Auditing requirements

In Western countries limited liability companies are generally subject to an annual audit carried out by independent external auditors whose role is to express an objective opinion on the truthfulness and fairness of the financial statements.

In China, auditing is not a legal requirement but is required under the regulations. Prior to the introduction of the ASBE, the primary objective of auditing in China was to carry out inspection on the financial records of a business to ascertain their accuracy and legality (ie whether the transactions conducted complied with relevant State laws and regulations). Auditors in China are concerned with protecting the legal interests of the company as well as the interests of the State. Only with the implementation of the ASBE were the concepts of true and fair presentation introduced.

Prior to 2000 financial statements of state-owned enterprises were not required to be audited annually by independent auditors, but periodical or special audits conducted for the purpose of ascertaining the enterprise's tax liabilities or other purposes might be conducted by the State Audit Bureau or Tax Bureau. Since 2002, except for a few types of specialized industries that have been explicitly exempted, all other State- owned enterprises must be audited at least annually. In addition, the regulations governing the accounting of joint stock companies and foreign investment enterprises require these companies to be subject to annual audit carried out by registered Chinese certified public accounting firms. When reporting on whether the financial statements of foreign investment enterprises are prepared in accordance with the relevant laws and regulations, auditors may make reference to the following main laws and regulations:

• The PRC Sino-foreign Equity Joint Venture Law (EJV Law) promulgated by the National People Congress (NPC), effective 8 July 1979 and revised 15 March 2001;

• Implementing Regulations of the EJV Law promulgated by the State Council (SC), effective 20 September 1983 and revised 22 July 2001;

• The PRC Sino-foreign Cooperative Joint Venture Law (CJV Law) promulgated by NPC, effective 13 April 1988 and revised 31 October 2000;

• The PRC Wholly Foreign-Owned Enterprises Law (WFOE Law) promulgated by NPC, effective 12 April 1986 and revised 31 October 2000;

• Implementing Rules of the WFOE Law promulgated by SC, effective 12 December 1990 and revised 12 April 2001;

• The PRC Small and Medium Enterprises Law (SME Law) promulgated by NPC and effective 29 June 2002;.

• The PRC Income Tax Law for Foreign Investment Enterprises and Foreign Enterprises (FIEs Income Tax Law) promulgated by NPC and effective 1 July 1991;

• Implementing Regulations of FIEs Income Tax Law promulgated by SC and effective 1 July 1991.