Key Takeaways
- Most Hong Kong incorporated companies must have their annual financial statements audited, including companies eligible for simplified reporting.
- A company does not become exempt merely because it has no revenue or has stopped trading. The statutory exception applies to a company that qualifies as dormant under the Companies Ordinance.
- The audit requirement and the documents submitted with a Profits Tax Return are related, but they are separate obligations.
Understanding the statutory audit requirement in Hong Kong is crucial for businesses operating within its jurisdiction. This article explains when an audit is required, what it involves and how it relates to a company’s tax obligations.
What is the statutory audit requirement in Hong Kong?
A statutory audit is an independent examination of a company’s annual financial statements by an eligible auditor. Under the Companies Ordinance (Cap. 622), Hong Kong incorporated companies generally need audited financial statements for each financial year. A company that qualifies as dormant under the Ordinance is exempt from the audit requirement. Eligibility for simplified financial reporting does not remove the need for an audit.
The requirement helps members and other users of the financial statements assess the company’s financial position and performance. It applies to companies of different sizes, although the financial reporting framework available to a company may vary.
For tax purposes, a corporation must also complete its Profits Tax Return and provide the supporting documents required by the Inland Revenue Department (IRD). The documents to accompany a return depend on the applicable return instructions and the company’s circumstances. The need to prepare audited financial statements under company law should therefore be considered separately from the return’s submission requirements.
How do audit and reporting rules differ?
| Company’s position | Financial reporting | Statutory audit |
| Ordinary active company | Prepares annual financial statements under the applicable requirements | Generally required |
| Company eligible for simplified reporting | May prepare simplified reports if it meets the statutory conditions | Still required |
| Company qualifying as dormant under the Companies Ordinance | Subject to the applicable dormant company exemptions | Exempt while it qualifies |
Simplified reporting changes certain requirements for preparing financial statements and reports; it is not an audit exemption. Equally, having little activity does not itself establish statutory dormancy. Directors should check the company’s legal status before treating an audit as unnecessary. Accounts and Audit
The Companies Registry states that a small private company may qualify for simplified reporting if it meets two of three size conditions in a financial year: revenue of no more than HK$100 million, assets of no more than HK$100 million, and no more than 100 employees. Other eligibility conditions and group rules may apply. Such a company still requires an audit unless it qualifies as dormant.
STATISTIC-SOURCE: https://www.cr.gov.hk/en/legislation/companies-ordinance/cap622/keychanges/account-audit.htm
What does the statutory audit process in Hong Kong look like?
The directors arrange for the company’s accounting records and annual financial statements to be prepared. The auditor then examines the statements and obtains evidence to support an independent opinion. This commonly involves reviewing transactions and balances and requesting records such as bank statements, invoices, agreements and supporting schedules.
The applicable financial reporting standards depend on the company’s circumstances. Companies eligible for simplified reporting may use an appropriate simplified framework; it is inaccurate to assume that every company prepares its statements under the same framework. The auditor conducts the audit under the applicable Hong Kong auditing standards and issues a report on the financial statements.
The auditor’s report is an important part of the company’s annual reporting documents. Maintaining complete accounting records throughout the year helps the company prepare its statements and respond to audit queries.
What are the auditor’s eligibility, roles, and responsibilities?
An appointment as auditor of a company under the Companies Ordinance may be held by a CPA (practising), CPA firm or corporate practice registered with the Accounting and Financial Reporting Council (AFRC). A CPA intending to carry out statutory audits must obtain a practising certificate from the AFRC. The company should confirm its proposed auditor’s eligibility before making the appointment.
The auditor reports to the company’s members on the financial statements. The audit opinion addresses whether the statements give a true and fair view and have been properly prepared in accordance with the Companies Ordinance. Where consolidated financial statements are required, the audit also addresses those statements.
An annual general meeting (AGM) is not required in every case. For example, the Companies Ordinance provides exceptions for a single-member company and, subject to its conditions, companies that use written resolutions or dispense with AGMs. The reporting documents must still be provided to members as required.
Why would your company require audit services?
The principal reason is to meet the company’s annual financial reporting obligations where a statutory audit is required. Audited statements may also assist members, lenders and other parties assessing the company’s finances. An audit does not, by itself, determine the company’s Profits Tax liability: the tax return and supporting tax computation address that separate question.
Missing accounting records or delaying the audit can make it harder to complete the company’s reporting and tax work on time. Directors should establish the financial year-end, maintain the underlying records and allow sufficient time for the auditor to review them. A company that has stopped trading should check whether it meets the formal requirements for dormant status before assuming that it no longer needs an audit.
When does a company become dormant?
A qualifying private company may declare itself dormant by passing a special resolution and delivering it to the Companies Registry for registration. Dormant status takes effect on delivery or a later date specified in the resolution. It ceases if the company enters into an accounting transaction or delivers a resolution declaring its intention to do so. Directors should check the timing and nature of any transactions, particularly when a company has only recently stopped operating.
How Premia TNC can assist your business needs
We offer accounting services tailored to your business requirements. Our services encompass:
- Preparing management accounts monthly, quarterly, half-yearly or annually
- Preparing accounts receivable and accounts payable ageing reports
- Maintaining bookkeeping records, including records relating to cheque payments and bank transfers
- Clearing backlogs in accounting records
- Preparing schedules and supporting documents for the audit
- Coordinating with the company’s external auditor and tax agent at the financial year-end
Our accounting plans can be tailored to the company’s needs and reporting timetable.
FAQs
Q1. Which Hong Kong companies require a statutory audit?
A1. Hong Kong incorporated companies generally require an audit of their annual financial statements, including those eligible for simplified reporting. A company that qualifies as dormant under the Companies Ordinance is exempt while the relevant dormant company provisions apply.
Q2. What happens if a company does not meet its audit obligations?
A2. Failure to arrange a required audit may leave the company unable to complete its statutory reporting properly and may create difficulties with related tax submissions. The consequences depend on the obligation breached and the circumstances. Directors should address missing records or overdue work promptly rather than assume that inactivity excuses compliance.
Q3. Does a company with no revenue still need an audit?
A3. Yes, generally. Having no revenue is different from qualifying as a dormant company under the Companies Ordinance. The company should check whether it has completed the formal dormant company procedure and whether any accounting transaction has ended its dormant status.
