A company audit is when an external body reviews its annual financial statements to ensure they are accurate and compliant with applicable laws.
Audits are typically conducted once per year, but more frequently if there are concerns about the accuracy of the financial statements.
Auditing in Hong Kong requires auditors to express an opinion on the entity’s financial statements.
The purpose is to protect the interests of shareholders and other stakeholders, as well as to give them confidence that the accounting reports accurately represent the company’s financial position.
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What is a company audit in Hong Kong?
In Hong Kong, all limited companies must undergo annual audits.
The auditor would express an opinion on whether the financial statements are prepared, in all material respects, following the reporting framework.
Submitting a completed audit report and other supporting evidence can be time-consuming.
However, it is important to ensure compliance with the Inland Revenue Department, Hong Kong Ordinance, and other laws in Hong Kong SAR.
The Companies Ordinance (CO) in Hong Kong requires all incorporated companies to have their financial accounts audited annually.
However, only a Certified Public Accountant (CPA) is qualified to perform an audit.
The CPAs have undergone the necessary education and training to issue an objective opinion on a company’s accounting reports.
In addition, CPAs adhere to a professional code of conduct and are independent of the company they are auditing.
At ReachTop KSHK CPA Limited, we offer comprehensive company auditing that will help you remain compliant with laws while you work towards improving your operations.
Audit Requirements for SMEs in Hong Kong
The independent CPA will need to assess the company’s financial report to determine whether they are an accurate representation of the company’s financial position.
Thus, the Hong Kong Certified Public Accountant may request to examine the following documents and accounting records before starting with the audit process:
- Income statement
- Statement of financial position
- Trial balance
- General ledger
- Bank statements
- Sales, purchase, and expenditure invoices
- Merchant account statement
- Company documents
These financial records will provide relevant accounting information on the company’s internal structure and help the CPA assess whether the company complies with all applicable laws and regulations.
By obtaining these documents, the auditor can ensure they have all the information they need to start the audit process.
The Auditing Process
The audit process is critical to ensuring the accuracy of financial statements. It is essential to assure that a company’s accounting reports are reliable.
Below are the steps in completing the audit process of a Hong Kong company:
- The company prepares and provides the financial statements and supporting documents, including other relevant accounting information, to the external auditor
- As part of the initial audit, the professional CPA reviews these documents to understand the industry, the company’s activities, and business transactions.
- The CPA examines the financial statement and company transactions to identify uncertainties and misstatements that could affect the financial accounts.
- The auditor forms an opinion on the accuracy and fair presentation of information in the financial reports.
- The next step is for the auditor to issue audit reports reflecting an audit opinion on the proper presentation of information in the annual reports.
- After an audit, the auditor prepared the audit report, including a tax computation and completed profits tax return. The company directors will review, confirm and sign the completed audit reports and other necessary documents.
- The auditor will submit these documents with the completed Profits Tax Return to the Inland Revenue Department.
What is Included in an Audit Report?
An audit report is a formal document containing the findings of an audit.
The report is addressed to the company’s shareholders to give them an overview of the auditor’s opinion on the company’s financial health.
An audit report is an important tool for shareholders in making decisions about their investment in a company.
The report typically includes the following:
- The auditors’ letter, with their opinion on whether the financial statements under review comply with the accounting standards in Hong Kong.
- The audited financial statements, including disclosures and computations of profits tax. These documents are prepared for tax filing.
Financial Reporting Requirements for Private Companies in Hong Kong
Private companies in Hong Kong must adhere to the Hong Kong Financial Reporting Standards (HKFRS) when preparing their financial statements.
The HKFRS is a set of accounting standards issued by the Financial Reporting Council of Hong Kong that govern the preparation of financial statements for all entities.
The purpose of the HKFRS is to provide a uniform reporting framework so that investors can compare apples to apples when making investment decisions.
What is Reporting Exemption?
A reporting exemption refers to the pronouncement of the CO, exempting certain private or guarantee companies from complying with specific requirements when preparing financial statements.
This exemption aims to reduce the compliance burden on small businesses and allow directors to focus on running their businesses.
In addition, it reduces the costs associated with compliance, making it easier to promote entrepreneurship and economic growth in Hong Kong.
The companies that qualify for this reporting exemption must adhere to less complicated accounting standards.
However, the exempted companies must still subject their financial statements to audit.
How to Qualify for Reporting Exemption
Private and guaranteed companies may qualify for reporting exemption and prepare simplified reports. Below are the conditions to qualify for the exemption:
A small private company must meet at least two of the following requirements:
- total revenue not exceeding $100 million in a given financial year;
- total assets not exceeding $100 million in a given fiscal year;
- the number of employees not exceeding 100 in a given financial year.
A small guarantee company may qualify for reporting exemption if its total revenue in a given fiscal year does not exceed $25 million.
Small and Medium-Sized Entity Financial Reporting Standard (SME-FRF) and Financial Reporting Framework (FRF)
In August 2005, the Hong Kong Institute of Certified Public Accountants (HKICPA) promulgated the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME-FRF & FRS).
The HKICPA adopted this framework and standard to improve the quality of financial reports of small and medium-sized entities (SMEs) in Hong Kong.
The SME-FRF & FRS were developed specifically for SMEs operating in Hong Kong.
The adoption of the SME-FRF & FRS helps improve the comparability and consistency of financial reports by SMEs in HK SAR and ultimately provides users of financial statements with more useful information.
Mandatory Sources of GAAP in Hong Kong
The three mandatory sources of GAAP in Hong Kong are the Companies Ordinance, Hong Kong Financial Reporting Standards (HKFRS), and Listing Rules.
The Ordinance provides the legal framework for businesses in Hong Kong and includes requirements for reporting.
The HKFRS sets out the accounting principles that all businesses must follow.
Finally, the Listing Rules provide detailed guidance on reporting for listed companies.
All three of these sources of GAAP are essential for ensuring the accuracy and transparency of reporting in Hong Kong.
Tips for Hiring an Auditor in Hong Kong
If you’re doing business in HK SAR, having a good auditor on your team is essential. An auditor can help you ensure that your financial records are accurate and compliant with local regulations.
But how do you go about choosing an auditor? Here are a few tips to keep in mind:
Consider the size of your business
You’ll need an auditor with experience dealing with complex financial statements if you’re a large corporation.
On the other hand, if you’re a small business, you may get by with a less experienced auditor.
Type of Audit Service
Some auditors specialize in certain areas, such as tax or compliance audits. Make sure to choose an auditor with experience in the type of audit you need.
Auditor fees can vary widely, and it’s important to get a sense of what you’re paying for before making a decision.
Auditor Fees
You’ll want to get quotes from several firms before deciding. Be sure to ask about any hidden costs or extras that may be included in the fee.
Check for References
Ask other businesses in Hong Kong for recommendations, or look for online reviews from different auditors. By taking the time to do your research.
Company Audit in Hong Kong FAQs
Do all companies need to be audited in Hong Kong?
All companies in Hong Kong must have their financial reports audited by an independent auditor to ensure compliance with tax laws and tax filing requirements.
A company audit is necessary as audit reports must be filed together with the company’s profits tax return.
What is an audit opinion?
An audit opinion is a formal notice issued by an auditor after examining a company’s financial statements.
The opinion states whether the financial statements are free of material misstatement and contain enough information for investors to make informed decisions.
What are the types of audit opinions?
There are three types of audit opinions: unqualified, disclaimer, and adverse.
An unqualified opinion is the most common and favorable type of opinion. The financial statements are free of material misstatement and provide adequate information for investors.
A disclaimer opinion is issued when the auditor cannot obtain sufficient evidence to give an unqualified opinion.
This may be due to limitations on the scope of the audit or disagreements with management.
An adverse opinion is rare and indicates that the financial statements are materially misstated. This could be due to fraud or errors in accounting estimates.
Who can audit in Hong Kong?
In Hong Kong, CPAs (Practising) are authorized to conduct audits. A certified public accountant in Hong Kong must be registered with the HKICPA.
What is the primary responsibility of the Professional Accountants Ordinance in Hong Kong?
The Professional Accountants Ordinance in HK is the primary legislation regulating the city’s accountancy profession.
The Ordinance sets out the requirements for registration as a professional accountant and establishes the Hong Kong Institute of Certified Public Accountants.
The HKICPA is responsible for regulating its members’ professional conduct and promoting public confidence in the profession.
In addition, the Ordinance establishes an independent Complaints Committee to investigate complaints against registered accountants.
The Complaints Committee has the power to reprimand, suspend or strike off any accountant found guilty of misconduct from the register.
Wrap Up
As a business owner, you know it’s important to have your financials in order.
At ReachTop KSHK CPA Limited, our team of certified public accountants is ready to provide your company with a comprehensive audit.
We have years of experience auditing Hong Kong companies, and we understand the unique challenges businesses in this city face.
So don’t wait any longer; reach out to us today and let us help you take your business to the next level!
