Hong Kong Auditor Appointment
- a22162
- Jul 25
- 5 min read
Hong Kong Auditor Appointment Explained
In Hong Kong, the appointment of an auditor for a company is a legal requirement under the Companies Ordinance (Cap. 622) for most companies. Here's a breakdown of the process and key considerations:
Who can be appointed as an auditor?
An auditor in Hong Kong must be a practicing Certified Public Accountant (CPA) or a firm of CPAs registered with the Hong Kong Institute of Certified Public Accountants (HKICPA).
They must be independent of the company they are auditing. Individuals who are officers or employees of the company, or partners/employees of such persons, are disqualified from being appointed as auditors.
When is an auditor appointed?
First Auditor: The directors can appoint the first auditor of a newly incorporated company at any time before its first Annual General Meeting (AGM). This auditor will hold office until the end of the first AGM.
Subsequent Auditors: The auditor is typically re-appointed annually at the company's AGM and holds office until the end of the next AGM.
Casual Vacancy: If an auditor resigns or is removed, a new auditor must be appointed to fill the casual vacancy. The directors can make this appointment, which is then often confirmed by shareholders at a general meeting.
Process of Appointment:
Directors' Resolution (for first auditor or casual vacancy): The board of directors passes a resolution to appoint the auditor.
Shareholders' Resolution (for annual appointment or confirmation):
For the annual re-appointment or appointment of a new auditor, a resolution (usually an ordinary resolution) is passed at the Annual General Meeting (AGM).
If the directors appointed an auditor to fill a casual vacancy, the shareholders typically confirm this appointment at a subsequent general meeting.
Special Notice for Removal of Auditor: If a company intends to remove an auditor before their term expires, special notice (at least 28 days) must be given to the company and the auditor. The auditor also has the right to make representations.
Professional Clearance: When there is a change of auditor, the incoming auditor should communicate with the outgoing auditor to obtain professional clearance and understand the circumstances of the change.
Notification to Relevant Bodies (for Public Interest Entities - PIEs): For Public Interest Entities (PIEs), the Financial Reporting Council (FRC) requires notification of new auditor appointments within 7 business days of the appointment taking effect.
Key Responsibilities of the Auditor:
To audit the company's financial statements annually in accordance with the Companies Ordinance and Hong Kong Financial Reporting Standards (HKFRSs) or relevant accounting standards.
To form an opinion on whether the financial statements give a true and fair view of the company's financial position and performance.
To report to the company's shareholders on the audited financial statements.
To ensure the company has kept adequate accounting records.
Exemptions:
Certain companies, such as dormant companies and some small private companies that meet specific criteria (related to total revenue, total assets, and number of employees), may be exempt from the full audit requirements.
Important Note: It's crucial for companies in Hong Kong to comply with the Companies Ordinance regarding auditor appointments to avoid penalties and ensure proper financial governance. Seeking advice from legal and accounting professionals is highly recommended for specific situations.
How Accounting Professionals can Help
Accounting professionals play roles in assisting companies with auditor appointments and related financial governance in Hong Kong.
Here's how they can help:
Corporate secretaries focus on the legal compliance aspects of the auditor appointment process. Accounting professionals, specifically Certified Public Accountants (CPAs) in public practice, are directly involved as the appointed auditors and offer their expertise in financial reporting and auditing.
Drafting Resolutions:
Directors' Resolutions: Preparing the formal minutes and resolutions for the Board of Directors to appoint the first auditor or to fill a casual vacancy.
Shareholders' Resolutions: Drafting the ordinary resolutions for the Annual General Meeting (AGM) to re-appoint existing auditors or appoint new ones.
Special Resolutions (if applicable): For more complex situations like the removal of an auditor before the expiry of their term, which often requires a special notice and specific procedures.
Ensuring Compliance with Companies Ordinance:
Advising on the specific requirements of the Hong Kong Companies Ordinance (Cap. 622) regarding auditor appointments, including eligibility criteria, timing, and procedural steps.
Ensuring that the company adheres to all statutory deadlines for appointment and notification.
Advising on Auditor Removal/Resignation:
Providing profesional advice on the proper procedures for auditor removal, including the requirement for special notice, the auditor's right to make representations, and the necessary shareholder approvals.
Assisting with the legal implications of an auditor's resignation, including the company's obligations to inform the Registrar of Companies.
Corporate Governance Advice:
Advising on best practices for corporate governance related to financial reporting and audit functions.
Ensuring that the company's Articles of Association (AoA) are consistent with the Companies Ordinance regarding auditor appointments and powers.
Reviewing Engagement Letters:
While the accounting firm drafts the engagement letter, professionals can review it from a legal perspective to ensure it adequately protects the company's interests, clearly defines the scope of work, liabilities, and dispute resolution mechanisms.
Filing with Registrar of Companies:
Ensuring that the necessary forms (e.g., Form AR1 for auditor appointment for Public Interest Entities, or forms related to cessation/removal) are correctly prepared and filed with the Companies Registry.
Providing Audit Services:
Performing the actual audit of the company's financial statements in accordance with Hong Kong Financial Reporting Standards (HKFRSs) and relevant auditing standards.
Issuing an independent auditor's report on whether the financial statements give a true and fair view.
Advising on Financial Reporting Standards:
Guiding the company on compliance with HKFRSs and other relevant accounting principles.
Assisting in the proper preparation of financial statements to ensure they meet regulatory requirements and provide a fair representation.
Pre-Appointment Due Diligence (for the incoming auditor):
As part of professional ethics, the incoming auditor will communicate with the outgoing auditor to seek "professional clearance," understanding the reasons for the change and any potential issues.
Assessing the company's accounting systems and records to determine the scope of the audit and any potential challenges.
Drafting Engagement Letters:
Preparing the formal engagement letter that outlines the scope of the audit, responsibilities of both the auditor and the company, audit fees, and terms and conditions of the engagement.
Identifying Internal Control Weaknesses:
During the audit process, auditors often identify weaknesses in the company's internal control systems and provide recommendations for improvement, thereby enhancing financial integrity.
Taxation Advice (from the same firm):
While audit and tax are separate functions, many CPA firms offer both services. They can advise on tax implications related to financial reporting and compliance.
Special Reviews/Reports:
Beyond the statutory audit, auditors can be engaged for special reviews, due diligence, or other reports required by specific circumstances (e.g., for mergers and acquisitions, or regulatory filings).
In essence, accounting professionals ensure the process of auditor appointment and corporate governance surrounding it is legally sound and compliant, while performing the audit and ensuring the financial statements are accurate and compliant with accounting standards. Often, companies will engage them to ensure a holistic approach to their financial and corporate governance responsibilities.
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