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To the Board of Directors and ShareholdersMarch 2nd 2012
We have audited the accompanying statements of the financial position of Celltrion Healthcare Co., Ltd. as ofDecember 31,2011 and 2010, and the related statements of income, comprehensive income, changes in equity andcash flows for the relevant years, expressed in KRW.These financial statements are the responsibility of the group’smanagement. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Thosestandards require that we plan and perform the audit to obtain reasonable assurances about whether thefinancial statements are free of material misstatements. An audit includes examining, on an empirical basis,evidence supporting the figures and disclosures enumerated in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by the company’s management, as well asevaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis forour opinion.
In our opinion, the financial statement, referred to above, fairly presents, in all material respects, the financialposition of Celltrion Healthcare Co., Ltd. as of 31 December 2011 and 2010, and its financial performance and cashflows for the years ends, in accordance with the International Financial Reporting Standards, as adopted by theRepublic of Korea (Korean-IFRS)
Gangnam-gu, Seoul 111-13 Nonhyun, Nobel sixth floor Building 2
Sam Young Accounting Legal Person
Representative Director Kim Duck
This report is effective as of 2 March 2012, the audit report date. Certain subsequent events or circumstances, whichmay occur between the audit report date and the time of reading this report, could have a material impact on theaccompanying financial statements and notes covered in the report. Accordingly, the readers of the audit reportshould understand that there is a possibility that the enclosed audit report may have to be revised to reflect theimpact of such subsequent events or circumstances, if they occur.
Celltrion Healthcare Co., Ltd. was established on December29th 1999. It’s main business scope ismanufacturing, processing and selling medical supplies. The company is located in Inchon City, South Korea.
On November 25th, 2010, the company divided its investment department into a new legal entity, CelltrionHoldings.
2. Significant accounting policies
The principal accounting policies were applied to the present accounting period on January 1st 2011. Therefore,the statement of profits or losses which have been written according to the previous Enterprise AccountingStandards is disclosed in paragraph 2.4 and paragraph 2.89, as well as its notes on the general enterpriseaccounting principle. Beyond that, the accounting policies have no effect on the operating results, financialconditions and notices.
The content of the significant accounting policies applied in the financial statements is as follows:Significant accounting policies
A. Revenue recognition criteria
The Company use fair value to forecast the revenue generated from the sale of goods, rendering of services,and use of the assets. When forecast the revenue, the value-added taxes, sale allowance, rebates anddiscounts was subtracted. The Company recognizes revenue when the amount of revenue can be reliablymeasured and it is probable that future economic benefits will flow to the entity.
For the securities and short term financial products held by the entity without large transaction costs, whichare easy to convert to cash and have a relatively stable value under the change of interest rate,if thecontract period (repayment period) is less than three months, were recognized as cash and cashequivalents.
C. Allowance for bad debts
The Company separately analyzed the recovery possibility of the balance of the bonds, loans and tradereceivables before the report termination date, and set the loan loss measurement as reserves for bad debtaccording to previous experience with loan loss prediction.
D. Inventory
The entity used FIFO to assess the inventory by acquisition cost. The inventory amount and sum of moneywere calculated using the continuing record method at the year end.
Inventoried are measured at the lower of cost and net realizable value. In addition, we reverse theimpairment within the limits of initial book value when the market value of impaired inventories exceedsthe carrying amount.
E. Securities
Due to frequent buying and selling, the securities bought by the Company for short-term profit should becalled as trading financial assets. Securities with definite repayment date are called held-to-maturityinvestment. Whether trading financial assets or held-to-maturity investment, they are categorized assecurities.
The acquisition cost of securities should be mainly based on market price, which includes the additionalexpenses of acquisition, while the acquisition cost of short-term trading financial assets should be mainlybased on the fair value.
In terms of held-to-maturity investments, the difference between acquisition cost and face value on the
maturity date should be depreciated under real interest method after repayments, and added the sum of
procurement costs and interest income. The cost with depreciation should be ultimately added into the sum
of statements of financial positions.
Trading financial assets and available-for-sale assets should be evaluated by fair value. The market value of
securities with market features should refer to the fair value, while the market value should refer to the final
price on the ending date of the report.
However, for available-for-sale financial assets, when the fair value of stocks cannot be precisely measured,
it should be evaluated by the acquisition costs. For trading financial assets evaluated by the fair value, the
unrealized gain or loss should be recognized in gain or loss for the period. While for the available-for-sale
financial assets, the unrealized gain or loss should be evaluated as other comprehensive gain or loss. The
aggregated value of gain or loss of available-for-sale financial assets can be recognized in the
available-for-sale financial assets, or it may be recognized as gain or loss for the period.
The recoverable amount of securities, if less than the acquisition costs (considering depreciation) of
securities or acquisition costs of equity, with objective proof to prove when the loss occurs and there is no
other proof to affirm the loss is unnecessary, should be recognized in gain or loss for the period.
F. Tangible asset measurement and depreciation method
The tangible assets are valued at acquisition costs or manufacturing costs. The relevant expenses that the
plant needed and maintenance expenses should be priced at acquisition cost (capital contribution in kind,donation and other assets without costs shall be priced at fair value).
In addition, the expenditure of procurement or manufacture of tangible assets, if meeting the requirements
of recognition as tangible assets, it is recorded as capital expenditure; otherwise it is recognized as
expenses occurred in the period.
On the other hand, in terms of depreciation of tangible assets, the expenses is accrued in accounts ascalculated and allocated using straight-line method according to the chart of estimated useful lives below
G. Intangible asset measurement and depreciation method
Intangible assets acquired separately are recognized at acquisition cost and intangible assets acquired in abusiness combination are measured at fair value at the acquisition date. After the acquisition, the bookvalue will be directly reversed and marked as an accumulated depreciation amount and accumulatedimpairment loss.
In addition, aside from development expenses, expenses of intangible assets generated internally areincluded in current profits or losses when occurring.
Other intangible assets 5 years Straight-line method
H. Asset impairment losses
Besides the company’s assets that are valued at fair value, with assets with a recovery value which falls
below the carrying amount due to the obsolescence of tangible and intangible assets and physical damage,the decreased value from the carrying amount should be recognized as an impairment loss. Regardless of
assets which are evaluated at fair value, the probable amount of the recovery price might be lower than the
carrying amount, which is a result of obsolescence, physical damages and market price dropping. When
this happens, the balance between the recovery price and the carrying amount should be recognized as an
impairment loss
When the recoverable amount of the assets that recognized an impairment loss in the later period exceeds
the carrying amount, the impairment loss under the limit of the present value of the carrying amount before
impairment is reversed. However, in the case of available-for-sale securities, the amount recovered
afterwards should be included in the reversal of the impairment loss within the limit of the
previously-recognized impairment loss. The probable recovery amount should be recognized as the reversalof the impairment loss, but the discounting balance of the carrying amount (before it’s defined as the loss)
is the limit.
I. Retirement benefit liabilities
The Company operates a defined contribution plan. The related payment obligation should be recognized
as retirement benefit that is accounting to Current profit and loss in relevant payment dates. If the
company is indebted to the contribution, an equal amount of unpaid contributions will be included in the
liabilities; if the contribution payment is larger than expected, reduce the future contribution payment or
return in cash. The excess payments were included into assets.
J. Provision and contingent liabilitiesWhen the Company is fulfilling its current obligation, which generated by past events and transactions and
doesn’t have certain payback time and payment amount, there is a high possibility for resource outflow. When
the cost of the obligation can be reliably measured, it should be recognized in the provision. Additionally, when
the difference between the provision’s nominal price and present value is large, in order to fulfill the obligation,
the expenditure amount should be assessed by the present value.
Additionally, the potential obligations measured according to past or future events with an uncertain rate of
occurrence or existing obligations generated by past events or transaction outcomes, if there is little possibility
of resource outflow or if the cash required to fulfill the obligation can’t be reliably measured, should be
recognized as a contingent liability.
K. Foreign currency translations
The company’s monetary assets and liabilities are converted according to the reporting period end closing rate(current period \ 1,153.3 / US $, \1,494.1 / !, previous period \ 1,138.90 / US $, \ 1,513.60 / !). The translationdifferences from the conversion are recognized in the current profits or losses. On the other hand,non-monetary items that are measured at their historical costs are converted based on the exchange rate at the
date of the transaction. Non-monetary items which are measured by fair value should be converted at thehistorical exchange rates when fair value was measured.
L. Income tax expensesThe temporary difference between the carrying amount of assets, liabilities and the amount of tax should bemeasured as deferred tax asset and deferred tax liability. The deferred tax asset and deferred tax liabilityare measured at the increase or decrease of the income tax amount generated by the fluctuating temporarydifference.
The feasibility of the deferred corporate taxes assets was examined each time at the end of the reporting
date. It can be identified as an asset when taxable income is confirmable, and the tax reduction on deferred
corporate tax assets is expected to be realized. For tax credits and tax deductions, if the deduction amount
is within the taxable income amount, then the amount should be recognized as a deferred corporate taxes
asset.
Deferred corporate taxes assets and deferred corporate liabilities have been classified as current assets
(current liabilities) and other non-current assets (non-current liabilities) according to asset subjects and
liability subjects on the balance sheet. Report and mark the deferred corporate taxes assets and liabilities
separately if they are related to the same authorities
Regulations on SME accounting treatment
As the SME confirming the basic law for SMEs, we accommodate for the special regulations of accounting
treatment for SMEs in accordance with Article 31, GAAP
(1) Long term deferred payment transactions
The liabilities which generated by long term deferred payment transactions and long term money loans
The content of the company’s short term investment assets up to the end date of the report are as follows (Unit:KRW 000’)
Division Annual Interest Rate(%)
2011.12.31
Amount
Current Period Last Period
Short-term loans 8.5 - 11,000,000
Short term debts up to the end of the last period all come from related party’s full credit.
4. Long term investment assets
The content of the company’s long term investment assets up to the end date of the report are as follows (Unit:KRW 000’)
Division
Annual Interest Rate
(%)31 Dec 2011
Amount
NotesCurrent Period Last Period
Long term financialinstruments
- 2,000 2,000 Mortgage deposit
Long term debts 8.5 61,957 - -
Total 63,957 2,000
The long-term financial instruments above will not be used as a mortgage deposit. Additionally, the long term loans above all come from the related party’s full credit.
5. Financial assets available for sale
Up to the end of the reporting period, available-for-sale securities are all non-marketable equity securities.Details are as follows: (Unit: KRW 000’)
The long term equity investment ratios of the available-for-sale securities mentioned above all exceed 20%.The equity method cannot be used on unrelated items of the external review. Fair vale cannot be reliablymeasured because of a lack of basic documents and experience, so the available-for-sale securities areassessed according to acquisition cost.
6. Tangible assets
Changes in the current and last periods’ tangible assets are as follows: (Unit:KRW 000’; net)
(Current period)
Division Vehicle Equipment Total
Acquisition costs at the beginningbalance
43,956 193,243 237,199
Acquisition / capital expenditures - 624,160 624,160
Disposal - (72,224) (72,224)
Acquisition costs at the endingbalance
43,956 745,179 789,135
Accumulated depreciationamount at the end of the period
43,955 78,650 122,605
Carrying amount at the end of theperiod
1 666,529 666,530
Depreciation - 62,507 62,507
Last period
Division Vehicle Equipment Total
Acquisition costs at thebeginning balance
43,956 204,030 247,986
Acquisition / capitalexpenditures
- 96,911 96,911
Disposal - (107,698) (107,698)
Acquisition costs at theending balance
43,956 193,243 237,199
Accumulated depreciationamount at the endingbalance
The content of changes in current and last periods’ pension liabilities (Unit: KRW 000’)
Division Current Period Last Period
Beginning balance 829,441 -
Retirement payable 323,701 835,366
Retirement payment (56,455) (5,925)
Retirement payment plan (1,096,687) -
Ending balance - 829,441
The company has introduced a defined retirement payment plan in the current period. Before the introductionthe retirement payment liabilities balance was KRW 1,096,687,000 including KRW 323,701,000 in retirementpayments which were recognized in the current period and paid to the related financial authority.
10. Foreign currency assets
The content of the conversion of monetary current assets and liabilities measured in foreign currencies are asfollows: (Unit: KRW 000’)
Current period
Subject Foreign Currency Amount Korean wonProfit and Loss on
Subject Foreign Currency Amount Korean wonProfit and Loss on
Exchange
Foreigncurrentassets
Cash and cash
equivalents
USD 6,212,846.71 7,075,811 (469,163)
EUR 13.12 20 (1)
Long term and shortterm trade receivables
USD 59,100,000 67,308,990 (582,880)
TotalUSDEUR
65,312,846.7113.12
74,384,821 (1,052,044)
11. Provide guarantee details, contingent liability and protocol matters.
A. Guarantee details offered by others
From the Representative Directors, the Company received a joint guarantee for a derivatives basic contractand KRW 40,000 MN loan from the exchange bank.
B. Contents of the guarantee provided for others
(1) The Company is responsible for providing joint guarantee for the debt of the new split companyCelltrion Holdings and the debt before split (including contingent liabilities before the split).
(2) The Company provides joint guarantee for Celltrion Holdings’ KRW 57,491 MN borrowings from
financial institution (Debts cap at KRW 71,239.2 MN) and Celltrion GSC’s KRW 7,524 MN borrowings
from financial institution (Debts cap at KRW 9,028.8 MN)
C. Contents of the guarantee provided for others
The representative director provided collaterals for Celltrion Healthcare’slong-term borrowings fromCelltrion Pharm.
D. Commitment
(1) At the end of the reporting date, the company has no remaining balance from the exchange banks’
line of credit or basic contract for derivatives.
(2) The company is signing contracts in order to engage in sales and distribution with other domestic
For the litigation cases going on mentioned above, we can’t accurately predict the final results. Therefore, theinfluence generated by the lawsuit results is not reflected in the financial statement.
12. Capital:
A. Capital stock
According to the articles of association, the total number of shares issued by the company was 20,000,000(5,000 KRW per share), at the end of 31 December 2011. The number of shares issued is 368,363 (300,000
ordinary shares, 68,363 preferred share). The paid-in capital is KRW 1,841,815,000.
The content of last period’s preference share is as follows.
Subject Content
Preference sharesby category
Accumulated participating redeemable and convertible preference sharesFirst preference share: lowest annual interest rate - 1% of the issue price of redeemableand convertible preference shareSecond preference share: lowest annual interest rate – 0.01% of par value theredeemable and convertible preference share
Date of increase inpaid-in capital
First preference share: 10 July 2009Second preference share: 31 August 2011
Voting rights Have voting rights
Note aboutRedemption
(1) Redemption date1. First preference share: Four years after the issue date, can be redeemed when theredemption conditions occur2. Second preference share: Five years after the issue date, can be redeemed when theredemption conditions occur(2) Redemption amountBased on redemption reasons and redeemed at a reasonable price
Conversionrequirements
(1) Conversion ratio: the initial exchange rate is 1:1 between redeemable and convertiblepreference share and ordinary share
(2) Conversion price: the issue price of each preference share(3) Required conversion period:First preference share: Start from one year after the issue dateSecond preference share: Five years within the issue date
The company conducted a spin-off on 25 November 2010. The capital of ordinary shares and preferenceshares decreased by KRW 1,500,000,000 and KRW 157,635,000 respectively, and generated KRW59,368,783,000 loss from capital reduction (Notes 22).
C. Statement of retained earnings
The current and last periods’ retained earnings are as follows:
Statement of Retained Earnings
=====================
The 12th period: 1 Jan 2011To 31 Dec 2011
The 11th period: 1 Jan 2010To 31 Dec 2010
Expected disposal date: 23 Mar 2012 Determined disposal date: 31 Mar 2011
Unit: KRW 000’
Division Current Period Last Period
I. Unappropriated retained earnings 34,791,093 41,010,820
1. Last period’s retained earnings carried forward 41,010,820 (13,625,249)
2. Net profit (loss) in the current period (6,219,727) 54,636,069
II. Appropriated retained earnings - -
III. Unappropriated retained earnings carried forward inthe next period
The details of income tax and deferred income tax assets (liabilities) are as follows:
The details of the main composition of the corporate tax
The details of the main composition of the corporate tax in the current and last periods are as follows (Unit:
KRW 000’)
Division Current Period Last Period
Current income tax payable - 5,461,867
Changes in deferred corporate tax assets caused bytemporary differences
(1,463,917) 10,512,532
Income tax expenses reflected directly in capital - (5,931,614)
Income tax expenses (income) (1,463,917) 10,042,785
A. Income tax expenses after directly adding and subtracting capitalThe contents of corporate tax expenses after directly adding and subtracting capital are as follows
(Unit: KRW 000’)
Division Current Period Last Period
Investments on equity method - (5,931,614)
B. Relationship between tax expenses and profits or losses before income tax expenses
The relationship between tax expenses and profits or losses before income tax expenses in the current andlast periods are as follows.
Division Current Period Last Period
Profit and loss before income taxes (7,683,644) 64,678,854
Income tax in accordance with the applicabletax rate
(1,690,402) 15,652,283
Adjustments 226,485 (5,609,498)
Expenses not deductible for tax purposes 187,442 (269,409)
Amount of unrecognized deferred tax due totemporary differences
- (71,410)
Recognized deferred tax reserves at thebeginning of the period
- (3,419,657)
Recognized loss carry forward in this period- (1,908,512)
Total (47,120) (220,003) (57,603) (4,170) (213,690) (46,095) (918)
Deferred tax liabilities (46,095) (918)
Deferred tax assets- net 2,344,291 221,801
(*1) In the period that the deductible temporary difference exists, if there is sufficient taxable income to beexpected, then the deductible temporary difference must be recognized as a deferred tax asset.
Deferred income tax assets (*1) 694,973 418,606Taxabletemporary
Uncollectedinterest
(37,392) (37,392) - - - - -
Foreign currencyconversion gains
- - (47,120) - (47,120) (11,403) -
Total (37,392) (37,392) (47,120) - (47,120) (11,403) -
Deferred tax liabilities (11,403) -
Deferred tax assets- net amount 683,570 418,606
(*1) In the period that the deductible temporary difference exists, if there is sufficient taxable income to beexpected, then the deductible temporary difference is recognized as a deferred tax asset.
D. Current income tax assets and current income tax liabilities before the deductionThe details of the current income tax assets and current income tax liabilities before the offset up to the end ofthe reporting date (Unit:KRW 000’)
Subject Current Period Last Period
Current income tax assets before the offset (*) 2,367,084 6,110,161
Current income tax liabilities before the offset - 5,461,867
Current income tax assets after the offset 2,367,084 648,294
(*) Current interim prepaid tax amount and interest equal the total amount of tax withheld.
16. Statement of comprehensive incomeProfits and losses in the current and last periods are as follows. (Unit:KRW 000’)
Division Current Period Last Period
Current net profits (losses) (6,219,727) 54,636,069
Other comprehensive income - -
Current total comprehensive income(losses)
(6,219,727) 54,636,069
17. Related party transactionsSpecial related entities in the current and last periods and transactions with special related personnel are asfollows:
A. Related party:
Division 2011 2010
Manager Jung-jin Seo Jung-jin Seo
SubsidiaryCelltrion Healthcare Hungary KftCelltrion Healthcare India Private LimitedCelltrion Healthcare ILAC SANAYI VE TICARET
D. Receivables and payables on financial arrangements with related parties (Unit:KRW 000’)
(Current period)
Subject DivisionInterest Rate
(%) Amount
Receivables
Long terminvestment assets
Other Related Parties 8.5 61,957
PayablesShort-termborrowing
Other Related Parties 8.5 22,600,000
Manager 8.5 300,000
Last period
Subject DivisionInterest Rate
(%) Amount
Receivables
Short terminvestment asset
Other Related Parties 8.5 11,000,000
PayablesShort-termborrowings
Other Related Parties 8.5 15,252,203
18. Statement of cash flows
Significant transactions without cash inflow and outflow in the current and last periods are as follows(Unit: KRW 000’)
Division Current Period Last Period
Alternative liquidity of long term receivables 23,501,276 -
Alternative liquidity of long term payables 33,000,000 -
19. Financial instruments
A. Main assumptions on the determination of financial instruments’ fair value
For the company’s financial instruments which don’t have an active market with a standard transaction
conditions, the fair value were calculated by using generally accepted pricing models based on thediscounted cash flows method, and refer to the fair value of other financial instruments and financialliabilities.
Additionally, the company’s financial instruments are current assets and liabilities instead of securities thatincluded in profit and losse subject. Therefore, the difference between discounted cash flows andpurchase costs has of no effect on the balance sheet. The financial instrument should be assessed usingthe fair value when purchased.
Total 38,830,436 59,252,203 46,200,000 - 144,282,639
(2) Liquidity Risk Management
The board of directors is responsible for liquidity risk management, which made basic policies for shortterm and long term financing activities and obey liquidity risk management regulations. The companymaintains adequate reserves and borrowing limits, continues to observe the predicted cash flows andactual cash flows, and adjusts the maturity of financial assets and financial liabilities to manage theliquidity risk.
20. Necessary subjects when calculating value-added:
Necessary subjects needed to calculate the current and last periods’ values added are as follows. (Unit: KRW000’)
Subject Current Period Last Period
Salary 3,536,121 3,520,131
Retirement benefits 323,701 835,366
Employee benefits 380,964 316,634
Depreciation 62,507 31,878
Amortization 2,736 3,190
Tax and public tax 16,657 4,689
Rent payments 343,007 179,640
Total 4,665,693 4,891,528
21. Event after the report termination date
According to the resolution of the board of directors on 31 January 2012, the company decided to choose 1February 2012 as the capital stock pay-up day, issuing 110,080 preferential shares, at 2,307,500 KRW pershare.
22. Equity spin-off
A. Overview of equity spin-off
According to the company Board of Directors’ decision on 17 September 2010, and the approval of the
Extraordinary General Meeting of Shareholders on 22 October 2010, the retail pharmaceutical businessdivision and investment division were transferred to the newly established Celltrion Holdings Inc. underthe spin-off method.
B. Methods and contents of spin-off
(1) The company’s spin-off method
The spin-off company Celltrion Healthcare Co., Ltd. branched off its investment department andestablished a new company and transferred its related assets and liabilities according to regulation 530th2-12 of the business law. The new spin-off company issues shares within the spread between assets andliabilities, which is the net asset value. After the company separated itself completely, shares weredistributed to shareholders under the spin-off method. For shareholders on the list of Celltrion Healthcare
Co., Ltd., shares held by Celltrion Holdings will be distributed at the rate of one share for one share.
Additionally, the spin-off company and the newly established spin-off company take joint responsibilityfor liabilities before the spin-off, respectively.
(2) The new company and the value of the property before spin-off
According to the Inheritance Object Subject attached on the Spin-off Business Proposal which wasapproved in the extraordinary general shareholders meeting held on 22 October 2010, the assets andliabilities transferred to the newly established company should be adjusted in accordance with changesof property in the relevant departments. The transferred assets and liability should be included in thenewly established company.
(3) Items regarding the inheritance of rights and obligations
The spin-off company’s assets that transferred actively or passively, rights and obligations, as well asother items, were all transferred to the newly established company at the date of the spin-off.
(4) Items regarding employee inheritance and retirement payments
Department employees and their pensions transferred from the previous company to the newlyestablished company will be inherited by the newly established company as of the spin-off date.
(5) Assets and liabilities, sales and operating profits should be transferred due to the spin-off
As of the end of the previous accounting years and the spin-off date, the departments’ assets andliabilities, sales and operating profit are as follows: (Unit: KRW 000’)
Division Financial Year before Spin-off Financial Year after the Spin-off
23. Date and constitution for the approval of the financial statement
In order to submit the financial statement of the current account period in the regular general meeting ofstockholders, it was prepared to be confirmed by the board of directors on 14 March 2012
Opinions on the Internal Accounting Management System Audit
Celltrion Healthcare Co., Ltd.
The internal accounting management system audit report by the external auditor is the annual audit of thefinancial statement for Celltrion Healthcare Co., Ltd. as of 31 December 2011.The result of the internalaccounting management system audit is operated based on the internal accounting control system and Item 3,
Article 2 of the relevant laws of external supervision.
Appendix: 1- Internal accounting management system audit report by external auditor
2- Operating condition assessment report by internal accounting management system auditor
Internal Accounting Management System Audit Report by External Auditor
Celltrion Healthcare Co., Ltd.
To the Representative Director
2 March 2012
We audited the operating situation of Celltrion Healthcare Co.’s internal accounting management system up to 31December 2011. Celltrion Healthcare Co., Ltd. is responsible for setting up its internal accounting managementsystem and preparing the operating condition assessment report. We are responsible for the audit and report resultsfor the same report content. In the internal accounting management system assessment report, the company’soperator wrote: as of 31 December 2011, the results of the internal accounting management system operatingcondition states that our company’s internal accounting management system is preparing for internal accountingmanagement regulations and organization as well as strictly obeying the relevant control procedures of internalaccounting management.
We conducted the audit according to internal accounting management system audit standards. The standard
starts from a material review, and we carried audit procedures and lower-standard recognitions on the internal
accounting management system operating condition assessment report submitted by operators. The audit should
fairly convey the company’s internal accounting management system, including questions on the internal accountingmanagement system operating condition report, while recognizing that the content is only relevant within the
limited range of its prescribed scope. However, compared with the listed SMEs, the non-listed ones enjoy relatively
looser political restrictions in terms of the structure and operation of their internal accounting control systems. These
private companies only need to structure their internal accounting control systems based on the related laws of
external supervision and the control procedures of the internal accounting control system, in accordance with the
“Supplementary Article”, in the 6th Chapter of the Internal Accounting Control System Standards.
Internal accounting regulations and organizations (management and operation) are established in order to
collect reliable accounting information and open it to the public, and also confirm that the financial statement
functions in accordance with the accounting principles that are generally accepted in Korea. However, because of
the essential limitations of the internal accounting control system, vital misstatements might not be found out and
avoided. Besides, when predicting future content based on the operating assessment reports of the internalaccounting control system, we must consider that possible changes might happen due to different situations, or
improper conditions resulting from a failure to observe certain procedures and policies. We must watch out for the
risk inherent in assessment changes and predicted content in the future.