The objective of audits conducted by CPAs is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes the auditor's opinion. CPA audits are required under the Companies Act, Financial Instruments and Exchange Act (FIEA) and other acts and regulations, and they contribute to ensuring the reliability of the financial information provided by various entities.
Auditing standards generally accepted in Japan (Japanese GAAS)
CPA audits must be carried out in accordance with the Auditing standards generally accepted in Japan (Japanese GAAS).
Japanese GAAS consist of the following:
- Auditing Standards issued by the Business Accounting Council (BAC), an advisory body established within the Financial Services Agency (FSA), which include:
- The Auditing Standards
- The Auditing Standards stipulate principles and key concepts about the financial statement audit, agreed among broad stakeholders.
- Standard to Address Risks of Fraud in an Audit
- The standard is only applicable to the publicly traded companies*.
- The Standard on Quality Control for Audits
- The Standard on Quality Control for Audits is required to be applied together with the Auditing Standards.
Auditing Standards Committee Statements (ASCSs) and a Quality Control Standards Committee Statement (QCSCS) issued by the Japanese Institute of Certified Public Accountants (JICPA).
The BAC requests the JICPA to develop detailed requirements to implement Auditing Standards issued by the BAC in practice. These requirements, together with relevant application materials, are included in the ASCSs and QCSCS 1.
The ASCSs and QCSCS 1 are developed based on Auditing Standards issued by the BAC, and to converge with the clarified International Standards of Auditing (ISAs) and the International Standard on Quality Control 1 (ISQC 1) issued by the International Auditing and Assurance Standards Board (IAASB).
The JICPA redrafted all ASCSs and QCSCS 1 based on the clarified ISAs and ISQC 1. Clarified ASCSs and QCSCS 1 use the same structure as the clarified ISAs and ISQC 1, (i.e. "Introductions", "Objectives", "Definitions", "Requirements", and "Application and Other Explanatory Material"). Clarified ASCSs and QCSCS 1 are effective for audits of financial statements for period beginning on or after April 1, 2012.
* The publicly traded companies：Companies that are required to provide disclosures under the Financial Instruments and Exchange Act (excluding unlisted companies with a stated capital less than 500 million yen or with annual sales less than one billion yen and total liabilities less than 20 billion yen), whose financial statements or the audit report thereon are used by a broad range of users.
Statutory Audits conducted by CPAs
Audits under the FIEA
Under the FIEA, certain listed companies and other specified entities are required to be audited by independent CPAs. CPAs issue three types of reports in audits under FIEA:
Audit report on the financial statements for the current fiscal year.
Financial statements submitted must be audited by independent CPAs in accordance with the Japanese GAAS. The independent CPAs express their opinions in the audit report that the statements of financial position, performance results, and cash flows are fairly and faithfully presented from every material perspective.
- （b）Review report of quarterly financial statements
The FIEA requires listed companies to submit quarterly financial statements, and those reports must be reviewed by independent CPAs.
- （c）Audits of internal control report
The FIEA requires listed companies to prepare reports on their internal control and have those reports audited by independent CPAs. This requirement has been introduced in reference to the Article 404 of the Sarbanes Oxley Act in the US, but has been adjusted to take into account the specific requirements in Japan (called as "J-SOX").
Audits under the Companies Act
Companies that must be audited by independent CPAs under the Companies Act are as follows;
- Companies with capital stock of ¥500 million or more, or total liabilities of ¥20 billion or more as of the latest fiscal year-end
- Companies that adopt a "Company with Committees" corporate governance system
- Other companies which appoint external auditors on a voluntary basis
Other Statutory Audits (Examples)
CPAs audits are required in a number of areas including the following:
- Incorporated private educational institutions that received subsidies from the central government or local governments
- Labor unions
- Certain large financial institutions
- Incorporated administrative agencies
- Local governments