Detailed Guide on Auditing in Hong Kong to Ensure Compliance for Hong Kong Companies

Understanding Company Auditing in Hong Kong

Company auditing in Hong Kong is a mandatory annual practice for all incorporated businesses. This audit involves an independent examination of a company’s financial reports to comply with companies ordinance’s requirements and tax obligations outlined in the Inland Revenue Ordinance. The fundamental goal of the audit is to provide an independent and objective examination of financial records that ensures the financial statements comply with accounting standards and regulations which as a whole are free from material misstatement and provide regulators, investors, directors, and managers with reasonable assurance.

Hong Kong mandates that audited financial reports must be overseen by a practising Hong Kong Certified Public Accountant (CPA(Practising)), who will then conduct the audit and file the tax return together with audited financial statements on behalf of clients  to the Inland Revenue Department (IRD). The Hong Kong Institute of Certified Public Accountants (HKICPA) registers, certifies, and regulates accountants to ensure compliance with professional standards and ethical conduct.

Financial Audit Obligations in Hong Kong: Who Needs Them?

In Hong Kong, all locally incorporated companies are required to prepare financial statements annually, subject to audit by a certified public accountant (practicing) registered with the Accounting and Financial Reporting Council. Following the audit, companies obtain a signed audit report, verifying the CPA’s credentials. The Accounting and Financial Reporting Council maintains a list of CPAs (Practising) who are eligible to conduct these audits.

Under the Companies Ordinance, companies, excluding certain exempt and simplified-procedure eligible entities and dormant companies, must undergo an annual statutory audit aligned with CO’s disclosure requirements.

Exploring Hong Kong’s Auditing Standards

The HKICPA has adopted the International Financial Reporting Standards (IFRS) since 2005. This implementation has significantly enhanced Hong Kong’s international compliance and competitiveness.

The HKICPA also issues the Hong Kong Standard on Auditing. These standards are vital to upholding the quality and integrity of audit practices in Hong Kong. Auditors are obligated to observe and comply with these stringent auditing and accounting standards.

Despite the consideration by some business owners to conduct statutory audits internally, Hong Kong’s stringent standards mandate that audits must be performed by an independent third-party entity adhering to these specified standards. As a result, companies are not allowed to conduct their own statutory audits.

What Is An Audited Financial Statement?

An audited financial statement is a comprehensive report that offers a clear evaluation of a company’s financial standing within a specific period. It typically comprises three primary sections:

• Balance Sheet: This section provides a snapshot of the company’s assets, liabilities, and capital as at a date, normally the year or period end, offering insights into the company’s capital structure and financial position.
• Income Statement: It summarizes the company’s profits, expenses, losses, and gains, providing a comprehensive view of its financial performance.
• Cash Flow Statement: This segment outlines the movement of cash and its utilization, showing how cash is managed, including debt payments and operational expenses.

These financial statements undergo an audit by an independent and qualified auditor to ensure they are as a whole free from material misstatement and comply with required financial reporting standards and related regulations.

Significance of Preparing Audited Financial Statements

Preparing audited financial statements is crucial, extending beyond compliance with the Companies Ordinance in Hong Kong. Thorough documentation of the company’s operations is essential, particularly when authorities seek clarification during disputes. For incorporated business, audit reports are required to be filed to the Inland Revenue Department together with profit tax returns.

Furthermore, these audited financial statements serve as vital supporting records required by local authorities and institutions, notably during significant company processes like shareholder changes.

Auditing in Hong Kong: Why Audit Required for Hong Kong Companies

Hong Kong companies’audit is mainly required by two main ordinances: the Companies Ordinance (CO) and the Inland Revenue Ordinance (IRO).

Company Ordinance (CO) Requirements

• Audit Type: Yearly statutory audit
• Mode of Submission: The audited financial statement is presented to the company members at the Annual General Meeting (AGM) or other general meeting.
• Submission Deadline: Within six to nine months following the financial year-end (FYE) depending on the type of companies.
• Applicability: Mandatory for all companies except dormant companies.

Inland Revenue Ordinance (IRO) Requirements

• Audit Type: Statutory audit for filing the Profit Tax Return (PTR)
• Mode of Submission: Alongside the PTR to the IRD
• Submission Deadline: Within one month from the PTR issue date.
  • Extensions: Companies granted extensions must meet deadlines of August 15 (for those with a financial year-end of December 31) or November 15 (for those ending on March 31).
• Applicability: Compulsory for all corporations, except dormant companies, entities incorporated in jurisdictions without the need for audited financial statements, and Hong Kong branches of foreign companies (provided specific information accompanies the PTR).

Yearly Statutory Audit Process in Hong Kong

The yearly statutory audit process in Hong Kong involves several steps, requiring collaboration between the business and the external auditor:

• Financial Statements Preparation: The company compiles financial statements and supporting documents for the auditor’s review, including contracts, invoices, receipts, and bank statements.
• Understanding Company Operations: The auditor analyzes the company’s activities to identify potential audit impacts.
• Financial Statement Examination: Scrutiny of financial statements and supporting documents to ensure accuracy and detect significant errors
• Auditor’s Report and Opinion: The auditor issues a report and express opinion over the financial statements’ accuracy.
• Confirmation by Director: The director’s report, financial statement, declaration and representation documents are signed by the company director.
• Submission to IRD: The auditor/tax representative submits the necessary documents on behalf of clients to the Inland Revenue Department (IRD).
• IRD Review: The IRD reviews the audit report and financial statements, providing the tax assessment result with taxable profits amount to the company. This review may take several weeks or months.

Companies benefit from preparing financial statements and supporting documents in advance. This proactive approach streamlines the audit process and ensures compliance.

How We Can Help – Our Auditing Service

At Premia TNC, our auditing services in Hong Kong cater to the specific compliance needs of businesses. Our experienced team specializes in meeting the stringent regulatory standards set by Hong Kong’s financial framework. We ensure your company’s financial report adhere to these requirements, providing you with reliable and compliant report.

We understand the need for a seamless and efficient audit process that minimizes disruptions to your operations. Our streamlined approach aims for smooth collaboration, focusing on efficient and proper audits.

Contact Premia TNC for a FREE consultation. Our team is ready to guide you through the audit process and provide tailored solutions for your specific business needs.