New Business Owner’s Guide to a Company Audit in Hong Kong | Company formation in Hong Kong

New Business Owner’s Guide to a Company Audit in Hong Kong

Estimate time to read: 7 min

A corporate audit ensures that all the data you have used in the financial statements of the business is accurate and fair. If you wonder which businesses need an audit, all of them will be addressed.

All Hong Kong business owners must be reviewed by someone outside the company for their financial records (no prejudice guaranteed). It indicates that you are compliant with local accounting requirements. It’s a moral responsibility on top of that. So, there’s no better time for a new business owner like you to get up to speed with the operation.

Regardless of what point the business is in, auditing is an important feature of the organization that you cannot ignore. While for most business owners, it is not that interesting of a subject, it is something that you need to remember from the moment you move into the business world.

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What is Auditing in Hong Kong?

Let’s get some insight about auditing in Hong Kong before digging straight into the article to grasp the criteria.

An audit is by definition, an official review and inspection by a third party of accounts performed. Auditing in Hong Kong aims to obtain, without any internal bias, a fair and correct view of a company’s financial statements

In Hong Kong, unlike some other nations, the financial accounts, income, and taxes owed to the government are normally checked and audited by a third party. The goal is to ensure conformity in Hong Kong with the applicable taxation laws. Otherwise, businesses can either purposely or inadvertently change their financial information to have a misleading view of their company’s financial information.

As a result, for hundreds of thousands of businesses in Hong Kong, this will lead to an inadequate mechanism for proper checks and enforcement with the Inland Revenue Agency, or IRD. It is also mandatory for firms to have their company reports and financial records reviewed or audited.

Audit and Tax Compliance in Hong Kong

All incorporated companies in Hong Kong are mandated by the Hong Kong Companies Ordinance to provide an annual audit of their financial records undertaken by a Hong Kong Certified Public Accounting (CPA) practice.

You will receive the first tax return form, provided by the Inland Revenue Agency, approximately 18 months after the company’s establishment in Hong Kong. You need to apply it along with the audit report and tax calculation after you have completed the completion of the PTR form.

Documents Required for Auditing in Hong Kong

Each corporation should submit financial statements to the auditor to demonstrate the overall operations of the firm. Where appropriate, the financial report should contain a balance sheet, a tax statement, and even a general corporate activity ledger.

Then, along with the supporting documentation, the auditor will review all these statements, including their accounts. If changes are required, they will give their views on the consistency of the financial statements

An auditor is responsible for evaluating the company’s accounts in Hong Kong and providing appropriate suitable audit documents for each entity. This is not only for them to keep an eye on the business finances, but also for them to have suitable documents as more paperwork is required by the IRD. This could be particularly valid if the company is filing for an exemption from overseas tax.

For a CPA to perform the audit successfully, the company must complete or schedule the following auditing documents in Hong Kong.

  • All statements from banks
  • Invoice/ subcontractor’s invoices for all transactions
  • All Management Accounts/financial statements
  • All receipts for expenses
  • All merchant account statement
  • All sales invoices/ arrangements with consultancy services
  • All other relevant Financial Records

The purpose of the CPA’s compilation of these records is not limited strictly to financial reports and supporting documents. In reality, it is also necessary for the well-being of your internal structure and organization of business operations.

How to do your first company Audit?

A third party must check and inspect everything alongside the financial accounts, taxes owed to the government as well as income. As a company owner, gathering all of the above is your responsibility, however, we know how busy you can be. That’s why you can rely on us for online accounting, electronic bookkeeping, and constructive tax support services.

Another strong starting point is to get those main acronyms out of the way:

CPA (Practicing): A Certified Public Accountant with a Practicing License (these are persons who can audit the financial records of the business)

IRD: That sounds official, and that’s it. This is the Department of Hong Kong Inland Revenue; they are the ones that deal with the collection of duties and taxes.

PTR: Profits Tax Return form

CO: This applies to the Hong Kong Corporations Ordinance, the entity regulating incorporated companies, and the Hong Kong licensed overseas companies

How to choose the Company’s Auditor?

Competent, professional, and trained. These are three terms that summarize what you can look for in your CPA in Hong Kong to do your company audit. They are the ones who will be in charge of checking your financial statements. You will need to file the required declarations or documentation until you have obtained your first tax return form from the IRD – which typically comes 18 months after your corporate incorporation. It is best to do this ahead of time, as usual. No reason to hurry. And you can stop a panic at the last minute.

The Process of Auditing for a Company

Now that you have a clear idea about the auditing documentation needed in Hong Kong, the next thing is to get some information about a company’s audit process.

For the auditor to properly review and validate not just the financial results, but also the enterprise as a whole the procedure requires different steps. Each record and documents supplied by the corporation plays an important role in giving trust that the financial statements reflect a true portrayal of the organization.

Any of the steps involved in the auditing process in Hong Kong or any other country are given below:

  • The administration of the organization normally files the financial reports and related documentation, and also presents them and all other applicable accounting material to the CPA.
  • The next move is for the CPA to evaluate and get an overview of the practices of the particular business, as well as other important considerations that may influence their investigation, such as the industry as a whole
  • In the financial statements, auditors will define each important transaction and then determine any uncertainties or defects that may have a significant or substantial impact on the company’s financial reports.
  • According to the relevant statistics, auditors will estimate what the company has done just to ensure that all the accounting records are correct and review all the information that confirms them.
  • When the audits on all records are finished, the auditors are given an opinion on the quality and equal portrayal of the company’s financial statements.
  • Based on the financial statements, the auditors then make an accounting report.
  • Both audit reports and other required audit records will be signed and submitted back to the auditor by the directors.
  • They will then create the tax computation form and submit the completed Profits Tax Return (PTR) to the government with these documents

Audit Report, Tax Computation, and Tax filing with the IRD

Once the audit is finished and all returned certified audit reports and audit records are received by the CPA, the final audit report and tax computation will be submitted to the IRD.

To supply them with the signed audit reports and other required audit papers, it is appropriate to work with the auditor in Hong Kong. The IRD can accept only the initial hard copy of the signed audit report from the company executives.

When these records are obtained by the IRD, they will take some time to analyze the figures, and then they include the tax payable schedule if the corporation has assessable income.

For the IRD to review the audit report, the whole process may take a few weeks or even a few months, as the IRD could be busy with other tax filings, especially around April, August, and November.

Your CPA will inform you when to review the company records and accounts for the next audit after you are through with the execution of the very first initial audit of the company. But believe us, it would be easier if all these papers were written ahead of time.

If a corporation waits until the moment, they obtain the PTR, so the accounting report and tax filings will be left with just one month to plan the file. Sometimes there is not adequate time to compile all the necessary documentation and conduct all the appropriate audit procedures. It would also be safer for both firms to schedule the papers ahead of time

Conclusion

For all business owners in Hong Kong, conducting a company audit is a legal necessity. It’s handled by a certified third-party who guarantees that the tax is accurately calculated and filed. And don’t procrastinate. Get on top of your get-go auditing and corporate accounting to make sure you know what records you need to have an image of your accounts and activities.

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