Audit for Hong Kong Companies
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Auditing for Hong Kong companies is an aspect you cannot neglect. You should consider auditing and accounting as early as at the time when you set up your business. You definitely do not want to procrastinate because any delay could cost you unnecessary expenses later on.
After the adoption of the new Hong Kong Companies Ordinance on March 3, 2014 by the government, Hong Kong has set regulations for companies to file a Statutory Audit in accordance with the Hong Kong Financial Reporting Standards.
Audit in Hong Kong
If you plan to do business in Hong Kong, it is important to understand accounting, bookkeeping, and auditing Hong Kong standards to avoid the risk of incorrect tax filings. The only licensed entity in Hong Kong responsible for registering and certifying accountants is the Hong Kong Institute of Certified Public Accountants.
It is responsible for the issuance of Hong Kong Standards on Auditing, Quality Control, Assurance, and Related Services, which is submitted in an annual tax assessment by the Inland Revenue Department (IRD). The Hong Kong Institute of Certified Public Accountants (HKICPA) members must observe these accounting and auditing standards.
As far as rules governing auditing in Hong Kong are concerned, a Hong Kong incorporated company must get its financial statements audited by a registered and certified public accountant.
The purpose behind conducting audits is to ensure that the information and documentation submitted to the IRD in the financial statements are accurate, with no internal bias. The audit of taxes, profits, and financial statements is done by a third party (CPA) to ensure compliance with taxation laws in Hong Kong.
In order to avoid any miscalculations and false audit reviews, the IRD requires a third-party audit review of accounts and financial statements of companies in Hong Kong.
The audit report, tax computation, and tax filing
Once the auditing is done and the CPA has received all the returned signed audit reports and audit documents, they proceed to send the completed audit report and tax computation to the IRD.
Also, it is advised that you work with auditors in Hong Kong so as to properly provide the authorities with the signed audit reports and other necessary auditor documents containing key information. The IRD only accepts the original hard copy of the signed audit report from the company’s high officials.
Once the IRD office receives the documents, it takes some time for them to review all the figures. In the case where the company has assessable profits, they provide the tax payable schedule.
When it comes to processing time, this can take anywhere from a few weeks to a few months (done by the IRD). Bear in mind that the authorities take more time during April, August, and November to process the report due to other tax filings.
When the first, initial, auditing of the company is complete, the CPA would advise the owners on time in order to prepare the company documents and statements for the next audit. However, it is best to prepare these documents in advance.
Important note: Companies that wait until the last minute (to receive the PTR) have only one month to prepare the file, audit report, and tax filings. Do know that this period of time is not enough to gather all necessary documents and perform all the relevant audit procedures.
Audit and tax compliance in Hong Kong
A business receives the first tax return form from the IRD 18 months after the incorporation. Upon completion, the Profit Tax Return form is submitted along with the audit report and tax computation.
Financial statements to be presented to auditors should include:
- Balance sheet
- Income statement
- Ledger of business transactions
- All financial statements
- All sales and purchase invoices
- All expenditure receipts
- All consulting service invoices
- All bank statements
- All contracts
- All subcontractor’s invoices
- All merchant account statements
- All management accounts
- All relevant accounting documents
A Hong Kong company is advised to keep in additional records of documents supporting all company transactions and activities, including:
- Organisation chart that shows the location of the company operations overseas
- Travel receipts and passport copies as proof of visit
- Shipping documents
- Sales orders
- Itemised telephone bills and faxes as proof of official call records
Upon receipt of the documents, the auditor reviews the statements, accounts, and supporting documents and shares opinions on their accuracy. The documents are required for a proper review of the company accounts.
The process of an audit in Hong Kong
The whole audit process involves a number of steps, wherein the CPA accurately checks and verifies various information such as financial statements and figures as well as the entire company. This is crucial to ensure that the financial statements presented show a true representation of your business.
Before presenting the documents to the CPA, the company management is responsible for preparing financial statements and supporting documents. Upon receipt of the
same, auditors start reviewing the documents. They also try to understand the company activities and consider relevant factors, which may affect auditing.
- The CPA identifies and evaluates any fallacies in the financial statements that could significantly influence the financial accounts.
- Based on the evaluation, they analyse the company’s activities to confirm the accuracy of financial statements. All the supporting documents are also examined for accuracy.
- The auditor then shares their opinion on the accuracy and fairness of financial reports.
- The next step is to create an audit report based on their opinion.
- The company directors must sign the audit reports along with other crucial audit documents before sending them back to the auditor.
- All of these documents, including Profits Tax Return and computed tax form filed by the CPA are submitted to the IRD.
A Hong Kong incorporated company is required by the local law to work with the CPA to ensure all information in audit reports is accurate. The company must submit signed audit reports along with necessary auditor documents. Only the original hard copy of the audit report signed by the company directors is accepted by the IRD.
The IRD may take a few weeks or months to review the audit figures and provide the tax payable schedule to the company in case of any assessable profits.
As far as preparation of financial statements is concerned, the company should prepare documents and statements for the next financial year upon completion of the initial audit.
This is better done in advance because if the company chooses to wait for the PTR, it might be too late. In that case, there will be only one month for the company to file the audit report and tax.
A startup in Hong Kong must have a profit and loss account, balance sheet, general ledger, and trial balance to ensure compliance of accounts with the local accounting standards.
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Offshore company audit in Hong Kong
An offshore company in Hong Kong should submit any profits report to the IRD if the profits have accrued within the special administrative jurisdiction. Any offshore company that has made profits in the territory of Hong Kong is liable to profits tax and has to fulfill the requirements of preparing an audit report in this regard.