What to Expect From Your Audit in Hong Kong
Running a limited company in Hong Kong involves strict adherence to the framework outlined in the Companies Ordinance. One of the essential obligations is submitting an audit report performed by a Certified Public Accountant (CPA) alongside your tax return filings.
The audit provides evidence that all financial information and documentation is in good order. If your business is due for an audit, this article will explain everything you need to know about audits in Hong Kong.
Audit Essentials
All auditors adhere to the standards set by the Hong Kong Institute of Certified Public Accountants (HKICPA). The audit procedures largely follow the same set of principles, regardless of what company does the audit.
This means that you must prepare certain documents for a comprehensive audit to ensure you meet HKICPA's requirements. These documents lay the foundation for the audit by providing a holistic overview of your company's finances.
To pass the audit, you must submit several documents regardless of the auditor you choose. At a minimum, you must provide the following:
General Ledger: The primary accounting record that tracks all financial transactions.
Balance Sheet: Includes assets, liabilities, and equity. It provides the auditor with a snapshot of the company's financial standing.
Income Statement (Profit and Loss Statement): Details a company's revenue, expenses, profits, and losses over a period.
Depending on your company's size and complexity, your audit may ask you for additional documents, such as an accounts receivable aging report, inventory records, and tax returns.
Additionally, all auditors will submit a bank confirmation request to obtain external information about your business. A bank's confirmation allows the auditor to provide external evidence.
Bear in mind that obtaining a bank confirmation takes at least two weeks on the bank's end. The delay can significantly impact your timeline for getting the audit report signed on time. If you are in a hurry, ask your auditor to start this process first.
Common Audit Questions
Audit questions or queries are part of the standard procedure. While the exact questions depend on your unique situation, we have a list of the most common ones you should prepare for in advance:
Balance Confirmations: If your company owes or is owed a substantial amount, both parties may be required to sign a balance confirmation letter. The document ensures that the outstanding amount is accurate.
Sample: Audit sampling involves the auditor requesting a small sample of issued and received invoices throughout the year to confirm the authenticity of income and expenses.
Cut-off Testing: The auditor requests copies of the first few invoices issued in the following year to ensure transactions were booked in the correct period.
Translation Flow: Your auditor may seek clarification regarding significant changes in transactions, such as major drops or increases in gross profits.
As a general rule, your business's complexity directly influences the quantity and nature of audit queries.
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Audit Adjustments
If your auditor finds discrepancies between transactions and the General Ledger or similar errors, they will propose an adjustment. An adjustment is a correction that ensures your accounts are accurate and aligned with HKICPA's standards.
Audit adjustments are expected and nothing to worry about. For instance, your auditor may propose an adjustment to the profits tax expense, as profits tax is based on the net income after the audit. You should leave the profits tax calculation until after the audit to ensure it will be accurate.
When working with a corporate services firm like ours, the chances of having adjustments are much lower.
The Main Types of Audit Opinions
There are four primary types of audit opinions that auditors issue to provide an evaluation:
Clean (Unqualified): The auditor did not find any problems with your financial statements. It is the optimal outcome that you should always strive for.
Qualified: Your financial statements are accurate, except for one or two issues. A common issue is appointing an auditor after the year-end, and the auditor was unable to observe the inventory count. You may also receive a qualified opinion if your company holds smaller subsidiaries, but you failed to consolidate all financial statements. You will receive a qualified opinion if the presumed impact is not too significant. Remember that investors typically deem qualified reports unacceptable.
Disclaimer: If your auditor cannot verify your financial statements, you will receive a disclaimer report. This can cause issues with the Internal Revenue Department (IRD) and your tax return.
Adverse: Auditors give an adverse opinion if they find significant inaccuracies in your financial reports. This may cause major issues with your bank, the IRD, or your investors.
We are committed to ensuring that your audit opinion results are clean to guarantee your financial success in Hong Kong. Partner with us for a meticulous and seamless audit experience.
How Long Does an Audit Take?
The timeline of your audit is an aspect you should never overlook. You have to start the audit process early to ensure you file your tax returns on time. The following factors affect your audit timeline:
Time of the year. If your financial year-end is in the tax December or March, expect longer turnaround times, as auditors are busy.
Quantity and complexity of transactions
Your auditor's work speed.
Here at Shepherd Asia, we aim to complete audits within one month of completing the accounting for a given period. By acting as an intermediary, we minimize the number of queries you need to address personally.
Our commitment extends to guaranteeing the accuracy of your audited financial statements and ensuring strict compliance with Hong Kong law. Additionally, we refrain from undertaking any work beyond what is necessary or specifically requested by you.
As an example of our successful work, one of our clients' auditors was initially using Financial Reporting Standards (FRS) for private entities. Upon our assessment, we determined that the company qualified for Small and Medium-sized Entity FRS (SME-FRS). By rectifying the issue, we ensured accurate financial reporting, saving our client's time and money in the process.
