Listed companies in Japan are required to prepare their consolidated financial statements in accordance with Japanese Generally Accepted Accounting Principles ("J-GAAP"). The J-GAAP is compatible with International Financial Reporting Standards ("IFRS") except for some relatively minor variance.  Eligible listed companies are also permitted to opt for IFRS or US GAAP.

    Corporations are required to report their corporate tax based on the regulations of the Corporate Tax Act ("CTA") which differs from J-GAAP. Therefore, an adjustment from J-GAAP to accounting treatment under the CTA is generally required.


    Audit Requirements forEntities Registered inJapan

    In Japan, not all corporations and entities are required to have a statutory audit. However, statutory audit is required when certain conditions exist as stated by several acts.


    Acts listed below specify the conditions of the corporations which require them to have a statutory audit:


    Under the Financial Instruments and Exchange Act:

    • All listed companies regardless of the size,
    • Corporations offering or selling marketable securities with issue price or sales price of JPY 100 million or more,
    • Corporations of which shareholders are more than 500 in current business year or in the past business year,
    • Corporations registered with the Japan Securities Dealers Association.
    Under the Companies Act:
    • Large corporations in the form of KK (defined under the Act as a corporation with stated capital of JPY 500 million or total liabilities of JPY 20 billion or more in the balance sheet of the end of its most recent business year)
    • KKs who have appointed committees,
    • KKs who have voluntary appointed accounting auditors.
    Under the Act on Securitization of Assets:
    • Corporations in the form of Tokutei Mokuteki Kaisha ("TMK", or Specific Purpose Company)

    There are more acts requiring certain entities to have a statutory audit such as the Act on Subsidies for Private Schools, the Shinkin Bank Act for credit unions, the Act on General Rules for Independent Administrative Agency, the Act on Political Party Assistance, and the Enforcement Order of the Limited Partnership Act for Investment.

    Audit Exemption

    Generally small- and medium-size corporations which are not categorized in the condition B stated above under the Companies Act are exempted from having a statutory audit. The above mentioned acts other than category A, B and C also exempt those entities who do not meet certain conditions from having a statutory audit (e.g. the Act on Subsidies for Private Schools exempts the private education institutions with subsidy of less than JPY 10 million from the duty of a statutory audit).

    LLP and limited liability company ("LLC") are not required for a statutory audit whereas Limited Partnership for Investment requires a statutory audit.


    Audit Appointment, Rotation and Joint Audits

    External auditors are elected in the shareholders meeting. The position will be held until the next annual meeting and they are considered re-elected should there be no resolution for their dismissal.

    In certain cases, auditors may also be dismissed by a resolution of the audit and supervisory board of the company. In such cases, an audit and supervisory board member must explain the reason for the dismissal at the next annual shareholders meeting. The dismissed auditor is entitled to attend the shareholders meeting to state his or her opinion regarding the dismissal.

    There is no requirement for rotation of audit firms, but according to the Certified of Public Accountants Act ("CPA Act") and the Ordinance for Enforcement of the Certified Public Accountants Act, those large corporations defined in the Act with certain conditions must rotate the engagement partners and other partners involved in the engagements every 7 years and cease their roles during the following 2 years. For those large audit firms with 100 listed audit clients or over, the CPA Act regulates that the lead engagement partner and lead quality control partner shall rotate every 5 years and cease their roles for the following 5 years.         


    Joint audits are extremely rare in Japan.


    Auditing Standards

    The audit standards undertaken are Auditing Standards and the Implementation Guidance in Japan. These standards are equivalent and consistent with the International Standards on Auditing issued by IAASB subject to some minor additional requirements relevant within Japan.


    Ethical Framework

    YUSEI Audit & Co. and its professions are bound by JICPA Code of Ethics ("JICPA Code") issued by Japanese Institute of Certified Public Accountants ("JICPA"). The JICPA Code is compatible with the International Code of Ethics for Professional Accountants set by IESBA with additional requirements specific in Japan.


    Audit Regulation

    Generally audit firms in Japan are subject to the external and internal monitoring processes with regard to their audit practice.


    External Monitoring

    Those audit firms who audit the public interest entities, large-sized companies and large union banks are subject to an external review by Quality Control Review Team of JICPA for every 3 years. Large audit firms, however, are subject to the review every 2 years. The inspection that will evaluate the design of audit quality controls is in accordance with the Quality Control Standards and adequacy implementation of such quality control policies and procedure. The results are reported to Quality Control Committee of JICPA and published on the JICPA web page to ensure transparency of the quality control review.

    Audit firms are also subject to inspection by the Certified Public Accountants and Auditing Oversight Board ("CPAAOB") of FSA when the authority thinks that it is necessary after the quality control review of JICPA is performed. CPAAOB is a public oversight body to monitor and oversee the JICPA quality control review and ensure compliance of Quality Control Standards by the audit firms.


    Internal Monitoring

    YUSEI Audit & Co. has established the internal Quality Control Committee to ensure effectiveness of the quality control system. The committee will maintain and continuously fine-tune the quality control system and conduct internal audit regularly to ensure that audit procedures are performed appropriately.

    The proper review system is adopted to ensure quality in audit services. The procedures include review of independence of the audit assignment team, review of all audit processes, and review of the reasonableness and appropriateness of the formation of the opinion on the respective audit assignment.

    Japan Crowe Horwath audit member firms are also subject to regular network peer review ("QAR") by Crowe Horwath International.


    Transparency Report

    All Japanese audit firms registered as auditors for listed companies are required by law to publish a transparency report (Outline for Quality Control Management) which is available from the JICPA's website.

    YUSEI Audit & Co.'s report includes the topics stated as follows:

    • Obligation for quality control,
    • Professional ethics and independence (including rotation rule),
    • Acceptance of new engagement and renewal of existing contracts,
    • Hiring, education and training, and evaluation and appointment of audit professionals,
    • How to conduct an audit,
    • Monitoring of audit quality system,
    • Communication with predecessor and successor,
    • Joint audit, and
    • Measurement for organization restructuring



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