Laws of the People's Republic of China

Ministry of Finance

Provision of Ministry of Finance on Improving and Strengthening the Administration of Annual Accounting Statement Audit

Cai Qi [2004] No. 5

January 17, 2004

This provision of Ministry of Finance on Improving and Strengthening the Administration of Annual Accounting Statement Audit is re-promulgated for the purpose of improving the quality of the accounting information of enterprises, giving full play of the social agency operations in supervising financial and accounting of enterprises and of regulating the administration of annual accounting statement audit, in accordance with Article 2 of Circular of the State Council on Improving Accounting Order and Quality of Accounting, after summarizing the running situation of the audit system of certified public accountants(hereinafter refers to as CPA) examine the annual accounting statements of the enterprises in the previous years and meeting the need of the access of WTO and reform and development of the enterprises. The provision is now printed and disputed to you and shall be implemented.

After the implement of the Provision of the Ministry of Finance on Improving and Strengthening the Administration of Annual Accounting Statement Audit, the Interim Measure of Ministry of Finance on State-Owned Enterprises Annual Accounting Statement Examined by the CPA (Cai Jing Zi [1998] No.114), Circular of Ministry of Finance on State-Owned Enterprises Annual Accounting Statement Examined by the CPA (Cai Qi [2000] No. 905) and Supplementary Circular of Ministry of Finance on SOE Annual Accounting Statement Examined by the CPA (Cai Qi [2001] No. 707) shall be repealed at the same time. Annex:Provision of Ministry of Finance on Improving and Strengthening the Administration of Annual Accounting Statement Audit

Chapter I General Provisions

Article 1

This Provision is promulgated for the purpose of meeting the need of the development of the socialist market economy, improving the quality of annual accounting statement of the enterprises and strengthening and improving the audit of the annual accounting statement of the enterprises, in accordance with Provisions of the State Council on Improving Accounting Order and Quality of Accounting.

Article 2

This Provision shall be applied to all the SOE and the State-Equity-Control non- financial enterprises (hereinafter refers to as enterprises) except the special enterprises listed in Article 3 within the territory of the People's Republic of China.

Where another law provides otherwise in respect of the foreign-invested enterprises and the listing companies, such provisions prevail.

The audit of the annual accounting statement of enterprises that was established on the oversea-investment shall be run in accordance with the relevant provisions of statute of domicile

Article 3

The system of CPA examining annual accounting statement shall not be applied to the following special SOE,

(1)

War industry enterprises, expect civil companies that has independent legal personality and that still retain or seal the capability of producing war products

(2)

Reeducation-through-labor enterprises, reform-through-labor enterprises, border farm, agricultural enterprises of the Production and Construction Corps of the Chinese Liberation Army and the reclamation area in Heilongjiang province

Article 4

The executive situation of special material reserve, special capital reserve and other operation related to special policies of enterprises that responsible for goods and material reserve, grain reserve, cotton reserve or non-staple food reserve shall be subject to the audit of the competent administrative authorities.

Article 5

Enterprises shall initiatively cooperate with CPA in examining the annual accounting statement and provide relevant information in accordance with the contract. The enterprises shall guarantee the truthfulness of all the information and shall take the corresponding accounting responsibility

Article 6

CPA and accounting firms shall finish the audit in accordance with the principle of Objective, Independent and Fair, the Independent Audit Criteria and other related provisions. CPA and accounting firms shall make audit report according to the demands of contract, and take corresponding responsibility

Chapter II General demands of the administration of annual accounting statement audit of enterprises

Article 7

The companies shall consign the audit in accordance with the decision of directorate or the manager administrative council.

Conglomerate shall unifiedly consign the audit of the annual accounting statement of its subsidiary companies.

Company which is still under the competent authorities shall consign the accounting firms to audit its accounting statement through the authorities.

Article 8

Enterprises shall consign an accounting firm or alter the consignment before October, and shall sign a contract with the accounting firm which declares audit scope, content, rights, obligations, price, payment and breach responsibility. The enterprises shall provide relevant conditions to the accounting firms it consigned to finish the audit.

Article 9

The accounting statement of enterprises shall be audited by the Chinese CPA or the accounting firms that registered in the territory of People's Republic of China in accordance with the concerning regulations.

Enterprises shall take the assets sum, amount of subsidiary company, district distributing and business character into account and consign the correspond accounting firm that has enough CPA, experience and audit capability.

All the enterprises shall not restrict the work of the accounting firm legally established. The departments, institutions that do not pay for the audit, except the conglomerate, shall not require or incite the companies to consign certain accounting firms or obstruct the consignment.

Article 10

Accounting firms that accept the consignment of the enterprises shall not transfer the consignment to other accounting firms after the distribution. The audit that consigned by the enterprises shall be down by CPA of the accounting firms.

Article 11

Conglomerates shall consign one or more accounting firms to audit in accordance with the principles of fair, just open, choosing reasonable and transparent modes like inviting public bidding and with specific administrative measure and procedure.

Article 12

Conglomerates shall confirm the leading accounting firm, cooperate with it to make an audit plan and organize the subsidiary companies to execute the plan in the case of consigning more than one accounting firms to make a united-audit.

Article 13

Enterprises shall pay for the annual accounting statement audit in accordance with the principle of "consigner pay".

The criteria of pay of the annual accounting statement of enterprises shall be set in accordance with the provisions promulgated by the local competent authorities.

Article 14

Enterprises shall not change the consigned accounting firms in the previous financial year if the accounting firms conform to the provisions of article 9 of the regulations, in which no offence against the discipline and regulations arise. In the case of necessary change, the consignee shall give reasons and expose it.

The accounting firm with the requirement of the consignee company shall change the CPA that consigned by a certain company for 5 years continuously.

Article 15

Enterprises shall not consign the annual accounting statement audit to the same accounting firm or the accounting firm that invested by same investor that makes the asset evaluation or financial consultant service to the reform of the enterprises' within the audit year.

Article 16

Enterprises shall complete the formality of record to the competent authority before October 31 every year after signing the contract. The enterprises under the direct control of central government shall put the record to the competent administration of Ministry of Finance through the conglomerate. The enterprises under the control of local government shall put the record to the local financial authority of the same level. The enterprises that still have relation with the government shall put the record to the competent financial authority of the same level through the department in charge. The enterprises shall, in the course of completing the formality of record, provide record report in which the reason of consigning and changing the accounting firm, the scope of audit, the mode of consign, the payment criteria and such items were written, and shall fill the record form of annual accounting statement audit of enterprise.( Enclosed in the appendix).

Chapter III Emphasis of annual accounting statement audit

Article 17

Conglomerate shall consign a complete annual accounting statement audit which including the subsidiary companies within the scope of incorporate.

CPA shall audit in accordance with the relevant important provisions of the Independent Audit Criteria for the subsidiary companies of the constituent or the 5-level subsidiary branches of certain special conglomerate of some industry.

Article 18

The annual accounting statement audit of enterprises shall include the audit of the separated accounting statements and merged accounting statements

The separated accounting statement audited by the CPA shall include balance sheet, profit charts, cash-flow charts, appendix and annex of the accounting statement promulgated in the Enterprises Accounting System. The merged accounting statement audited by the CPA shall include the merged balance sheet, merged profit charts and profit distributing charts, merged cash-flow charts and annex of accounting statement.

To the enterprises that still related to the government, the competent administrative authorities shall examine and collect the annual accounting statements that audited by the CPA and the statements that have been audited may not be audited again.

Article 19

Enterprises shall compile annex of the accounting statements in accordance with the provision of Article 14 of Regulation on Report of Enterprises' Financial and Accounting Situation and shall provide, in time without any concealment and fabrication, the documents and information on the accounting documents, accounting books, internal executive system, accounting policy, accounting mode, important sale and purchase contract, important invest and financing contract, assets recombination, reform of the enterprises and other important decisions that happened within the fiscal year of the annual accounting audit to the CPA.

Article 20

CPA and accounting firms shall audit the annual accounting statement of enterprises in accordance with the Independent Audit Criteria and other related regulations, and shall pay special attention to the following listed items,

(1)

Accounts receivable, advances to suppliers, the yeas of other receivables and its main debtor, provisions for bad debts,

(2)

Inventory evaluation, provision for loss of inventory, inventory for more than 3 years

(3)

Main content of deferred assets and intangible assets, provision of amortization and provision for loss of intangible assets

(4)

Projects of long-term invest of equity, holding share, accounting methods, provision for loss and confirmation of loss of investment

(5)

Main types, depreciable life, appraisal method of depreciation and provision for loss of the fixed assets,

(6)

Main project and the investment situation of construction in progress, provision for loss of the construction in progress

(7)

Accounts payable, advances for customers, amount and creditors for more than 3 years

(8)

Items of taxation, tax ratio, amount of current year, annual balance, item of incoming tax change

(9)

Export refund declaration and result, policy of tax deduct and abatement, appropriation and using of the financial capital

(10)

Assets for securities, futures, exchange deal, confirmation of loss and profit and floatation of profit and loss

(11)

Adjustment reason and amount of undistributed profit at beginning of year, policy and executive situation of profit appropriation and distribution

(12)

Contingent matters like provide cover, outstanding lawsuit and arbitration

(13)

Policy and executive situation of recombination of assets or credit, reform of enterprise, equity transaction and influence for annual accounting statement

(14)

Wage system, situation of establishing, and execution of housing, medical care and aged providing.

(15)

Competent authorities and other items consigned by the consignee

Chapter IV Administration of Annual Accounting Statement Audit of Enterprise

Article 21

Enterprises that was made audit report that has reservation, no opinion or deniable opinion shall expatiate the altered items at the beginning of the year or the information of adoption of the audit advice to the CPA that audit the accounting statement and shall provide relevant information

Article 22

CPA shall report and require enterprises to alter the incorrectness and mistake in accounting that found out in auditing in accordance with the relevant provisions.

CPA shall reflect in his report the exposition of the affiliated notes to the annual accounting statements of enterprises, especially the demurral of items listed in Article 19 , or the enterprises did not alter according to the audit advice, or the other important items.

Article 23

In the case the enterprise do not provide necessary financial and accounting materials or other relevant materials, or do not give enough cooperation resulting in that audit can not be made normally as scheduled, CPA shall handle the situation in accordance with the provisions in the Independent Audit Criteria and make essential explanation in the audit report.

Article 24

Enterprises shall offer the warrant documents of reform and detailed implement plan in the case of carry out system reform including consolidation, dividing, revamping, reforming, MOB, altering the distribution system, housing, medical care and aged-providing.

CPA shall pay enough attention to the matter that if the reform measures of enterprises conform to the provisions concerning assets and financing, taxation and accounting, and shall reflect in the audit report the insufficiency of exposing and disobeying of the provisions.

Article 25

Enterprises shall timely provide, in the course of cooperating with the CPA to make the annual accounting audit, the internal control system of managing decision making, operation flow, incoming and payment of capital, loss cancel and other relevant matters.

CPA shall make effective communication with the consigner and make management proposal in accordance with relevant provisions on the important loophole that influence assets safety and truthfulness of internal control accounting information.

Article 26

Conglomerate shall provide, in the course of cooperating with the CPA to make the amalgamated annual accounting statement audit, detailed information relevant to the amalgamated accounting statement including manuscript of merge, check material of associated transaction, alternation material of internal unified accounting policy of the conglomerate, consolidation countervail material and countervail material of the previous year of amalgamating.

CPA shall pay enough attention to the scope o consolidation, consolidation countervailing item and measure of countervailing, and shall examine the legality of the making of amalgamated accounting statement.

Article 27

CPA and accounting firm shall make the audit report in accordance with the Independent Accounting Criteria and other regulations within the promissory time after the field audit. Enterprise shall not incite or force the CPA and accounting firms to make unfaithful or incorrect audit advice, and shall not make other unreasonable requirements.

Article 28

Leading accounting firm that consigned by the conglomerate shall harmonize all the participating accounting firms to implement the collectivity audit plan, take in charge of quality control of the audit, make the collective audit report and bear the audit responsibility.

Accounting firms consigned by the conglomerate shall cooperate with the leading accounting firm to compile and implement the collectivity audit plan, make audit report on concerning part and bear relevant audit responsibility.

Chapter V Administration of Audit Report

Article 29

Audit report of annual accounting statement of enterprises shall offer explanation of audit result including the following listed items,

(1)

Enterprises that were audited

(2)

Adjustment of difference of the previous audit

(3)

Matters that were not adjusted of current year

(4)

Matters that were not confirmed of current year

(5)

Other matters that CPA calls a need to explain or reflect

The leading accounting firm shall offer the list of participating accounting firms and the type of audit report in its report of audit result.

Article 30

Leading accounting firm shall reflect collectively the audit result of all the participating accounting firms in the audit report it makes.

The leading accounting firm shall, in the course of making the collectivity audit report, take the influence of the consolidated accounting statement of conglomerate into account and then decide the type of audit report in the case that the accounting statements regarding the subsidiary company were given reservations, no advice or negative advice.

Article 31

Enterprises shall report the audit report and the annual accounting statement to the competent financial authorities, investors and other relevant departments in accordance with the provisions.

Conglomerate shall report the audit report and the amalgamated annual accounting statement before April 20 of the following year. The conglomerate in accordance with the relevant provisions shall decide the reporting deadline of subsidiary companies that listed in the scope of amalgamated accounting statement.

Article 32

The competent administrative authorities shall instruct the enterprises improve financing control or adjust the account after the examination of the audit report made by the accounting firm that has reservation.

Article 33

Enterprises shall give a presentation of related situation and advice of compiling annual accounting statement in the case that the accounting firms give an audit report that has reservation, no opinion or negative opinion.

The competent administrative authorities in accordance with relevant provisions and respective situation of the enterprises shall inspect on the quality of accounting information, set accounting system to right and give penalties in accordance with the law or regulations like Accounting law of People's Republic of China and Regulation on Financial and Accounting Report of Enterprises.

Chapter VI Financial Supervision

Article 34

Competent administrative authorities shall give a thorough examination of the record of enterprises and the annual accounting statement and the audit report and strengthen the supervision of the annual accounting statement audit.

Article 35

Enterprises shall alter the consignment under the following circumstances,

(1)

Consigner does not conform the provision of Article 7

(2)

Accounting firm does not conform the provision of Article 9 so that the audit plan can not be implemented

(3)

Accounting firm violates Article 10 by transferring the audit other accounting firms after distribution

(4)

Violating Paragraph 1 of Article 14 by changing accounting firm without sufficient reasons

(5)

Violating Article 15 by consign the same accounting firm or the accounting firm invested by the same person that make assets evaluation or give financial consultancy.

(6)

There exist fake facts or disguise of important facts.

(7)

Accounting firms can not fulfill the contract resulting in serious lack of items of annual accounting statement or mistake of important information

Article 36

The competent administrative authorities shall return the audited annual accounting statement and notify the accounting firm to re-audit under the circumstance that the audit report did not totally expose matters listed in Article 19 and Article 20 or the content of audit report did not fit Article 29 .

Article 37

Competent administrative authorities shall instruct the enterprises, which did not consign audit, which did not provide relevant financial and accounting information and which did not cooperate effectively resulting in CPA's disability of running efficient procedure of audit, consign accounting firms to audit again and may give penalty of circulating a notice of criticism.

Article 38

The decision made by competent administrative authorities in accordance with Article 35 , Article 36 ,and Article 37 shall be executed within 30 working days after the going into effect by the enterprises.

Enterprises shall bear the extra audit added because of the decision of the authorities.

Article 39

Competent administrative authorities shall investigate and affix the legal responsibility of direct responsible person and other responsible person of enterprises in accordance with the provision of Article 39 of Regulation of Financial and Accounting Report under the following circumstances,

(1)

No consignment or refusal audit by accounting firm.

(2)

Providing fake annual accounting statement and other related accounting information.

(3)

Refusal to provide relevant financial and accounting information and documents or cooperate with the CPA or obstruct the working of CPA.

(4)

Inciting or forcing CPA and accounting firm to make unfaithful or false audit report.

Article 40

Competent administrative authorities shall give penalty of circulating a notice of condemnation once proved the accounting firm or CPA violates this provision by following listed activities,

(1)

Undertake audit at low price resulting in incomplete implementation of audit procedure

(2)

Dividing audit to other accounting firms.

(3)

Surpassing scope of audit capability resulting in delay of finishing the audit plan.

(4)

Providing audit report that does not fit this provision

CPA and accounting firm shall be investigated and affix legal responsibility in accordance with the Accounting Law of People's Republic of China and other related regulations in the case of violating law and regulations.

Article 41

Financial administrative bureaus at all level shall inspect the quality of accounting information and issue announcement to the public in accordance with relevant provisions of Accounting Law of People's Republic of China.

Article 42

Missionary concerned of the competent financial authorities shall be given administrative penalty in the case of being found misuse of authority, favoritism and fraudulent practices, abuse power for personal gain or divulgement business secret in the course of annual accounting statement audit resulting in harming the benefit of the enterprises. Those who violate the criminal law shall be transferred to judicial departments and investigated and affixed legal responsibility.

Chapter VII Supplementary Provisions

Article 43

This Provision takes effect as of the date of February 1, 2004.

Annex: Record Bill of Annual Accounting Statement Audit of Enterprises (omitted)