Auditing in Hong Kong
It is often advantageous to start a business in Hong Kong due to the straightforward taxation system.
It is often advantageous to start a business in Hong Kong due to the straightforward taxation system, as well as it’s low tax rates and it’s territorial concept for profits tax for Hong Kong companies. This is further illustrated by the friendly regulations for businesses and corporations, with the Hong Kong government’s eyes set on lowering corporate tax rates below 10% for small businesses in the future. However, to effectively operate this tax system, the Hong Kong tax system relies heavily on a high level of understanding and compliance from businesses and taxpayers.
Not only should businesses understand when and how to pay taxes, but also that each company’s accounts must be reviewed and audited by a Hong Kong Certified Public Accountant. This system may be different from other countries, however compliance of the taxation system is of the utmost importance in instilling an effective tax regime in Hong Kong.
What is Auditing in Hong Kong?
An audit by definition, is a official review and verification of an accounts, often by a third party. The reason for this is to obtain a true and accurate view of the financial statements of a company, without internal bias. Unlike some other countries, the financials statements, profits and ultimate taxes payable to the government is reviewed and audited in Hong Kong. This is to ensure compliance with the relevant taxation laws. Otherwise companies may change or alter their financial information, either intentionally or in error, to provide a false view of their financial information of their company. This would create an ineffective system for proper checking and compliance by Inland Revenue Department, or IRD, for the hundreds of thousands of companies in Hong Kong. Thus company accounts and financial statements are required to be audited by a third party.
Who are Certified Public Accountants?
This audit in Hong Kong is conducted by a licensed Hong Kong Certified Public Accountant, or CPA for short. These are tax professionals which have studied and passed the necessary examinations to show their competency in accounting, auditing and taxation in Hong Kong. Companies can find a Hong Kong CPA to help them to review their accounts and files their annual taxes.
The IRD will still review the audit work from these CPAs from time to time. If they find inconsistencies or red flags in the audit reports, they may follow up with additional queries and requested further supporting documents, as this could be seen as a negative connotation for the CPA and tax payer if errors are found. This is why it is recommended for the company to take time to find a highly qualified and professional CPA, even if it requires paying a bit more for better work.
Audit and Tax Compliance in Hong Kong
According to the Hong Kong Companies Ordinance, Hong Kong incorporated companies are required to perform annual audit for the financial statements by a Hong Kong practicing Certified Public Accounts (CPA). This will apply to all Hong Kong incorporated firms, whether commencing business in Hong Kong or abroad. Inland Revenue Department in Hong Kong (IRD) will issue the first Profits Tax Return form in approximately 18 months after the incorporation of the company. The PTR will need to be submitted along with the audit report and tax computation.
The audit report and filing should be complied by following the regulations and requirements of IRD. The reason for conducting an audit is to form an opinion on whether the information presented in the financial report is reflecting a true and fair view of the company.
What documents are needed for an audit?
The company should provide the financial statements to the auditor to show the overall business. The financial statements should include an income statement, a balance sheet, and general ledger of the business transactions, if possible. The auditor would then review these statements, and along with the supporting documents, review their accounts and offer their opinion on the accuracy of the financial statements.
An auditor is responsible to review the company’s accounts and obtain sufficient appropriate audit documentation for each company. This is not only for them to conduct a proper review of the company accounts, but also for them to have proper records, in case the IRD requests for further documentation for the accounts.
For a CPA to conduct the audit efficiently, the company should prepare the following documents for the audit:
- All financial statements/management accounts
- All sales invoices/ consulting service invoices/ contracts
- All purchases invoice/ subcontractor’s invoices
- All expense receipts
- All bank statements
- All merchant account statement
- All other relevant accounting documents
These documents would be taken into account by the CPA not only for the financial information and supporting documents, but also for how well your internal system and organization of the company operations are.
The process of auditing for a company
The audit process comprises of various steps for the auditor to accurately check and verify not only the financial figures but also the company as a whole. All of the information and documents provided help to provide confidence that the financial statements show a true representation of the company.
Here are some steps that are involved when we talk about the process of auditing in Hong Kong or in any other country.
- The management of the company prepare the financial statements and supporting documents, and provide these to the CPA with any other relevant accounting information.
- After this, the auditors begin their review by obtaining an understanding of the activities of the specific company and other important factors such as industry as a whole, which may have an effect on their audit.
- For each significant transaction in the financial statements, the auditors identify and evaluate any uncertainties or errors which could have a significant influence on the financial accounts of the company.
- Based on those identified, auditors estimate what the company has done to make sure the financial statements are accurate, and examine all the supporting evidence.
- After these transactions are examined, an opinion is made by the auditors on the accuracy and fair representation of the financial statements for the company.
- At the end after all of this has been done, the auditors make an audit report from their audit and opinion on the financial statements.
- The audit reports and other necessary audit documents will need to be signed by the directors, and sent back to the auditor.
- They will then create the tax computation form, and submit these documents with the completed Profits Tax Return (PTR) to the government.
The whole audit process will contain more steps and tasks performed by the auditor, as well as their questions and adjustments on the accounts. However, this brief outline should give you a better understanding of the process of the audit as performed by the CPA.
You can also check out our more comprehensive description as in our Startupr Guide.
Audit Report, Tax Computation and Tax filing with the IRD
Once the audit is finished and the CPA has received all the returned signed audit reports and audit documents, they will send the completed audit report and tax computation to the IRD. It is necessary to work with the auditor to provide them the signed audit reports and other audit documents, as even if the audit work in complete, the IRD will only accepted the original hard copy of the signed audit report from the company directors.
Once the IRD receives these documents, they will take some time to review the figures and provide the taxes payable schedule, in the case where the company has assessable profits. This could take them a few weeks to even a few months to review, as the IRD may be busy with other tax filings, especially around April, August and November.
After the first initial audit, your CPA should advise you on when to prepare the company documents and statements for the next audit. It is highly recommended to prepare these documents ahead of time, as if the company waits until they receive the PTR, they will only have one month to prepare the file the audit report and tax filings. This is often not enough time to perform all the relevant audit procedures and documents, thus its suggested to prepare the documents ahead of time.
This article is here to provide more information on the field of auditing and it’s impact for your company and tax responsibilities. Don’t feel overwhelmed if this contains a lot of previously unknown information, as the field of auditing is deep and takes some people years to study and understand. Also the process is based on documentation and formalities, so be patient when dealing with your company’s audit and CPA.
At Startupr we are here to assist you with your company accounts and tax responsibilities in Hong Kong. We provide comprehensive bookkeeping services at a fair price, and we can appoint an independent CPA in dealing with your company’s audit and tax filings. Feel free to contact us for a free quote, tax information or tax status for your company.