Updated: Apr 2
Not sure how to conduct an audit for your Hong Kong company? Read about Hong Kong auditing standards, auditing process and more!
According to the Hong Kong Companies Ordinance, the annual financial statements of all companies registered in Hong Kong must be audited by a practicing Hong Kong Certified Public Accountant (CPA). However, as a business owner, you may not be familiar with audit requirements and may have a headache as to how to arrange for your company to be audited.
We will introduce auditing standards in Hong Kong, auditing process, auditing and tax preparation, and how to hire an auditor. Now, let's get started!
An Overview of Hong Kong Audit
The law requires all companies incorporated in Hong Kong to audit their financial reports every year.
A statutory audit report is a review of a company's financial reports by an independent party to comply with the disclosure requirements of the Hong Kong Companies Ordinance and tax obligations under the Inland Revenue Ordinance.
Financial reports include balance sheets, income statements, statements of changes in equity, and statements of cash flows.
Audits are done by third-party auditors to ensure that financial records fairly and accurately reflect the transactions they claim to represent and are free of bias.
In Hong Kong, audits must be conducted by a Hong Kong Certified Public Accountant (CPA). The CPA will review your financial records and submit them to the Inland Revenue Department (IRD). CPA is registered with the Hong Kong Institute of Certified Public Accountants (HKICPA), a statutory body established under the Hong Kong Professional Accountants Ordinance. Its main responsibilities include registering a certified public accountant, issuing practicing certificates, and regulating the professional standards and conduct of members.
Auditing and Assurance Standards on Auditing in Hong Kong
The Hong Kong Institute of Certified Public Accountants is responsible for promulgating the Hong Kong standards on auditing and assurance, which are known as the Hong Kong standards on quality control/management, auditing, assurance and related services.
The preface to the Hong Kong Standards on Quality Control, Auditing, Assurance and Related Services sets out the objectives and due process of the Council of the Institute with respect to the Hong Kong Standards for Quality Control, Auditing, Assurance and Related Services.
HKICPA members are required to comply with these auditing and accounting standards.
Given the stringent auditing standards in Hong Kong, the audit must be done by a third party with a neutral opinion and in compliance with the above auditing standards. Additionally, auditors rely on internal records to conduct audits effectively.
Hong Kong Audit and Tax Filing Process
Preparing for and performing an audit is not easy. This is a lengthy process that takes time and effort from both the business and the external auditors. The following is a brief overview of the audit process in Hong Kong.
Company prepares financial statements and supporting documents (such as sales and purchase invoices, contracts, bank statements, expense receipts, etc.) for handling by the auditor.
The auditor begins by understanding the company's activities and identifying factors that may affect the audit.
The auditor then examines the financial statements and supporting documents for accuracy and identifies and evaluates any errors that could materially affect the financial statements.
Auditor issues audit reports and audit opinions to reflect the accuracy and appropriateness of the company's annual financial statements.
Directors of the company sign the audit report and supporting documents.
The auditor receives the signed audit report, creates the tax calculation form, and sends all required documents to the IRD.
It may take weeks or months for the IRD to review audit reports and financial statements and send tax returns for taxable profits to the company.
Although some of the main tasks are performed by auditors, you should not underestimate the preparation time required. To save you time and stress, it is highly recommended that you prepare financial statements and supporting documents in advance.
Audit and Tax Filing Preparation
In preparation for audits and tax returns, you should keep records of your business operations and prepare the following documents for your auditor. You'll find that some are specific financial documents, while others relate to providing insight into your business operations.
statement of financial position
statement of profit or loss
Bank and trading account statements
Sales, purchases and expense receipts
Contracts or agreements for leases, employees, contractors, etc.
Copy of license, such as SFC license or real estate agent license (if applicable)
Copies of company registration documents: business registration, articles of incorporation, articles of association and annual returns
In addition, it is advisable to keep additional documentary records evidencing all company transactions and activities, such as organizational charts showing the company's overseas offices and locations, and copies of travel receipts and passports as proof of visits.
Now you may be wondering, when should you prepare to file your taxes?
The Inland Revenue Department issues the first Profits Tax Return 18 months after the date of incorporation of the newly incorporated company; however, the IRD may prepare Provisional Profits Tax Return earlier.
After receiving the Profits Tax Return, you must submit it together with the required documents within one month from the date of issue.
If you need to extend the deadline for filing your Profits Tax Return, you can apply for a 2-week extension, provided you file your Profits Tax Return online. It's the IRD initiative to encourage electronic filing, especially for smaller companies.
In addition, businesses can apply for an extension under the Block Extension Scheme.
Taxpayers may be fined or even prosecuted for late filing of tax returns. Another consequence is that non-compliant taxpayers may have to pay higher taxes. The maximum penalty for non-compliance is HK$10,000 plus three times the tax undercharged.
How to Hire an Auditor in Hong Kong?
With so many risks at stake, you want to make sure your business' accounting and auditing is in the right hands. But given the day-to-day stress of running a business, the last thing you want to do is think about accounting and auditing. Some people may think that handling accounting and finance themselves will save their business money, but in reality, it can backfire.
Hiring the right auditors and accountants is especially important to relieve your headaches, save you time and minimize costly accounting errors.
Here are some tips on what to look out for when hiring an auditor.
Find an auditor who understands your business
If your auditor doesn't really understand your business, many things can go wrong. Make sure to look for an auditor who can communicate openly with you and really understand your business. It's also helpful to make sure your auditor can guide you through the process and set clear expectations.
Look for someone with extensive industry experience
Having an experienced auditor who is familiar with your industry means more efficient audits with fewer mistakes. Most importantly, a skilled auditor can provide your company with more relevant services for accurate reporting and meaningful information about your business.
Find an auditor that should be able to work with the accounting software you use
More and more businesses are using accounting software to keep accounting and bookkeeping records. Therefore, it is critical that your auditors know how to use your accounting software to gather the data and information needed to save everyone time.
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