A topic that is not often spoken about when doing business in Hong Kong is the requirements that come after the first year of operations. It's not discussed often because people are more focused on the benefits that come from doing business in Hong Kong. Nevertheless, we cannot ignore it since it could have a big impact on your business operations.
In this article, we will focus on the Statutory Audit Report, especially since this point is stated in the Hong Kong Companies Ordinance, which by law, it is necessary to carry out once a year for companies incorporated in Hong Kong.
But first, we must do a summary of the accounting system in Hong Kong, since it is the first step before coming to the audit report.
Which accounting standard is used in Hong Kong?
Since 2005, the Hong Kong Institute of Certified Public Accountants (HKICPA) has adhered to the use of the International Financial Reporting Standards (IFRS) for their Financial Reporting Standards (FRS), improving, even more, the competitiveness of Hong Kong with international compliance.
It is important to make the distinction between the systems of Hong Kong and Mainland China, which have different financial, tax, and legal systems. In this sense, the Companies Ordinance, which is the law that rules over the companies registered in Hong Kong, requires that a Certified Public Accountant (CPA) audit company records of their transactions once a year. The outcome of this process is what generates the Audit report.
What is an Audited Financial Statement?
Financial statements are reports that help to understand and to evaluate the financial position and health of a company within a defined period. It consists of 3 sections:
- Balance sheet: here the assets, liabilities, and capital of the company are shown in a specific period. This section helps to know better the structure of the capital of the company.
- Income statement: it reflects the profits, expenses, losses, and gains of the company. In summary, showing the net income after deducting the expenses in a specific period.
- Cash flow Statement: it is composed of the cash positioning of the company and shows the movements of cash and how the money is used. For example, to pay debts, operations expenses, etc.
Once the financial statement is prepared, normally by a qualified accountant, it can be audited. Having the financial statements audited will help your company validate that the records are correct and within compliance. More details of the auditing standards process will be shown below.
What is the purpose of preparing audited financial statements?
Apart from being a requirement by the Companies Ordinance, it forms an essential part of one of the steps that help a company to keep compliance according to the rules set in Hong Kong. The process would normally follow the next steps:
- Gather the management accounting records and all the supporting documents.
- Preparation of the Financial Statement management reports with the help of an accountant with accounting experience.
- Send the Financial Statement to be audited by a Certified Public Accountant in Hong Kong.
- Receiving feedback from the auditor and clarifying any questions or missing documents to sustain the information submitted in the Financial Statement.
- Finally, once the Financial Statement has been audited and the statutory audit report prepared, it can be submitted together with the Profit Tax Return to the Inland Revenue Department (IRD).
It is not common for the authorities to require further clarification in the case that controversy arises. This is when it becomes important to record the keeping of all the documents related to the operations and transactions of the company.
Ultimately, the audit reports are a crucial element that allows a company to file the Profits Tax Return declaration. The Hong Kong tax system is regulated by the Hong Kong Inland Revenue Department, which checks on companies for their tax filing in due time and manner. Additionally, an audited Financial statement serves as a supporting record of your company that is required by other local authorities and institutions such as banks and the company's registries, especially when doing changes of shareholders.
Who can audit a Financial Statement?
As it is a requirement in the law, all Hong Kong-incorporated companies must prepare their financial statements every year, and send them to be audited. In Hong Kong, only a registered accountant with the Hong Kong Institute of Certified Public Accountants (HKICPA) can audit a financial statement.
After the Financial Statement has been audited, the last step would be to receive the Signed Audit report. It is important to check that the person who conducted the audit is a Certified Public Accountant. The Hong Kong Institute of Certified Public Accountants has a list of all the registered members that can generate an audit report, and this is a useful tool to find a certified individual that can provide the service to your company. You can find the list of websites here.
As discussed in this article, Hong Kong companies have just a few requirements and most of which need to be fulfilled once a year. Nevertheless, it is important to take the time to keep all the necessary documents to complete the process step by step, so the operations of a company are not interrupted. Commonly, companies misplace files and records that later become a problem for the audit process and therefore the Profits Tax Return cannot be submitted to the Inland Revenue Department (IRD). It is highly advisable to approach the professionals who can guide you with this official requirement and are experts in the accounting industry of Hong Kong. If you wish to learn more about accounting and bookkeeping tips and guidelines in Hong Kong, we have just what you need.
What is an audited financial statement?
Who can audit a financial statement in Hong Kong?
What is the purpose of an audited financial statement?