Maintaining Accounting Records and Compiling Annually Audited Accounts in Hong Kong

No matter what your current business stage is, both auditing and keeping accounting records in Hong Kong are equally important aspects of the business that you shouldn’t neglect at any cost. For most business owners, this is one topic that gives them headaches. But note that it is something that you need to study right from the moment you step into the business world. Keep on reading to know all the details about it.

Accounting Records and Audited Accounts in Hong Kong

Keeping of Accounting Records in Hong Kong

Keeping accounting records in Hong Kong is mandatory. It is vital to maintain a proper accounting record as they help you know where exactly your money is going. Given below are various sections from the new Companies Ordinance.

Section 373 Companies Ordinance – Company must keep accounting records

Excluding the dormant companies, an audit of financial statements is needed for all companies under the new companies ordinance(CO). Section 373 of the New CO requires a company to keep accounting records that are sufficient to:

  • You must show and describe the company’s transactions.
  • Publish with analytical accuracy the company’s financial position and financial performance.  
  • Allow the directors to make sure that the financial statements comply with the new Companies Ordinance.

Daily entry of the accounting records must be done, including:

  • The details of all the money received and spent by the company,
  • The company’s record of assets and liabilities.

Suppose the above-mentioned terms to keep accounting records do not apply to a subsidiary undertaking of a company. In such a case, the company needs to take all reasonable steps to ensure that the subsidiary undertaking keeps accounting records, which is sufficient to enable the company’s directors to ensure its financial statements comply with the New Companies Ordinances. Furthermore, in section 374 of companies ordinances, a company must be keeping its records in Hong Kong at its registered office or any place that the directors think fit.

Section 379 Companies Ordinance – Directors must prepare financial statements

Section 379 of the New CO requires the development of financial statements for each financial year, including consolidating financial statements in case it is a holding company at the end of the financial year. Preparation of consolidated financial information is not required in certain cases. They are if the firm is a wholly-owned subsidiary of another body corporate in the financial year, or b. the company is a partially owned subsidiary of another body corporate in the financial year.

Make sure that at least six months before the end of the financial year, the directors inform the members in writing of the directors’ intention not to prepare and provide consolidated financial statements for that particular financial year, and this specific notification is not for any other financial year. As at a date falling three months before the end of the financial year, no member has responded by giving the directors a written request to prepare consolidated statements for the financial year.

Section 51C Inland Revenue Ordinance – Business records to be kept

Every person carrying a business in Hong Kong must keep sufficient business records, either in English or Chinese, for his income and expenditure to enable his available profits to be determined. Such records must be kept for seven years. If anybody fails to do so, they have to pay a penalty of HK$100,000.

Keeping accounting records in Hong Kong means ensuring that business records must include:

  • Books recording the receipts, payments, income, and expenditure. 
  • All original documents like vouchers, bank statements, invoices, bills, and receipts. 
  • Book that has a record of assets and liabilities. 
  • Documenting regular cash receipts and cash expenditures.
  • A record of where the business involves dealing in goods.
    • A record of all goods that are purchased and sold; that includes the date of transactions, the goods concerned, suppliers, customers.
    • Record of trading stock at the opening and end of the accounting period, including the stocktaking details to prepare the stock record.
  • Where the business involves providing services, which includes records of all the services provided showing the date of transactions, services, and the customers.

Auditing for Hong Kong Companies

Auditing in Hong Kong companies is one significant aspect that cannot be ignored. The moment you start your business, it is advisable to begin keeping accounting records and auditing in Hong Kong. After the commencement of new Companies Ordinances, auditing in Hong Kong is needed following the financial reports of Hong Kong. Audit by definition means to review and verify an account with the help of a third party. Similar is the case with the auditing in Hong Kong. Unlike many other countries, the financial statements, profits, and ultimate taxes payable to the government are reviewed and audited in Hong Kong. Read on to know more about it.

Auditing in Hong Kong

Auditing in Hong Kong is essential to avoid the risk of incorrect tax filings. The licensed entity which is responsible in Hong Kong for registering and certifying accountants is the Hong Kong Institute of Certified Public Accountants. The entity is also responsible for the issuance of the Hong Kong Standards on Auditing, Quality Control, Assurance, and other related services, which is further submitted to an annual tax assessment by the Inland Revenue Department.

The Hong Kong Institute of Certified Public Accountants (HKICPA) members must follow these accounting and auditing standards. According to the rules governing auditing in Hong Kong, a Hong Kong company needs to get its financial statements audited by a registered and certified public accountant.

The idea behind conducting audits is to make sure that the data and documentation submitted to the IRD in the financial statements are correct, with no internal bias. The audit of taxes, profits, and financial statements is conducted by a third party (CPA) to guarantee compliance with tax laws in Hong Kong. Furthermore, to avoid any miscalculations and false audit reviews, the IRD requires a third-party audit review of companies’ accounts and financial statements in Hong Kong.

Documents required

To prove the overall operations of the business, each business in Hong Kong should provide its financial statements to the auditor. Usually, a financial statement should incorporate a balance sheet, an income statement, and even a general business record. The auditor would examine all these statements, along with the supporting documents and their accounts. In case there is a need for amendments, they will offer their opinion on the accuracy of the financial statements. Typically, an auditor is accountable for reviewing the company’s accounts and gathering sufficient relevant audit documentation for a specific organization. This is not only to have an eye on the company accounts but also for them to have relevant records when the IRD requests additional documentation. This may further be reliable in case the company is applying for offshore tax exemption.

In order to conduct the audits efficiently, the company must prepare the following documents for auditing in Hong Kong:

  • Every Bank statement
  • All merchant account statements
  • All sales and consulting service invoices
  • Purchases invoice and invoice of the subcontractor
  • All the receipts of the expenses
  • Each and every contract
  • All financial statements and management accounts
  • All other relevant accounting documents

It is advised to keep an added records of documents supporting all company transactions and activities, including:

  • Organization chart, which explains the location of the company operations overseas.
  • Travel receipts and passport copies as proof of visit.
  • Documents of shipping.
  • Sales orders
  • Proof of official call records such as telephone bills and faxes as

It is recommended to have all these documents handy in order to have smooth auditing in Hong Kong.

Process of auditing

Now that you have an idea about the documents required let us read about the process of auditing in Hong Kong. The entire audit process requires to follow a number of steps, wherein the CPA accurately checks and verifies various information such as financial statements. They also verify and check the company as a whole. It is important to make sure that the financial statements given show an accurate representation of your business.

Here are some steps that are involved when we talk about the process of auditing in Hong Kong or in any other country.

  • The company’s management prepares the financial statements and supporting documents to prepare the CPA with any additional relevant accounting information.
  • Once this is done, the auditors begin their study by understanding the specific company’s activities and other essential factors such as industry as a whole, which may affect their audit.
  • For all the significant transactions in the financial statements, the auditors identify and estimate any uncertainties or errors that could significantly influence the company’s financial accounts
  • Based on the recognition, auditors evaluate what the company has done to ensure the financial statements are 100% accurate and examine all the supporting evidence.
  • After these transactions are examined, the auditors make an opinion on the accuracy and fair representation of the company’s financial statements.
  • At the end, the auditors make an audit report from their reviews and opinion on the financial statements.
  • Next, the audit reports and necessary audit documents will be signed by the directors and sent back to the auditor. 
  • The tax computation form will then be created, and these documents will be submitted with the completed Profits Tax Return (PTR) to the government.

The whole audit process will include many more steps and tasks performed by the auditor. Still, this brief outline gives you a better understanding of the audit process as performed by the CPA.

Need any assistance in accounting or tax filing in Hong Kong?

Documentation is required to be evaluated appropriately and avoid any mistakes. Accurate documentation will allow you to gather as much correct information as possible. In case you lack in any of these areas. It is better to hire a professional instead of taking risks. Note that Startupr is one of the leading accounting and taxation services in Hong Kong; if you need any assistance, contact our experts now!