All Hong Kong incorporated businesses, other than those with a dormant status, have to do a financial audit with an audit report for every year, which is done by someone outside of the business. This statutory provision is irrespective of whether your business is local or overseas, whether you’re just starting out or at a more advanced stage.
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Audit and Audit Report in Hong Kong
In Hong Kong, every company must be audited on a yearly basis according to the law; this audit is conducted for the financial statements of the company. These audit functions are not just mere formalities; they are a matter of professional reputation and to ensure compliance with Hong Kong Companies Ordinance and the Inland Revenue Ordinance.
Financial reports in particular contain balance sheet, income statement, statement of changes in equity, and cash flow statement.
Notably, audits are performed by independent firms just to assure the company is independently and transparently represented by the financial health.
Related Article: 2024 Tax Filing Season: Tax Deadline 2024 in Hong Kong You Need To Know About
When should I do an Audit?
The audit reports of a firm in Hong Kong is usually done annually.
The Statutory Audit Report of yours is the basis for your Profits Tax Return (PTR) that is sent to you by the Inland Revenue Department (IRD). These deadlines tend to be different depending on your company’s financial year-end date.
In case your company is newly set up, be ready to get your initial PTR form within 18 months after incorporating your company. If admitted, the PTR must be filed together with the audit report and the underlying tax computations not later than three months from the issuance of the PTR.
Auditing Report standards in Hong Kong
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the body that lays down the Hong Kong Auditing and Assurance Standards. The latter are also known as the Hong Kong Standards on Quality Control, Auditing, Assurance, and Related Services.
These standards have been harmonized with the International Financial Reporting Standards (IFRS) since 2005 thus the city has attained a high degree of compliance with international financial regulations.
HKICPA members should adhere to these standards of auditing and accounting in their work.
However, not all people think they can audit themselves. While Hong Kong’s regulations say that only Certified Public Accountant (CPA) are the ones allowed to conduct the annual audit.
Moreover, it should be noted, that there is a difference between the Hong Kong and the mainland systems. They are regulated by different financial, tax, and legal frameworks. In Hong Kong, the Companies Ordinance is the law that regulates the activities of the registered businesses.
The Auditing and Tax Filing Process in Hong Kong
Conducting an audit is a lengthy and tedious task, doing so requires a lot of time and energy from the company as well as from the auditor. Typically, the process follows these steps:
- The company prepares its financial statements and related documents (e.g. sales invoices, bank statements, and contracts) and provides them to the CPA.
- At the initial stage, the CPA will conduct an analysis to browse what the business activities are.
- During the next step, a financial professional conducts a detailed analysis of the source documents to determine whether there are any errors or inconsistencies that can have an impact on the financial statements.
- In the end, the auditor issue the audit report, which is further accompanied by audit opinion that states the reliability and presentation of financial information.
- The company’s director is the one who issues the signed off audited documents.
- The CPA shall receive a signed audit report plus he/she will sign, prepare the PTR and tax computation and file the said documents to the IRD.
The company may have to wait for a period between a couple of weeks and several months to enable the IRD to assess the PTR and the tax computations explained in the audit report before the issuance of a tax assessment, tax bill or statement of loss whichever is appropriate.
With the complexity that comes with moving, the best ways to cope would be to prepare the audit report in advance. Preparing in advance will also reduce stress and make the process easier.
How to Prepare for an Audit Report and Tax filing
Preparation is vital. It is crucial to keep all the documents you need and your business records in order which will help the process a lot and make it easier. These documents include:
- General Ledger & trial balance:
- The general ledger is the main accounting book of a business, and it records all financial transactions. It offers complete detailed information for all transactions and assists in the preparation of financial statements.
- The trial balance is a list of all ledger accounts, showing their debit or credit balances to confirm that total debits equal total credits, thus ensuring precision in the accounting records.
- Income Statement
- The income statement, which is also known as a profit and loss statement, details the revenues and expenses of a company within a certain period, which usually is a quarterly or annual fiscal year.
- It reveals the company’s profit or loss by illustrating whether it was profitable or not for the period.
- Balance Sheet
- The balance sheet reflects the status of the company’s financial position at a certain moment in time, typically at the end of a fiscal quarter or year.
- It presents the assets, liabilities, and shareholder equity of the company, giving an insight into its financial state and solvency.
- Bank and trading account statements
- Bank statements contain all activities that occurred in a bank account for a given period, including deposits, withdrawals, and other transactions.
- Trading account statements give a quick look at all the transactions that have been done regarding buying and selling of securities like stocks or bonds and the gains or losses.
- Invoices and Receipts
- An invoice is a document that is issued by a seller to a buyer with details of the products or services provided, quantities, prices, and terms of payment.
- Receipts are evidence of payment given by the seller to the buyer after payment for goods or services has been made. Both are important for monitoring sales, revenue and expenditures.
- Copy of Licences
- Licenses are legal permits which one must have in order to engage in some business activities like running a restaurant, selling alcohol, or providing professional services.
- Making copies of licenses ensures that the business complies with regulatory requirements and also shows legitimacy to customers, partners, and authorities.
- Contracts or agreements
- Contracts or agreements define the details of a business relationship between parties, including clients, suppliers, employees, or partners.
- The define rights, responsibilities, obligations, and expectations, thus preventing misunderstandings and conflicts.
- Copy of Company Registration Documents, such as Business Registration and Annual Return
- Such documents may be business registration certificates, articles of incorporation, and annual returns submitted to government authorities.
- They provide the legal personality of the company, its ownership structure, and other necessary details for lawful business.
In addition, making additional documentation like travel receipts and organisational charts can be tremendously useful.
Audit Report Opinions Types
Auditors provide one of four types of opinions in the audit report:
- Unqualified Report: A green light implying that the financial statements prepared, in all material respects, in conformity with the financial reporting standards of Hong Kong.
- Qualified Report: The financial statements contain material misstatements, which are in disagreement with financial accounting/reporting standards, or auditor is not in the position to collect sufficient competent audit evidence in order to conduct the audit or issue an unqualified opinion. A report can still be acceptable to creditors, lenders, and investors, if only a qualified one.
- Adverse Report: Shows serious problems with financial statements concerning their accuracy and reliability. Also, it is an indication of fraudulent or inaccurate reporting.
- Disclaimer Report: In a nutshell, none of the opinions can be formed because the auditor was not allowed to perform or was not in a position to execute the audit procedures as planned. This defect can, of course, be corrected when the audit is carried out.
Engage the Right Auditor
It is a critical decision to select a Hong Kong CPA. Firstly, make sure they are registered with HKICPA. Furthermore, look for expertise in your line of business and proficiency in your accounting software. A good connection and clear communication are crucial for successful auditing.
How Can FastLane Group Help?
Handling the intricacies of an annual audit and tax compliance in Hong Kong is a daunting chore- more so when you have to run a business.
Our certified public accountants and tax specialists are very knowledgeable in the Hong Kong Companies Ordinance and Inland Revenue Ordinance, and international financial reporting standards.
No matter if your business is based in Hong Kong or if it operates worldwide, we can make the auditing process more efficient, comply with relevant regulations and improve your tax position.
Please feel free to contact us for any questions you may have about our services.