These Direction are adopted under Article 2 of the Securities Listing Contract between the Taiwan Stock Exchange Corporation (TSEC) and listed companies, for the purposes of promoting faithful implementation of internal control systems by listed companies and checking whether listed companies are implementing internal control systems in compliance with relevant rules and regulations.
Except where otherwise prescribed by act, regulation, or rule, these Directions shall apply to all TSEC audits of the implementation of internal control systems of listed companies. Where any applicable provision of law on which these Directions are based is amended, such amended provision shall govern. These Directions do not apply to listed companies operating financial, insurance, or securities business, or to foreign issuers.
The TSEC shall, in principle, carry out quarterly audits of the implementation of audit plans by internal auditors of two percent of listed companies, and shall, where necessary, carry out on-site audits and use compliance tests. On-site audits shall be conducted on at least one-fourth of audited companies, and shall be conducted on any company to which any circumstances under paragraphs 1 through 9 of Article 4 hereof apply. Within one month after the end of each quarter, the TSEC shall compile and submit the audit reports and/or follow-up reports for that quarter to the competent authority for recordation. The quarterly selection ratio under paragraph 1 may be adjusted as needed, provided that at least eight percent of companies shall be selected for audit in the whole of each year.
The TSEC will select a company for audit by the following criteria:
- where an Internal Control System Statement is issued with a statement other than "no material deficiency" in the internal control system.
- where an Internal Control System Statement containing a statement of material deficiency has been issued within the most recent three years.
- where there is a change in the Internal Control System Statement from the original "compliance with all acts and regulations" to "compliance with major acts and regulations."
- where there is failure to file an auditors list, audit plan, audit plan implementation report, report on correction of deficiencies and irregularities, or Internal Control System Statement under the Regulations for the Establishment of Internal Control Systems by Public Companies.
- where any material deficiency is found in the implementation of the internal control system under the TSEC Directions for Routine and Exceptional Supervision of the Financial and Business Affairs of Listed Companies or the TSEC Directions for Review of Financial Reports of Listed Companies.
- where there is any change in mid-year to an annual audit plan already filed, without reasonable grounds.
- where any material non-compliance was found during the previous internal control system audit.
- where there is any change in financial or internal audit executives, without reasonable grounds.
- random selection will be made from among listed companies whose internal control system has not been audited during the most recent three years; however, a company may be exempted from selection if during the preceding year the company has obtained corporate governance certification from an external independent objective institution, provided that if any material deficiency is found in the company's internal control, an audit of its internal control shall still be conducted.
- where an audit is otherwise necessary.
When auditing the internal control system of a listed company, the TSEC, in addition to auditing one or more audit items selected from the annual audit plan formulated by such audited company, shall list the following matters as requisite audit items, provided that the TSEC may adjust relevant audit items for specific supervisory purposes:
- acquisition or disposal of assets.
- trading in derivatives.
- lending funds to others.
- providing endorsements or guarantees for others.
- state of operations of the board of directors.
- such other audit items as the competent authority or the TSEC may deem necessary.
An audited company shall submit the following documents within the time limit designated by the TSEC:
- Internal Control System Statements for the most recent three years.
- any internal audit plan as well as self-inspection report, audit report, and follow-up report and relevant working papers on audit items that are prepared for the given year.
- internal control recommendations issued by a certified public accountant for the most recent period.
- such other materials as the TSEC may deem necessary.
The TSEC carries out internal control system audits on listed companies with a view to checking whether the internal auditors of audited companies have faithfully carried out auditing operations. The key points for each audit item include:
- whether an internal control system has been adopted in compliance with securities-related laws and regulations and with laws and regulations applicable to the industry to which it belongs.
- whether internal controls have been faithfully implemented in compliance with the internal control system.
- whether internal audits have been faithfully implemented in compliance with the annual audit plan.
When conducting an audit of the internal control system of a listed company, the TSEC shall focus its attention on the following matters:
- Reviewing whether the spot-checked operations shown in the audited company’s self-inspection reports, audit reports, follow-up reports, and relevant working papers have undergone proper approval, authorization, validation, adjustment, cross-checking, record checking and division of functions.
- Ascertaining whether the audited company’s auditors have conducted audits in compliance with the formulated annual audit plan and prepared working papers, audit reports, or follow-up reports accordingly.
- Reviewing whether the audited company has been subject to any sanction by the competent authority for its industry, and if it has received such a disposition, requesting the audited company to provide an explanation or a plan for improvement.
The TSEC auditors shall prepare audit reports on their implementation of auditing work, specifying the following:
- audit items.
- audit findings.
- follow-up activities.
If the audit findings reveal non-compliance by a listed company in its implementation of the internal control system, the audited company shall be requested to propose specific ameliorations or solutions and report the same by letter to the TSEC for recordation. In the event of material non-compliance, the TSCE may by letter request the audited company to dispatch personnel to participate in guidance courses held by a body designated by the competent authority, with a copy of the letter to such designated body. If the audited company fails to dispatch personnel for that purpose, the TSEC may, based upon the nature of the deficiency, list it as a first target for substantive review of the financial report, routine supervision, exceptional supervision, or internal control system audit to be administered at a later time. In addition, the TSEC will continue tracking the amelioration of the deficiency and preparing follow-up reports until the deficiency is remedied. Where necessary, a certified public accountant may be engaged to issue an opinion on relevant matters. The content of the follow-up report shall include the deficiency found in the previous audit and the status of its remedy in the current audit.
Corresponding actions shall be taken promptly upon discovery of the following during an audit:
- Upon discovery of a material irregularity for which an in-depth audit is necessary, the company shall be listed as an audit target for routine supervision or exceptional supervision.
- Upon discovery of a material irregularity or violation of applicable provisions of the TSEC Operating Rules, the prescribed measures shall be taken and a report shall be submitted to the competent authority.
- Upon discovery of a material deficiency or upon occurrence of an event under any subparagraph of Article 43 of the Regulations for the Establishment of Internal Control Systems by Public Companies, where necessary, the TSEC may submit a report to the competent authority requesting the audited company to engage a certified public accountant to conduct a special internal control system audit and issue an audit report.
These Directions shall take effect after having been submitted to and approved by the competent authority. Subsequent amendments thereto shall be effected in the same manner. Any addition to, deletion from, or amendment to the relevant attachments and schedules hereto shall take effect after having been ratified by the president of the TSEC.