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Auditing System

Audits are of two types, based on who conducts the audit: internal audits conducted by personnel in the organization, and external audits conducted by outside parties independent of the organization, for example, audits by CPAs. The aim of external audits is to provide reasonable assurance to various stakeholders as to whether the financial statements prepared by companies are fairly presented, based on their audits as an independent third party. CPA audits are required under many laws including the Companies Act, and the Financial Instruments and Exchange Act, and contribute to ensuring the credibility of the financial information that entities provide.

A major internal audit is the one conducted by "company auditors" who large entities are required to appoint under the Companies Act to oversee the activities of large entities' directors. Recently, more companies have tended to employ internal auditors to audit internal control, under management supervision, in order to establish a more rigorous structure for external audits. In this case, the work of CPAs, company auditors and internal auditors is closely interrelated to enable each party to conduct their audits more effectively.


CPA audits must be conducted in accordance with the Auditing Standards codified by the Business Accounting Council (BAC) and with the implementation guidance (Auditing Standards Committee Statements) issued by JICPA. The Auditing Standards codified by the BAC together with the implementation guidance issued by JICPA are deemed to be the generally accepted auditing standards (GAAS) in Japan.

In Japan, CPAs provide audit services in the following areas:

Statutory Audits

The Financial Instruments and Exchange Act

Companies that must be audited by independent CPAs under the Financial Instruments and Exchange Act (FIEA) are follows:

  • companies that issue shares listed on a financial instruments exchange or are in the process of listing;
  • companies that filed a registration statement; and
  • companies with a specified number of shareholders.
(1) Audit requirements under the FIEA
Filed financial statements must be audited by an independent CPA in accordance with Japanese GAAS. An independent auditor's report expresses an opinion as to the fairness of the presentation of the company's results of operations, financial position, and its cash flow, in accordance with the generally accepted accounting principles (GAAP) in Japan.
(2) Review of quarterly financial statements
The FIEA requires listed companies to submit quarterly reports. Additionally, quarterly financial statements included in the quarterly reports need to be reviewed by an independent CPA.
(3) Audit on internal control over financial reporting
The FIEA requires listed companies to prepare an Internal Control Report and to have it audited. This requirement is modeled after the one provided by Section 404 of the Sarbanes-Oxley Act, though with modifications in consideration of the experiences in the U.S.

The Companies Act

Companies that must be audited by an independent CPA under the Companies Act are as follows:

  • Large companies : Capital stock of ¥500 million or more, or liabilities of ¥20 billion or more, as of the latest fiscal year-end;
  • companies which adopt a “Company with Committees” corporate governance system; and
  • other companies which appoint an accounting auditors (kaikeikansanin) on a voluntary basis.

Other Statutory Audits (Examples)

  • Private schools receiving subsidy from national or local government
  • Labor unions
  • Political party's subsidy report prepared in accordance with the Political Party Grant Law.
  • Mutual insurance associations
  • Credit banks and credit cooperatives
  • Labor banks and other specified financial institutions
  • Special-purpose companies
  • Investment corporations
  • Independent administrative corporations
  • National universities
  • Local governments

Non-Statutory Audits

  • Religious organizations, non-profit organizations, consumers cooperatives, and healthcare organizations
  • Audits in connection with mergers, business transfers, and acquisitions
  • Other audits not covered above

Cross-Border Audits

  • Japanese companies with cross-border listings and financing
  • Foreign companies' subsidiaries or branches in Japan

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