The annual audit and profit tax return filing can be an intimidating process for companies of all sizes. During the preparation and process of an audit, it can be overwhelming and time-consuming. However, proper preparation can minimize the stress business owners would often experience during an audit and can actually increase the efficiency of this process!
In this article, we aim to explain what an audit is, how it relates to your tax return, and provide some tips that can help entrepreneurs through this process so that you will be able to reduce your preparation time and feel more confident when collaborating with your auditors!
What is an audit and why are they conducted?
An audit is the examination of a company’s financial reports, conducted by an independent party for the purpose of complying with the disclosure requirements set out in the Hong Kong Company Ordinance and the tax obligations outlined in the Inland Revenue Ordinance.
In accordance with this Ordinance, all Hong Kong incorporated companies are statutorily required to audit their financial reports on a yearly basis. These financial reports will include a balance sheet, an income statement, a statement of changes in equity, and a cash flow statement.
The purpose of an audit is to gather information to form an opinion on whether the financial report supplied sufficient facts to evaluate the financial position of an organisation as a whole. During an audit, auditors will examine a company’s financial reports to determine whether the information presented is a fair and accurate reflection of the company.
Upon completion of their audit, your auditors will prepare a set of audited financial statements and profits tax computations to be submitted to Hong Kong’s Inland Revenue Department (“IRD”) for review. The IRD will then use these documents to determine the tax obligations of the company for that financial year. As such, a successful statutory audit will help ensure compliance so that their tax obligations can be fulfilled without error.
4 Tips that can help small businesses experience a successful audit
1. Do not wait to perform reconciliations
Reconciliation is an accounting process that compares two sets of records to check that figures are correct and in agreement. Reconciliation is vital in business accounting as reconciled accounts help prevent errors in accounts in the general ledger and financial statements to ensure every item is consistent, accurate, and complete. Because reconciliations also help ensure that cashflows are properly presented in the financial statements, takes time to ensure that they have been completed without error. Businesses and individuals may reconcile their records daily, monthly, or annually.
Perhaps most importantly, ensure that your accounting treatments reconcile to your trial balances. Ensure that you are able to present related documentation to your auditors to help provide context for any account that looks remotely suspicious.
You can never start preparing for your audit too early given that the audit process is the last place you would like to discover a mistake in your financial statements!
2. Prepare your documents before the audit
Before conducting an audit, auditors will ask you to provide a varying list of documents / information they require for inspection. Given that the audit process is often hectic and stressful for all parties involved, and that auditors will most often ask additional questions, there is no such thing as too much preparation.
To help facilitate the audit process, it is recommended to gather all requested documents / information before the audit begins (audit preparation checklist). This way, your auditors can minimize the time spent conducting their tasks and will have a window of time to ask additional questions if needed. To the extent that your auditors are engaged on a time-cost basis, adequate preparation can lower your estimated audit costs.
3. Prepare your trial balances beforehand
Trial balances list all of a company’s general ledger accounts (both revenue and capital). Trial balances will be prepared periodically by a company to help ensure a company’s bookkeeping entries are accurate. Given their purpose, trial balances are frequently requested by auditors during an audit.
To ensure a successful audit, companies should take steps to routinely prepare trial balances. In the event that your trial balances do not reconcile with your financial statements, additional time and resources will be required during this time-sensitive process to rectify any errors identified.
4. Use cloud accounting software
Cloud accounting software, like Xero, offers their users simple yet powerful ways to manage their finance. Dedicated accounting software allows greater management of every facet of a business, from bookkeeping to invoicing. Besides, Xero announces updates regularly and offers an update of its systems with new features to allow customers to streamline their financial analysis while enhancing the level of customization and flexibility. Consistent use of such software will ensure that the information presented to your auditors is of the highest quality.
In addition, perhaps one of the more appealing attributes of cloud accounting software is the added convenience of being able to share your information with your advisors. To facilitate the sharing of information, cloud accounting software like Xero allows multiple parties to view and import information as they require. Cloud accounting software thus decreases the amount of time necessary to conduct an audit.
Major considerations to complete your audit successfully
1. Keep a record of your business transactions
Although cloud accounting frees up time by automating tedious operations, keeping track of your original invoice and receipts copies is still required. Keep copies of these papers on hand so you can use them as documentation for whatever it is that you’ve written in your books. In the long run, keeping track of your transactions will make it simpler to assert and resolve claims and conflicts.
2. Facilitate communication and updates to the team and organization
Finance and accounting professionals should prioritize audit requests during this time of year unless other requests become more pressing. Be mindful of the time and upcoming deadlines, as the end of the year approaches and organizations begin their annual audits.
In addition, make sure to keep the team up to date on the audit process so they are aware of the progress as well as the deadlines.
3. Outsource your auditing work to a reliable organization
Offering auditing services is key for any CPA firm like FastLane. You don’t need to spend extra money on an in-house specialist or auditing software. If you choose to outsource your audit, you may hire audit assistants or engage with a reputable outsourcing audit business. The CPA firm audit support service will guarantee the accuracy, minimise hazards, and spot fraud or miscalculations in the accounting systems of customers.
What happens when an audit is completed?
When an audit is finished, your auditors will help arrange for your completed audit reports and tax filing of your company to be sent to Hong Kong’s Inland Revenue Department (“IRD”) for review.
Upon receiving your documents, the IRD will review your audit report and tax computations to determine the tax obligations of your company for that particular year of assessment. Once again, a properly completed audit will help ensure that the IRD’s subsequent tax calculations are a fair representation of your company’s tax obligations for that year.
As compliance with Hong Kong audit regulations continues even after the successful submission of an audit report. It is best to familiarize oneself with the full set of requirements and deadlines pertaining to a Hong Kong audit. Please refer to our e-book A Beginners Guide to Hong Kong Taxation for more information regarding the exact audit requirements in Hong Kong.
How FastLane can help?
We hoped we explained what a successful Hong Kong statutory audit is and some tips that can help your future tax filing. Next, let us learn more about the requirements for audit and tax submission!
Need help? FastLane is a licensed Hong Kong CPA firm. With our team of qualified professionals, we assist over 1000 clients in their audit and taxation over the years. Whether you need help preparing your financial statements, tax calculations, or communicating with the IRD, FastLane is experienced to satisfy your specific needs.