According to the Hong Kong Companies Ordinance, all companies registered in Hong Kong must have their annual financial statements audited by a practicing Hong Kong Certified Public Accountant (CPA). However, as a business owner, you might not be familiar with the auditing requirements and might be scratching your head on how to arrange your company for auditing. This is why we’ve come up with this beginners’ guide to auditing for Hong Kong companies!
In this article, we’ll cover Hong Kong standards on auditing, the auditing process, audit and tax filing preparation, and how to hire an auditor. Now, let’s dive in!
Auditing in Hong Kong: An Overview
All companies incorporated in Hong Kong are required by law to audit their financial reports every year.
Statutory audit reports are an examination of a company’s financial reports conducted by an independent party to comply with the disclosure requirements of the Hong Kong Companies Ordinance and tax obligations of the Inland Revenue Ordinance.
Financial reports include a balance sheet, income statement, statement of changes in equity, and a cash flow statement.
An audit is done by a third-party auditor to ensure that the financial records are a fair and accurate representation of the transactions they claim to represent and without bias.
In Hong Kong, auditing has to be conducted by a Hong Kong Certified Public Accountant (CPA). The CPA will audit your financial records and submit them to the Inland Revenue Department (IRD). CPA are registered with The Hong Kong Institute of Certified Public Accountants (HKICPA), which is a statutory body corporate established under the Professional Accountants Ordinance in Hong Kong. Its primary responsibilities include registering accountants, issuing practicing certificates, and regulating members’ professional standards and conduct. You can find a CPA from the Institute’s website.
Hong Kong Standards on Auditing: Auditing and Assurance in Hong Kong
The Hong Kong Institute of Certified Public Accountants is responsible for the issuance of the Hong Kong Auditing and Assurance Standards, which are known as the Hong Kong Standards on Quality Control, Auditing, Assurance, and Related Services.
The Foreword to the Hong Kong Standards for Quality Control, Auditing, Assurance, and Associated Services sets out the objectives and due process of the Institute Council with respect to the Hong Kong Standards for Quality Control, Auditing, Assurance, and Associated Services.
The members of the HKICPA must observe these standards for auditing and accounting.
Some business owners may wonder if they can handle statutory auditing themselves. Given the strict auditing standards in Hong Kong, audits must be completed by a third party that maintains a neutral opinion and observes the above auditing standards. Therefore, companies legally cannot perform the audit themselves.
Nonetheless, accounting and bookkeeping can be conducted in-house with the help of an accountant or bookkeeper. In addition, auditors rely on internal records to perform auditing effectively.
How does Auditing in Hong Kong work? The Auditing and Tax Filing Process
Preparing and performing an audit is not easy. It’s a long process that takes time and effort from both the business and the external auditor. Here’s a brief overview of the audit process in Hong Kong.
- The company prepares the financial statements and supporting documents (e.g. sales and purchase invoices, contracts, bank statements, expenditure receipts, etc.) for the CPA’s handling.
- The CPA first understands the company’s activities and identifies what could potentially affect the audit.
- The CPA then examines the financial statements and supporting documents for accuracy and to identify and evaluate any errors that could materially affect the financial statements.
- The auditor issues an auditor’s report and audit opinion to reflect the accuracy and appropriate presentation of the company’s annual financial statements.
- The director of the company signs the audit report and the 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 a few weeks or months for the IRD to review the audit report and financial statements and send the tax schedule for the case of taxable profits to the company.
Although some of the major tasks are performed by the auditors, you should not underestimate the preparation time you need. To save you time and stress, it’s highly recommended that you prepare the financial statements and supporting documents in advance.
Audit and Tax Filing Preparation
To prepare for audit and tax filing, you should keep records of your business operations and have the following documents prepared for your auditors. You will find that some are specific financial documents, while others are related to providing insight into your business operation.
- General Ledger
- Balance Sheet
- Income statement
- Bank and trading account statements
- Service invoices
- Sales, purchase, and expense receipts
- Contracts or agreements for leasing, employees, contractors, etc.
- Copy of licenses, such as SFC License or Real Estate Agent License (if applicable)
- Copy of Company Registration Documents: Business Registration, Articles of Incorporation, Articles of Association, and Annual Return
In addition, it’s recommended to keep additional records of documents evidencing all company transactions and activities, for example, an organizational chart showing the company’s overseas offices and location, and travel receipts and passport copies as proof of visit.
Now you may be wondering, when should you prepare for tax filing?
The Inland Revenue Department issues the first Profits Tax Return for newly incorporated companies 18 months after their date of incorporation; however, it’s possible that the IRD may prepare a Provisional Profits Tax Return at an earlier date.
After receiving the Profits Tax Return, you must submit the return along with the required documents within one month from the issue date.
If you need to extend your deadline to submit your Profit Tax Return, you can apply for a 2-week extension, provided that you submit your Profits Tax Return online. This is an initiative by the Inland Revenue Department to encourage electronic filing, especially for smaller corporations.
In addition, businesses can apply for an extension under the Block Extension Scheme.
A taxpayer can be fined or even be prosecuted for being late with their tax returns. Another consequence is that the offending taxpayer may have to pay an even higher tax. The maximum penalty for non-compliance is HK $10,000 plus three times the tax undercharged. For more details, you can refer to the Penalty Policy of the IRD.
Auditors in Hong Kong: How to Hire One?
With so much at stake, you want to make sure your business’s accounting and auditing are in the right hands. But given the daily stress of running a business, the last thing you want to do is think about accounting and auditing. Some might think that handling accounting and finances themselves will save their business money, but in fact, it could do just the opposite.
Hiring the right auditor and accountant then is especially important to ease your headaches, save you time, and minimize costly accounting mistakes.
Here are a few tips on what to look for when hiring an auditor.
- Find a CPA that understands your business
Too many things can go wrong if your CPA doesn’t really understand your business. Make sure to look for an auditor that can openly communicate with you and truly understand your business. It is also helpful to make sure that your CPA can guide you through the process and set clear expectations.
- Look for one with rich industry experience
Having an experienced auditor who is familiar with your industry means more efficient audits with very few errors. On top of that, a skilled auditor can provide more relevant services to your company to get accurate reports and meaningful information about your business.
- Your auditor should be able to work with the accounting software you use
More businesses are using accounting software to keep accounting and bookkeeping records. Therefore, it’s crucial that your auditor knows how to use your accounting software to gather data and information needed to save everyone’s time.
Auditing for Hong Kong Companies: Conclusion
Finding an auditor that is right for your business is not easy. But we can connect you with an independent auditor who provides a comprehensive auditing service that fits your business’ needs.
You might also want to consider outsourcing accounting and bookkeeping operations that will allow you to focus on the business you love doing. We help you get rid of the paperwork and administrative tasks at an affordable budget, so you can spend time growing your business.
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