For Chinese companies establishing subsidiaries in Japan, understanding the Japanese audit system is crucial.

While annual audits are mandatory for all companies in China, Japan only requires statutory audits for companies that meet specific criteria.

This article provides a comprehensive guide for CFOs and accounting managers navigating Japan’s audit requirements, from determining whether an audit is necessary to practical compliance strategies.

Use this as a reference to ensure regulatory compliance and efficient business operations, with insights tailored to Japan’s unique legal framework.
 

1. Key Differences Between Audit Systems in China and Japan

In China, annual audits are legally required for all companies, regardless of size or industry. This regulation ensures financial transparency and compliance with foreign investment laws, linking audit reports directly to tax filings and business license renewals.

In contrast, Japan mandates audits only for certain companies, such as large corporations and listed companies, under the Companies Act and the Financial Instruments and Exchange Act. Small and medium-sized enterprises (SMEs) are generally exempt but may choose to conduct voluntary audits.

Comparison of Audit Requirements

2. Understanding Japan’s Audit Requirements

A company in Japan is required to undergo an audit if it meets any of the following conditions:

(1) Large Companies Under the Companies Act

Companies with:

• Capital exceeding 500 million yen or
• Total liabilities exceeding 20 billion yen

(2) Listed Companies (Financial Instruments and Exchange Act)

Companies listed on Japanese stock exchanges (e.g., Tokyo Stock Exchange, Nagoya Stock Exchange) must undergo audits.

(3) Parent Company’s Audit Impact

If a foreign parent company is subject to audit requirements in its home country, its Japanese subsidiary may also need to undergo an audit as part of consolidated financial reporting.

Additionally, certain industries, such as banking, insurance, and public-interest corporations, have industry-specific audit requirements.
 

3. Companies Subject to Statutory Audits in Japan

(1) Large Companies (Companies Act, Article 2)

A company qualifies as a “large company” if:

• Capital exceeds 500 million yen at establishment or after capital increases.
• Total liabilities exceed 20 billion yen (evaluated on a non-consolidated basis).

Examples:

• A Japanese subsidiary with 600 million yen in capital → Audit required
• A company with 300 million yen in capital but 25 billion yen in liabilities → Audit required

*A subsidiary of a large foreign parent company that does not meet the above criteria → Audit NOT required

(2) Listed Companies (Financial Instruments and Exchange Act, Article 193-2)

Listed companies must undergo audits to protect investors. Additional audit requirements include:

• Interim audits or quarterly reviews
• Internal control evaluations related to financial reporting

(3) Industry-Specific Audit Requirements

Certain industries, including banking, insurance, and public-interest corporations, have separate statutory audit requirements under industry laws.
 

4. What to Do If Your Company Is Not Required to Undergo an Audit

Even if an audit is not legally required, SMEs can enhance financial credibility through:

• Voluntary audits: Though costly, they improve trust with investors and business partners.
• Internal audit systems: Regular financial checks help detect fraud and errors early.
• Cloud-based accounting tools: Software like freee and MF Cloud automates financial processes, reducing the risk of fraud and inconsistencies.

5. The Relationship Between Bookkeeping and Auditing

Bookkeeping and auditing work hand in hand. Bookkeeping records daily financial transactions, while auditing independently verifies accuracy.

• Poor bookkeeping makes audits difficult and may lead to compliance issues.
• Addressing audit findings improves financial transparency and strengthens business operations.

Companies undergoing audits should prioritize strong bookkeeping practices to ensure a smooth audit process.
 

6. Preparing for an Audit in Japan

To ensure a seamless audit, companies should:

• Maintain accurate accounting records: All transactions should be properly recorded, with supporting documentation.
• Prepare financial statements: Balance sheets and profit-and-loss statements should be ready for auditor review.
• Coordinate with auditors: Early discussions on audit scope and timelines help avoid last-minute issues.
• Strengthen internal controls: Effective controls enhance financial accuracy and audit readiness.

7. Practical Considerations for Chinese Companies in Japan

(1) Overcoming Language and Cultural Barriers

Audits conducted in Japanese can lead to miscommunication. To prevent errors:

• Engage a bilingual audit team familiar with Chinese or English.
• Ensure that financial terminology is accurately translated.

(2) Compliance with Japan’s Electronic Books and Records Act

Japan has strict regulations on electronic record-keeping. Companies should adopt cloud-based accounting solutions to streamline document management.

(3) Tax-Audit Coordination

Japanese tax regulations and audit requirements are closely linked. To avoid tax-related audit complications:

• Work with a Japanese tax accountant to ensure compliance.
• Proactively address tax matters that may impact audit results.

8. Conclusion

This article has outlined the key differences between audit systems in China and Japan and explained Japan’s audit requirements.

For Chinese companies entering the Japanese market, understanding these differences is essential for compliance and smooth operations.

Even when audits are not mandatory, voluntary audits and strong financial management practices can enhance business credibility.

By preparing adequately and fostering cooperation between bookkeeping and auditing, companies can ensure a seamless audit process and strengthen their operations in Japan.

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