Verification of Capital Contributions

Chapter 1 General provisions

Article 1 This pronouncement is prepared in accordance with the General Independent Auditing Standard to establish standards and define the working requirements for and to ensure a high standard of professional work by, Certified Public Accountants ("CPAs") in the course of performing verification of capital contributions.

Article 2 The term "verification of capital contributions" in this pronouncement refers to the CPA’s verification of the truthfulness and legitimacy of the entity’s paid-in capital (share capital) and its relevant assets and liabilities according to the requirements of this pronouncement, following the CPA’s acceptance of the engagement in accordance with relevant laws and regulations.

The term "entity" in this pronouncement refers to an enterprise, or an institution managed on a commercial basis, which is newly established in the People’s Republic of China and should have their capital contributions verified according to the law.

Article 3 Unless otherwise specified, CPAs should refer to this pronouncement in performing other professional work involving the verification of capital contributions.

Chapter 2 General principles

Article 4 In the course of performing verification of capital contributions, the CPA should maintain independence, objectivity and integrity. The CPA is responsible for the truthfulness and legitimacy of the capital verification report.

The term "the truthfulness of the capital verification report" refers to the requirement that the capital verification report should objectively reflect the CPA’s scope and basis of the verification of capital contributions, the major verification procedures performed and the opinion expressed on the verification.

The term "the legitimacy of the capital verification report" refers to the requirement that the preparation and issuance of the capital verification report should be in accordance with the requirements of both the PRC Certified Public Accountants Law and this pronouncement.

Article 5 If the entity has not established books of account, the CPA should request that the entity establishes the necessary books of account before the verification.

Article 6 If the CPA encounters any of the following circumstances, he should clearly inform the entity and ask it to take corrective action. If the entity insists that it will not take corrective action, the CPA should refuse to issue the capital verification report.

(1) The entity cannot provide true, legitimate and complete information for the verification of capital contributions.

(2) The entity does not co-operate or obstructs the verification of the capital contribution items.

(3) The entity insists that the CPA provides an incorrect or inappropriate verification report.

Article 7 The CPA who performs the verification of capital contributions may, use assistants as necessary. The CPA should instruct, supervise and inspect the work of the assistants and is responsible for the results of their work.

When the CPA involves an expert to assist in the course of the verification of capital contributions, the CPA should consider the competence and independence of the expert and is responsible for the results of his work.

Chapter 3 The contents and requirements of the verification of capital contributions

Article 8 The CPA should understand the entity’s background, consider his own competence and ability to maintain independence and should make a preliminary assessment of the risk involved in the verification of capital contributions before determining whether to accept the engagement. If the engagement is accepted, the accounting firm and the client should sign an engagement letter for the verification of capital contributions.

Article 9 In the course of performing verification of capital contributions, the CPA should prepare a plan and make appropriate arrangements for the verification work.

Article 10 The scope of the CPA’s verification work includes the paid-iii capital (share capital), the corresponding cash, tangible and intangible assets which make LIP the paid-in capital (share capital), the relevant liabilities etc.

Article 11 The CPA should apply the following approaches to verify the various forms of capital contributed by the investors:

(1) If the capital is contributed in the form of cash, the verification of the contributed capital should be based on the receipt vouchers and statements issued by the bank where the entity maintains its bank account. For the capital of a joint stock limited company raised through public subscriptions, the underwriting agreements with the underwriter and the list of subscribers should also be checked.

(2) If the capital is contributed in the form of tangible assets such as premises, buildings, machinery and equipment, raw materials etc., the CPA should perform a physical check of the tangible assets and verity their ownership. The tangible assets should be valued in accordance with relevant laws and regulations and should be verified on the basis of asset valuations recognized by the Administration of State-owned Assets, Value verification is by the commodity inspection authorities or those valuations unanimously agreed by each investor and approved by the relevant authorities.

(3) If the capital is contributed in the form of intangible assets such as industrial property rights, non-patented technologies, land use rights etc., the CPA should verify their ownership. The intangible assets should be valued in accordance with relevant laws and regulations and should be verified on the basis of asset valuations recognized by the Administration of State-owned Assets or those valuations unanimously agreed by each investor and approved by the relevant authorities.

Article 12 In the course of the verification of capital contributions, the CPA should pay attention to important matters such as the investment entity, the form of capital contribution, the proportion of capital contributed by each investor, the period of the investment, the types of currencies invested etc.

Article 13 The CPA should examine the accounting records of the entity’s paid-in capital (share capital) and relevant assets and liabilities. The CPA should request the entity to make adjustments when he detects errors. If the entity refuses to make adjustments, the CPA should, according to the nature and materiality of the adjustment, determine whether to reflect this in the capital verification report.

Article 14 The CPA should document the process for the verification of capital contributions in the working papers.

Chapter 4 Capital verification report

Article 15 After performing the necessary verification procedures, obtaining sufficient appropriate verification evidence and analysing and evaluating the verification conclusions, the CPA should form an opinion on the verification of capital contributions and issue a capital verification report.

According, to the relevant laws, the capital verification report is a legal proof of capital contribution.

Article 16 The capital verification report should include the following basic contents:

(1) the title, which should be standardised is "Capital verification report";

(2) the addressee, who should be the (Client engaging the CPA to verify the capital contributions;

(3) the scope paragraph, which should specify the scope of the verification, the entity’s responsibility and the CPA’s responsibility for the verification, the basis of the verification, the major verification procedures performed etc.;

(4) the opinion paragraph, which should clearly specify the (,PA’s opinion on the verification of capital contributions;

(5) the signature, stamps and the accounting firm’s address. The capital verification report should be signed and stamped by the CPA and stamped with the accounting firm’s chop;

(6) the date of the report, which refers to the date the CPA completes the field work for the verification; and

(7) appendices, which include "A schedule of paid-in capital (share capital)", "Notes to the verification of capital contributions" and other appendices which the CPA considers necessary. ,

Article 17 In the scope paragraph, the CPA should clearly specify that it is the entity’s responsibility to provide true, legitimate and complete information for the verification of capital contributions and to safeguard the assets and that it is the CPA’s responsibility to issue a true and legitimate capital verification report in accordance with the requirements of this pronouncement.

Article 18 When expressing an opinion on the verification of capital contributions, the CPA should clearly specify the verified amount of the entity’s paid-in capital (share capital) and relevant assets and liabilities up to the date of the capital verification report.

Article 19 If there is a disagreement between the CPA and the entity as to the verified amounts of the entity’s paid-in capital (share capital) and relevant assets and liabilities and no consensus can be reached, or if the CPA considers it necessary, an explanatory paragraph should be added after the opinion paragraph to clearly reflect the relevant matters and to provide an explanation for the disparity.

Article 20 The capital verification report should be sent to the client directly and should not be Subject to approval by other organisations. consequences arising from the client’s or other third parties?improper use of the capital verification report are not the responsibility of the CPA or his accounting firm.

Chapter Supplementary provisions

Article 21 The Chinese Institute of Certified Public Accountants is responsible for the interpretation of this pronouncement.

Article 22 This pronouncement takes effect from 1 January 1996.