Introduction
As mentioned in our previous blog, 4 Tips for Hong Kong Tax Filing and Statutory Audit, the audit and profits tax filing season can get complicated 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 may not be entirely familiar with what the audit 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 know more about the audit process and requirements in Hong Kong.
| TLDR: Audit is an examination of companies’ financial reports conducted by a Certified Public Accountant (CPA). Audit reports will be signed by companies’ directors and used for determining tax computation by IRD. Private companies and other companies limited by guarantee are qualified to prepare simplified audited accounts according to the SME-FRF & SME-FRS reporting standard. |
2. What is the purpose of an audit?
3. Who can complete the audit?
4. How much does an audit cost?
Audit Report
6. What is included in an audit report?
7. Is there any audit report example?
8. What is the process for auditing?
Auditing Terms Explained
10. What are the different types of audit opinions?
Financial Reporting
11. What should be included in a financial statement before being presented to an auditor?
12. What are the accounting standards in Hong Kong?
13. What are the financial reporting requirements for private companies and listed companies?
Reporting exemption
14. What type of company is qualified for reporting exemption?
15. What is exempted from the accounts and director’s report for those who are qualified?
What is an Audit?
Audits are examinations of a company’s financial reports, conducted by an independent party (usually a certified public accountant) to comply with the requirements set out in the Hong Kong Companies Ordinance (“Companies Ordinance”) and the tax obligations outlined in the Inland Revenue Ordinance (“IRO”).
What is the purpose of an audit?
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.
Who can complete the audit?
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”).
How much does an audit cost?
The cost of any audit usually depends on the volume of transactions, the turnover for the assessment period, and the complexity of the company’s books. The average starting rate for a quality audit for SMEs in Hong Kong ranges from HK$7,000 to HK$10,000. Depending on the factors mentioned, the fee would range from HK$7,000 to HK$35,000.Feel free to contact us to get a free audit consultation and quotation for your company.
Preparing An Audit Is Not Easy
As you can see there are specific requirements for an audit. While there are many things you need to pay attention to in order to properly prepare an audit report every year, it is easy to overlook the process. In the next part, we will talk more about the details of the audit report, to allow you to have a better understanding of the procedure and its functions.
Preparing An Audit Is Not Easy
As you can see there are specific requirements for an audit. While there are many things you need to pay attention to in order to properly prepare an audit report every year, it is easy to overlook the process. In the next part, we will talk more about the details of the audit report, to allow you to have a better understanding of the procedure and its functions.
Audit Report
What is an audit report?
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 it forms the basis of calculating the tax liabilities of the company and will provide legitimacy towards the company’s business activities.
The IRD will refer to the audit report 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 fewer chances of being questioned.
During the audit, 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.
What is included in an audit report?
- A written letter from the auditor containing their opinion on whether the company’s financial statements comply with the Hong Kong accounting standards.
- A set of audited financial statements, disclosures, and profits tax computations are to be submitted to the IRD for tax filing purposes.
Is there any audit report sample?
This sample is originally from HKICPA sample
You can always find relevant information on the HKICPA website. Please feel free to look for audit reports provided by HKEx and the following example to have more understanding of information about audits.
What is the process for auditing?
The Hong Kong audit process is as follows:
- The company prepares the financial accounts along with the supporting documents for the CPA’s further handling.
- The auditor reviews and understands the activities of the company as well as the nature of the company, both of which could affect the audit.
- The auditor identifies and evaluates significant transactions in the financial statement.
- The auditor tests the financial statements and spots uncertainties and errors that could influence the financial accounts.
- The auditor reviews the financial statements and its supporting documents to ensure that the report on transactions is accurate.
- The auditor made an opinion report to reflect the accuracy and fair representation of the company’s financial statements.
- The auditor makes a report from the audit and opinion on the financial statements.
- The director of the company signs the audit report and the supporting documents.
- The auditor receives the signed audit report and creates the tax computation form and sends it back to the IRD along with the Profits Tax Return.
The content and depth of the audit documents depend on the identified risks of material misstatement, the judgment required in performing the audit, and the significance of the audit evidence obtained by the auditor.
Small summary
Although some of the major tasks are handled by auditors, do not overlook the preparation part. After having a glimpse of the procedures for handling audit reports, we will look into the actual details of the report. There are specific opinions that show how your auditors view your reports. In the following part, we will explain more about different opinions so you can have more ideas when you receive your audit report.
Auditing Terms Explained
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.
What are different types of audit opinions?
- 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 an 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.
Early Preparation is Key
I believe you know more about different types of audit opinions. In order to get an unqualified opinion, companies usually prepare earlier with a timeline. It is suggested to reserve time to prepare your audit and tax filing, or you can consult professionals for extra help. In the next module, we will talk more about what specific in financial reporting you need to pay extra attention to.
Early Preparation is Key
I believe you know more about different types of audit opinions. In order to get an unqualified opinion, companies usually prepare earlier with a timeline. It is suggested to reserve time to prepare your audit and tax filing, or you can consult professionals for extra help. In the next module, we will talk more about what specific in financial reporting you need to pay extra attention to.
Financial Reporting
What should be included in a financial statement before being presented to an auditor?
Here is the checklist of required documents:
-
- Audited financial statements of subsidiary companies
- Copy of original Profit Tax Return from the IRD
- All financial statements
- All sales/service agreements, employment contract, tenancy agreement
- All purchase invoice Receipt for all expenses
- Bank statements (The auditor might ask you to sign a confirmation form which will be sent to the bank to obtain the bank balance)
- All sales invoices with the corresponding receipt
- Copy of any special license like SFC License and Property Agent License (if any)
- Copy of company registration documents:
- Updated business registration certificate
- Incorporation certificate
Afraid of missing any important documents? You can also download our detailed Audit Report Checklist for your reference.
What are the accounting standards in Hong Kong?
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 recognizes, measures, presents, and discloses its accounting policy and financial results. The HKFRS has been designed to apply to general-purpose financial statements.
What are the financial reporting requirements for private companies and listed companies?
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.
Overwhelmed by Financial Reporting?
There are many guidelines and details for preparing an accurate financial report. We know it can be hectic if this is the first time you need to handle financial reporting. However, there are some cases for reporting exemption that you may consider. Follow the next part and see if that exemption is applicable for you.
Reporting exemption
What type of company is qualified for reporting exemption?
According to the new Company Ordinance, private and guaranteed companies are qualified to prepare simplified accounts and directors’ reports.
To qualify for the reporting exemption, you need to meet the requirements below:
For a small private company, it is required to meet two of the following conditions:
- Your total revenue does not exceed $100 million in a financial year;
- Your total assets do not exceed $100 million in a fiscal year;
- The number of employees does not exceed 100 in a financial year.
For a small guarantee company, it is required that:
- Your total revenue does not exceed $25 million in a fiscal year.
Please note that for the subsidiaries of a listed company, you may qualify for reporting exemption, in the case that it is not a company specified in section 359(4) (for example, an insurance company or a bank) if you meet the requirements above.
What is exempted from the accounts and director’s report for those who are qualified?
For companies that qualify for reporting exemption, the financial statements can be prepared following the Small and Medium-Sized Entity Financial Reporting Standard and Financial Reporting Framework.
Moreover, for the qualified companies, it is not required to prepare the following when creating the accounts and directors’ reports:
- Disclosure of the auditor’s remuneration in financial statements;
- A “true and fair view” for financial statements;
- Disclosure in the material interests of directors in transactions or contracts within the notes to financial statements;
- The inclusion of the following information in the director’s report:
- Business review
- Donations
- Director’s reason for resignation
- Material interests of directors in transactions, arrangements, and contracts
Please note that for reporting exemption-qualified companies, their financial statements are still required to be audited.
Final Thought
Preparing an audit can be hectic without proper preparation. The goal of this article is to give you more information about what are the details when dealing with auditing reports. An audit should be done through consistent effort instead of a deadline fight. As audit reports are directly related to profit tax calculation, poor preparation can adversely affect the tax filing process. In the next article, we will talk more about profit tax-related issues, feel free to check out more what items you need to prepare profit tax filing.
