As mentioned in our previous blog, 4 Tips for Hong Kong Tax Filing and Statutory Audit, the audit and profits tax filing season can be a complicated process for companies of all sizes. As many Hong Kong businesses are operated by individuals who do not ordinarily reside in the city, it’s very common that business owners will often not be entirely familiar with what this process entails and why it’s so important for their business. In this article, we look to provide further guidance on this topic, specifically for new businesses who are keen to understand what the audit process entails and what they can expect from their auditor.
What you will learn from this article:
1. What is an Audit?
Audits are examinations of a company’s financial reports, conducted by an independent party to comply with the disclosure requirements set out in the Hong Kong Companies Ordinance (“Companies Ordinance”) and the tax obligations outlined in the Inland Revenue Ordinance (“IRO”).
Pursuant to the Companies Ordinance, all Hong Kong incorporated companies are statutorily required to audit their financial reports on a yearly basis. However, only Hong Kong Certified Public Accountant firms (“CPA”) are qualified to be appointed as an auditor for a company to complete an audit report.
It is the auditor’s responsibility to examine a company’s financial statements to determine whether the company has been in compliance with the taxation laws and accounting and auditing standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).
The purpose of an audit is as follows:
- To enhance the degree of confidence of intended users towards the financial statements (achieved by the expression of an opinion by the auditor). However, the company is ultimately responsible for the preparation of the company’s financial statements and supporting documents to be reviewed
- Ensure that the information and documents ultimately submitted to the IRD are accurate, with no internal bias.
2. What is an Audit Report and What Does It Mean?
Once an auditor has completed an audit, they will prepare an Audit Report which is to be signed by the company’s directors and the company auditor. An Audit Report is important because they form the basis of calculating the tax liabilities of the company and will provide legitimacy towards the company’s business activities. It includes a written letter from the auditor containing their opinion of whether the company’s financial statements comply with the Hong Kong accounting standards. The auditor will also provide a set of audited financial statements, disclosures and profits tax computations in the Audit Report to be submitted to the IRD for tax filing purposes.
The IRD will refer to these documents to determine the company’s tax obligations for that financial year of assessment. It is not uncommon that the IRD will raise questions about the audited financial statements and tax computation, however, a well-completed Audit Report with an Unqualified Opinion will have less chances of being questioned.
During the audit process, it is necessary to work with the auditor closely to provide them with the accounting records and supporting documents in order to complete the Audit Report. Finally, the IRD will only accept the original hard copy of the signed Audit Report from the company directors.
3. What is an Audit Opinion?
Audit Opinions are statements made by an auditor in the Audit Report. They are references to whether the information presented in a company’s financial reports are reflecting a complete, fair and accurate view of the company.
There are different types of Audit Opinions that can be provided:
- Unqualified Opinion – the auditor concludes that the company’s financial statements are fairly and appropriately presented and are in compliance with Hong Kong’s accounting standards
- Disclaimer of Opinion – the auditor concludes that there is insufficient audit evidence on which to base an opinion
- Adverse Opinion – the auditor concludes that the financial statements provided by the company was limited in scope or there was a material issue in regards to their preparation
The Audit Opinion provided by an auditor is largely determined by the review of the audit assessment. In the event that the auditor deems the circumstances of an audit to be unsatisfactory, they may be inclined to present an opinion other than unqualified opinion.
Common examples are when an auditor finds a company’s accounting records to be inadequate or missing and the auditor is unable to carry out an audit procedure to draw a proper audit conclusion in accordance with the accounting standards and auditing guidelines. In these circumstances, the auditor would attempt to carry out reasonable alternative procedures to obtain sufficient appropriate audit evidence to support an Unqualified Opinion where appropriate.
To the extent that an adverse opinion was presented, the auditor must disclose their findings in their Audit Report and highlight the deficiencies during the audit review. IRD and other stakeholders may interpret an adverse opinion as an indication that the audited company may have encountered serious reporting issues or had failed to adhere to their company obligations.
4. What Are the Hong Kong Accounting Standards?
Hong Kong companies are governed by the Hong Kong Financial Reporting Standards (“HKFRS”). These standards serve as the fundamental guiding principles for how a Hong Kong company recognises, measures, presents and discloses their accounting policy and financial results. The HKFRS has been designed to apply to general purpose financial statements.
Hong Kong companies must emphasize adherence to the HKFRS during the preparation of their financial statements. Financial statements that fail to adhere to the HKFRS may cause delays in the audit process – furthermore, the company may potentially incur additional audit fees or may receive an Adverse or Disclaimer of Opinion.
All in all, it is important to understand the Accounting Standards and what is an audit report. As a licensed Hong Kong CPA firm, FastLane CPA’s team of qualified professionals can assist you to assure compliance with applicable reporting standards and identification of internal control issues. We focus to provide you with quality and cost effective Hong Kong audit and tax engagement services. Please contact the FastLane Group for a price quotation! Click here for further understanding about audit requirements!