Auditing of Accounts

It is vital to comprehend each thing involved in the process out of which auditing in Hong Kong is also a part of.

Have you set up a Hong Kong company or are you just searching for the things that you would have to take care of when you open one? Either way, after you have set up a Hong Kong company, there are some things that you need to take care of daily as well as annually to follow the legal obligations such as the financial statements, audit report and annual return.

For you to keep your company in good standing, it is vital to comprehend each thing involved in the process out of which auditing in Hong Kong is also a part of. Hence, let us dig into the nitty-gritty detail of everything that is related to auditing including the difference between auditing vs. bookkeeping and more others.

Introduction

Audit Reports are written opinions of the financial statements of the business by an auditor. The Audit Report shows the financial health of a company, reviewed and confirmed by an independent third party accountant. The annual audited accounts in a Hong Kong company might seem like some element of mundane accounting and taxation for any company in Hong Kong. But it is, in fact, something that has many far-reaching consequences. This is why it is being stressed on a lot due to its importance as a yearly task for each and every Hong Kong business to undertake.

But why is it so necessary and why do we need to know all about it before even incorporating a company in Hong Kong? In case you want to open a business in Hong Kong, there are three main things that have to be considered when opening the business and even running it in Hong Kong in terms of auditing. These are:

  • Hong Kong company registration – In this, you need to undergo a lot of legalities for opening the company, bank account and submit the appropriate documentation.
  • Accounting & Tax – Preparing the yearly or the quarterly accounts and the filling them for the purposes of the taxes that have to be paid to the government.
  • Annual Company Audit Report – In this, a CPA, also known as the Certified Public Accountant is hired to audit the accounts of your business and then provide a report as to their accuracy, that would be used in the filing process later on.

Setting up a company is not the only task that needs some attention. The moment you have started the business, it becomes essential to take care of it so that it can run in the best method possible without getting into any unnecessary losses. This involves the process of properly keeping the financial accounts and preparing the audit reports.

What is Auditing?

An audit is an objective evaluation and examination of the financial statements of the organization to ensure that the records are an accurate and fair representation of the transactions. The auditing in Hong Kong is done by a person who is from outside the firm and hire specifically for this task. This task must be done by a Certified Public Accountant, who has passed the necessary exams and received the qualifications to practice accounting and prepare Audit Reports for companies.

The IRD would rely on the audits from a Hong Kong CPA to validate the accuracy of the return of the taxpayer or other transactions. These CPAs would take the time to thoroughly review the accounts, and offer their opinion on the financial statements of the company. Moreover, if the IRD finds inconsistencies or red flags in the financial statements, this is taken as a negative connotation that can be seen as an evidence of a kind of wrongdoing by the taxpayer. This is the reason why it is said to get the audit report prepared by a highly qualified professional Certified Public Accountant, even if it means paying more for better work.

Break Down of Auditing in Hong Kong

Now that you understand what an audit report is, you need to know who would do the auditing for you. As mentioned above, it is noted as something negative when the IRD has found inconsistencies or exaggerated numbers in your financial statements. Hence, it is better to prepare the report before you file the profits tax return with the IRD, which is the Inland Revenue Department in Hong Kong.

Audits that have been prepared by a third party that is not a part of the company can be a much better help in removing any bias, when it comes to the financial state of the company. The audits basically look for something that is called the material error, in the statements in the specific object. This is any significant errors in your accounts during their review.

And this is what helps the stakeholders to get a sense of accuracy when considering the state of the company being audited and can assist to allow them to make better, and more informed decisions. Also, the audit that has been performed by a person who is a third party would always be an honest one, that would not affect any daily working relationships.

Mostly, all the companies obtain an audit once in a year, and the larger companies may get an audit report quarterly. There are some companies where the audits are a legal obligation due to the compelling reasons to intentionally misstated the financial information in an effort to commit fraud. For a few of the publicly traded companies, the auditors are utilized as a means to estimate the effectiveness of internal controls on the financial reports.

What Don’t Auditors Do?

Do not confuse the external auditor with a bookkeeper, or do not mix their tasks as well. Other than this, there are many things that the auditors do not do, that have been shared below:

  • Create internal audit report on the information that is provided to the members of the company, for instance, the report of the director.
  • Test the capacity of all of the internal controls of the organization.
  • Thoroughly review each and every transaction carried out by the organization.
  • Evaluate the appropriateness of the business activities or decisions or strategies of the organization that are made by the directors.
  • Check every figure in the financial audit report – audits are based on careful testing and analyzing only.
  • Let the shareholders know about the quality of the management and the directors, the quality of the risk management controls and procedures of the organization, or the quality of the corporate governance.

What Can’t Auditors do?

Obviously, these auditors that you might be thinking to employ for your Hong Kong company can’t do everything for you. They have their limits and what they can’t do are:

  • Be there all the time – There is a time limit for preparing the audit reports, which means that the auditors are not in the company at all times. The fundamental purpose of the audit report is to develop an opinion about the information in the financial report recorded as a whole, and not to distinguish all the possible irregularities. In short, this just means that the auditors do always look out for the signs of the potential material frauds in a business, but it is not that all the organizations have a fraud identified. In other terms, auditors are watchdogs, not bloodhounds.
  • Predict the future – Up till now, you might have become evident with the fact that the auditing in Hong Kong is about the specific accounting period that has passed, like a previous month or year audit report. Hence, it cannot be used for the judgment of something that has the chances of happening in the future. And this cannot offer the assurance that the organization would continue the business indefinitely.

What exactly Do Auditors Do?

Confused with all the dos and don’ts above? Well, the auditor’s work is to make a report on the financial situation in a company after analyzing everything in it. This is how it goes – they discuss the scope of the audit work with the organization where the management or the directors might request for some additional processes that needs to be performed by the auditors for the auditing in Hong Kong.

The auditors sustain independence from the directors and the management so that the judgments and the tests are made in an objective manner. The auditors are responsible to figure out the extent and the kind of audit procedures that would be performed, which depends on the controls and the uncertainties that have been identified. The procedures might include:

  • Asking many questions – A lot of questions would be asked from a lot of the organization’s members.These questions can be from the formal written questions to the informal questions asked orally.
  • Analyzing accounting and financial records, other related documents, and the tangible items like the equipment and the plant.
  • Making decisions on notable estimations or postulates that the management of the company made when they had prepared the financial report.
  • Getting a written confirmation on the particular matters like asking the debtor to validate the debt amount that they owe the company.
  • Testing a few of the internal controls of the company.
  • Following particular procedures or processes that are being performed in the organization.

How is the auditing in Hong Kong conducted?

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

  • The management of the organization prepared the financial audit report. Also, it has to be prepared following the legal obligations and the financial reporting standards.
  • After this, the auditors begin the examination by obtaining an understanding of the activities of the company and analyzing the industry and economic problems that may have affected the business during the reporting period.
  • For each significant activity recorded in the financial audit report, the auditors recognize and evaluate any uncertainties which could have a substantial influence on the financial position of the company, and some of the measures for internal controls.
  • Based on the uncertainties and restrictions identified, auditors estimate what management has done to make sure the financial report is accurate, and examine all the supporting evidence.
  • After the audit reports are examined, the judgment is made by the auditors to check if the financial report is an accurate and fair representation of the financial results and financial position of the organization, as per the financial reporting standards.
  • In the end, after all this has been done, the auditors make the audit report from what they understood by analyzing everything by sharing their opinion of the members or shareholders of the organization.

Difference of auditing vs. bookkeeping (accounting)

Have you got confused about the bookkeeping, accounting, and auditing in Hong Kong? Well, each one of them is related to each other, but they are not the same thing. They are different from each other regarding reliability, analysis, recording, parties served, advantages, and scope. Nonetheless, the difference between accounting vs. auditing vs. bookkeeping can be expressed as follows:

  • Bookkeeping is an act of recording the business transactions of the company in the ledgers and the books of the original entry.
  • Accounting means the compilation of the bookkeeping as financial accounts, in such a way where a person can easily understand the position of the company.
  • Auditing is the validation of these accounts to figure out the accuracy of them for providing an accurate and fair view of the final accounts and audit report.
  • The primary work is done by the accountant and the bookkeeper, while the final touch is given by the auditor by preparing the audit report.
  • When the work of the accountant ends, the work of the auditor begins.
  • A bookkeeper and an accountant have to record the transactions in the books of accounts, while an auditor has to check and verify that such sales and statements are correct and prepare an audit report.
  • The accountant can give the information of the records to the management. The accountant does not have the responsibility to provide any advice or suggestion while the auditor’s work is to analyze the accounts records and then offer an audit opinion.
  • The Auditor has to be a qualified Certified Public Accountant, but to be an accountant, there is no requirement to be a CPA.

In short, the difference between auditing vs. bookkeeping is simple, where the bookkeeping work is done for the business transactions and accounts of the company . On the other hand, auditing has nothing to do with accountancy and bookkeeping, but is a significant and investigative analysis of the financial information as per the accounting principles, after the bookkeeping and operations have been completed for the financial year.

Certified Public Accountant

Now that you are clear with all the terms, do you know who is the right auditor to work in your Hong Kong company? For the auditing in Hong Kong, you would need a CPA for preparing the audit report. This person must be a CPA accredited in Hong Kong.

There are a lot of agencies that offer these services, and there are many incorporation companies that assist you with these services as well. But in case you want to hire someone from outside, there are some things to keep in mind for the CPA you want to hire for your Hong Kong company.

Here are some other things that you ask the person or yourself while you look to hire a CPA for the auditing in Hong Kong:

  • Ask the accountant if they have ever provided the services to someone who had a wide range of currencies, and the multi-currency bank accounts. If they have, then you can easily be sure about your outcome of the audit report in the end.
  • Is your CPA using accounting software, or do they only put things into excel? In today’s world, accounting software not only facilitates the accounting, but also the accuracy and sharing of information.
  • Do you have a lot of business transactions, and do you use many different online based payment platforms? If yes, do you want your CPA to know about these? Not all the accountants are familiar with this and you would have to ask them about it.
  • Also, make sure the communication methods are made clear before the hiring is done. You would want the accountant to respond timely, and not wait days for a response.
  • In the case of offshore activities, is your CPA experienced with profits tax exemption company’s and tax query letters? Many local Hong Kong CPA may offer attractive prices, but have little to no experience in dealing with offshore clients and tax query letters. Also, how high is their success rate for profits tax exemptions?
  • How is the reputation of the CPA firm? If you are dealing with sensitive tax filings such as profits tax exemptions, you don’t want your audit to be handled by a bad CPA firm under higher scrutiny from the HK Inland Revenue Department (IRD).
  • Are you using some online banking system and is the CPA you are interviewing comfortable with that arrangement? Again, technology. You need to be sure about the person’s skills since not everyone is familiar with the same technology.

And if you have got overwhelmed with this, then know that this is just a small list. Of course, you also need to trust them, and agree with the way they ask to communicate! But be sure about the person you are employing so that your work is completed perfectly without much hassle. Startupr can appoint an independent CPA for your company, to properly handle the auditing and taxation requirements.

Company’s Responsibilities for an Audit

Even though the majority of the work falls on the CPA to conduct the audit and taxation matters as per their standards, the company also has some duties and responsibilities for their audit as well. In general, they should be to provide the relevant financial data and documents and communicate well with the CPA.

Here are some of the guidelines for the company’s responsibilities for the audit:

  • Communication is key. Expect the auditor to ask a lot of questions about the accounts. Even though you may have a busy schedule, try to answer the auditor’s questions when you can. This is important to move along the process and finish the audit.
  • Be willing to be transparent and offer a clear picture of the financials of the company. The last thing you want is the auditor to nearly finish the job, only to discover the company’s Paypal account which you forgot to mention. This will delay the audit, and may have consequences if you have important tax deadlines to meet.
  • Don’t assume the job is done after payment. Accounting is a process, not a product. Even if the CPA is paid for the work, they cannot create the numbers from thin air. Thus you will need to follow up with the relevant information as they ask.
  • Importance of documentation. Like a lawyer cannot win a case without evidence, an auditor cannot verify figures without documents. Be sure to keep organized records of your documents, in case the auditor needs them to verify figures in the accounts.
  • Realize auditor’s are people too. Even if the process can be annoying at times, keep in mind the auditor wants to finish the task as much as you do. Be patient with the process.

These are some of the main responsibilities of the company, and although there are other points, this information will help you for the communication with the CPA and the audit process.

Audit Report, Tax Computation and Tax filing

After all the story about what auditing in Hong Kong is all about and how to hire the best CPA for the audit report preparation in your company, now let us understand why the report is needed. So, if you feel that you do not care about the report and you are okay with the way things without the help of a bookkeeper, accountant or an auditor, it is essential to understand that the government cares since these things are what would be used to file the taxes of your company.

Yes, that is why the topic has been stressed a lot! Let us comprehend the on-going statutory compliance and the annual filing requirements for the Hong Kong private limited companies that have been explained in brief below. With this, you would know why there is so much fuss about the difference of auditing vs. bookkeeping as well as the audit report in a company.

Basic Ongoing Compliance Requirements

At first, let us see what the activities are that a company has to follow, which is related to the tax filing, and auditing in Hong Kong. In terms of the obligations of the auditing in Hong Kong, a private limited company needs to:

  • Keep an appointed auditor unless it is an organization that considered as “dormant” as per the Companies Ordinance. A dormant company is the one that has no accounting activities during a financial year.
  • Keep the following documents and records at all times: share certificates, updated financial records, audit report, minutes of all the meetings, registers that includes share register, and directors register prepared by the bookkeeper.
  • Follow the annual accounts filing requirements and the deadlines of the Companies Registry and Tax Authority of Hong Kong.
  • Keep detailed and accurate accounting reports and the audit report to enable the assessable profits of the company to be immediately determined. All records must be retained for the next seven years from the date of the transaction. This is something that the bookkeeper takes care of. These reports are then used to get the auditing in Hong Kong done.

And for this, the directors need to record the financial accounts of the company that includes the Profit and Loss Account, as well as the Balance Sheet in compliance with Hong Kong’s Financial Reporting Standards (FRS) framework. This is where the auditing in Hong Kong enters into a company for the audit report to be prepared in connection with the annual accounts.

Filing of Annual Tax Return with Inland Revenue Department (IRD)

The IRD notifies the company about the Tax Return filing on the 1st April of each and every year, and for those companies that have just been incorporated, they get the notification on the 18th month after the date of incorporation. It is expected that the companies should file their tax return within one month from the day on which the notification was given.

The companies can easily request for the extension of the filing, if it is needed. But if there is a failure to submit the tax return before the due date, there may be massive penalties placed in terms of payments or even prosecution. Also, while the filing is done, the following documents have to be attached as the supporting documents:

  • A tax computation showing how the amount of assessable of profits or the adjusted losses was arrived at.
  • The balance sheet of the company, audit report, and profit & loss statement relating to the basis period.

If you are still not clear about this and want to understand more information about the filing of taxes, you can refer to the next section which focuses on the filing of taxes for your company. We will explain in more detail on how to file taxes in Hong Kong, which tax deductions and allowances you may apply for, and much more.

Conclusion

In case any of the above reports and documents are not kept, the company and the directors may face a penalty. Also, in case the accounting reports are out of Hong Kong, the returns have to be present in Hong Kong as outlined by the Financial Reporting Standards (FRS) framework. This has also been modeled on the International Financial Reporting Standards (IFRS), and issued by the International Accounting Standards Board (IASB).

Now, you can see why it is a big deal. You do not need to do something that the government has not made compulsory, but the other things have to be fulfilled as per the rules like the auditing in Hong Kong for the company. If you feel that you are not able to handle all these things, then you can take the help of an agency who is an expert in this like Startupr. We can help with the bookkeeping of the company, and appoint an independent CPA for dealing with your company’s audit and tax filings.