We presume that those who have visited this page are looking for CPAs (CAs) or audit firms to conduct audit for subsidiaries in Japan, for various reasons. However, depending on the company’s business scale, complexity of transactions, and industry, the choice of who should be appointed for the audit may vary. This page describes points to keep in mind when appointing a component auditor.

1. In what cases are audits required?

(1) Parent company is a foreign listed company

In cases where the parent company is listed overseas and is required to disclose an Annual Report, the subsidiaries are also required to submit financial results in line with the parent company’s accounting period and have them audited by a component auditor.

(2) Joint venture between a foreign and a Japanese company

In cases where a Japanese and a foreign company each invest 50% and establish a joint venture, audits may not be mandatory. However, due to strong requests from the shareholders of the foreign company, Japanese investing company may reluctantly consider undergoing audits.

(3) For the preparation of consolidated financial statements

In cases where the overseas parent company is not listed but prepares consolidated financial statements once a year, audit is sometimes required. Due to the high financial significance of the Japanese subsidiary, it may be instructed to have its financial results audited.

(4) For the purpose to restrain

In cases where the parent company has a high awareness of governance, such as sending internal auditors to each subsidiary company every year, financial results of the subsidiary without objective third-party guarantees are considered unreliable and require review procedures by a certified public accountant.

2.Are there any subsidiaries that do not require an accounting audit?

However, not all consolidated subsidiaries or equity method applied companies are required to undergo external audits by certified public accountants. Generally, only significant subsidiaries with high financial importance are required to be audited. For subsidiaries with lower importance, it is not necessarily required to conduct an audit. So how is the importance of a subsidiary determined? Generally, the following financial indicators are often considered the criteria for determining the importance of a consolidated subsidiary (financial importance). ・Net profit for the period  ・Sales  ・Total assets  ・Retained earnings If any of the above financial indicators for a subsidiary exceed 10% of the consolidated group, it is often required to undergo external audit procedures. In addition, there are cases where a subsidiary is recognized as an audit target due to its high qualitative importance (qualitative importance). Specifically, this applies to Japanese consolidated subsidiaries that engage in large non-routine transactions, such as real estate or securities investments, or those with a significant amount of account items containing estimate elements (such as allowance for doubtful accounts).

3.What is Referred Work?

Referred work refers to the audit of consolidated subsidiaries or equity-method affiliates performed by another certified public accountant based on instructions from the parent company’s auditor. When a Japanese certified public accountant conducts an audit of a foreign-owned company in Japan referred by the overseas parent company, it becomes referred work. The reason why the parent company’s auditor does not conduct the audit directly is that the documents such as vouchers and invoices for transactions conducted by Japanese subsidiaries are written in Japanese, and thus, it is difficult for foreign auditors to proceed efficiently. If a subsidiary accounts for a considerable proportion in terms of the consolidated group’s sales or total assets, it is usually subject to referred work by the same group corporation as the parent company’s auditor. However, in the case of smaller Japanese subsidiaries, it is not uncommon to entrust the work to other small and medium-sized auditing firms or individual certified public accountants.

4.Why are audit fees for foreign companies high?

Even for relatively small consolidated subsidiaries, audit fees are not cheap. There are several reasons why audit fees for foreign companies tend to be high, including the following:

・Overseas accounting standards are applied

Since overseas parent companies apply International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (GAAP), Japanese subsidiaries also need to conduct financial statements based on these standards. However, there are still many differences between Japanese and international standards, so adjustments are necessary. These procedures require a lot of effort, resulting in higher audit fees.

・Few certified public accountants are proficient in English

Instructions from overseas auditors and reporting to parent companies are all conducted in English. Japanese certified public accountants who can respond to audit tasks with high quality in English are still few in number, and their charge rates tend to be high.

・Audits conducted by audit corporations are subject to systematic audit standards

In major audit corporations, multiple checks are conducted when submitting deliverables to external parties. Specifically, the report created by the audit team is reviewed by the responsible partner, and then reviewed again by the quality control partner. Since the charge rate of partners is high, the total audit fees inevitably increase.

5.Who should be entrusted with the audit?

・It is not a problem for an individual accountant to conduct an audit.

In the case of a relatively unimportant subsidiary, communication with the parent company’s auditors is not frequent. Information exchange is usually done by email, and there are not many video conferences. For such companies, there is not necessarily a need to appoint a large auditing firm with high costs. From the perspective of the parent company, there are generally no major issues. Even within the same group, an individual accountant, despite not being affiliated with the parent company’s auditors, would still be required to follow the same audit procedures. Since the audit procedures to be performed in accordance with instructions are standardized, there may be no difference in quality even if an accountant who is proficient in English conducts the audit. Moreover, since the audit can be performed efficiently with a small number of people, the workload can be reduced, and the subsidiary can benefit from lower costs.

・Disadvantages of audit firms

In the case of small consolidated subsidiaries, it is not uncommon for inexperienced staff to be assigned even if an audit is entrusted to a large audit firm, since experienced staff are assigned to large companies. Despite charging high fees, the quality of service may not be good. In view of such circumstances, it should be actively considered to entrust the audit to small and medium-sized auditing firms or individual certified public accountants.


It is believed that in consolidated subsidiaries with relatively small profit and asset sizes, there are great advantages to be gained in terms of both cost and procedures by entrusting audit work to individual accounting firms rather than large auditing firms. Those with extensive experience in finance and accounting may already know that even if you entrust audit work to a large auditing firm, whether you are satisfied with their service in the end depends largely on the personality of the person in charge, and not on the brand of the auditing firm. Considering the extent of your presence in the consolidated group from the perspective of your foreign company, it is hoped that this article will be of some help in deciding who should be entrusted with referral work.