Hong Kong Statutory Audit
Statutory reports are required annually for companies incorporated in Hong Kong. These reports must contain audited financial statements for the current year, with corresponding amounts for the preceding year, including a balance sheet, profit and loss account, and a cash flow statement.
Annual financial statements of every limited company incorporated in Hong Kong are required to be audited by a qualified accountant with a practicing certificate issued by the Hong Kong Institute of Certified Public Accountants (HKICPA) in accordance with the Hong Kong Companies Ordinance.
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only body authorised by law to issue financial reporting and auditing standards for professional accountants in Hong Kong.
Statutory audit reports are a comprehensive examination of a company’s financial reports, conducted by an independent party to comply with the disclosure rules set out in the Companies Ordinance and tax obligations outlined in the Inland Revenue Ordinance.
Hong Kong Financial Reporting Standards (HKFRS)
As a Special Administrative Region of China, Hong Kong enjoys the rights to develop its own accounting standards, rather than applying the standards of mainland China. These are known as the Hong Kong Financial Reporting Standards (HKFRS) and have been fully converged with the International Financial Reporting Standards (IFRS) since 2005.
A Hong Kong Statutory Audit must be conducted under the HKFRS framework, or under the Small and Medium-sized Entity Financial Reporting Framework (SME-FRF) or Small and Medium-sized Entity Financial Reporting Standard (SME-FRS) if the company satisfies the ‘reporting exemption’ criteria for certain private companies and companies limited by guarantee that satisfy the conditions set out in the Companies Ordinance.
The full HKFRS is considered more relevant for listed companies and could be burdensome for some private companies, while the SME-FRF and SME-FRS regime is best suited for micro private companies.
To further ease the financial reporting burdens of private companies, the HKICPA issued a simplified standard as an alternative reporting option. The Hong Kong Financial Reporting Standard for Private Entities is an option that larger private companies can use instead of the HKFRS. Entities are not required to adopt this standard, even if they are eligible to do so.
Audited financial statements
For taxation purposes, companies incorporated in Hong Kong must submit an audited financial statement to the Inland Revenue Department (IRD) together with their Profits Tax Return (PTR).
Audited financial statements must be prepared and signed off by a certified public accountant on behalf of a business or non-profit organisation to provide financial accountability and accuracy to a company’s stakeholders or people with an interest in the company.
For newly incorporated private companies, the first set of audited financial statements should be submitted to shareholders at the Annual General Meeting (AGM), within nine months (six months for existing companies) after the financial year-end. Subsequent AGMs should be held not more than 15 months apart.
For foreign companies, the audits of financial statements may be conducted in accordance with international auditing standards.
Information required for Hong Kong Statutory Audit
The following information is required for a Hong Kong Statutory Audit:
- Annual financial statements will include a balance sheet, an income statement, a statement of changes in equity, and a cash flow statement
- All sales/service agreements, employment contracts, tenancy agreements for the assessed period
- All sales invoices, purchase invoices and expenses receipts for the assessed period
- Bank statements
- Complete list of affiliated companies and affiliated persons
- Audited financial statements of subsidiary companies
- Copies of any special licences, if applicable
- Copy of company’s registration documents:
- Updated Business Registration Certificate
- Incorporation Certificate
- Articles of Association
- Annual Return
Under the Companies Ordinance, a company director is required to prepare a financial year statement that complies with the requirements of the Companies Ordinance. These financial statements must be provided to third-party auditors in the auditing process to form the annual statutory audit reports.
Consolidated financial statements
A Hong Kong company that controls one or more entities at the end of the financial year, is required to prepare a consolidated financial statement, which must set out the total assets, liabilities, equity, income, expenses, and cash flows of the parent and subsidiary company because they constitute a single economic entity.
A consolidated financial statement is mandatory if the Hong Kong company is owned by an individual. However, a Hong Kong company that is owned by a body corporate may be exempt from preparing consolidated financial statements if it meets one of the following conditions:
- It is a wholly owned subsidiary of another body corporate in the financial year.
- It is a partially owned subsidiary of another body corporate in the financial year and the director meets the notification requirements set out in the Companies Ordinance and there is no objection to the notification given by the director.
For companies that do not prepare a consolidated financial report, and where the exemption conditions do not apply, the auditor will issue a qualified opinion in the audit report on the company’s non-compliance with the Companies Ordinance.
Foreign Companies in Hong Kong
Companies that are incorporated outside Hong Kong but have a place of business in Hong Kong are subject to the same reporting requirements as a Hong Kong company.
The basic requirements are that the foreign company has to register its business with the Business Registration Office of the IRD and to submit Profits Tax returns issued to it.
If foreign companies are required to publish their financial statements under the laws or regulations of their place of incorporation, they should also file financial statements in the annual return to the HK Registry.
Where a company is incorporated in a jurisdiction whose laws do not require accounts to be audited and no audit has been performed on the company’s accounts, the IRD will accept unaudited accounts filed in support of the return.
If an audit has actually been carried out, even when there is no such requirement under the laws of the relevant jurisdiction, the audited accounts should be submitted with the return.
Foreign companies whose securities are publicly traded on the Hong Kong Stock Exchange may prepare financial statements in accordance with either the HKFRS or the IFRS or, under certain limited conditions, other reporting frameworks such as the China Accounting Standards for Business Enterprises (ASBE) or the US Generally Accepted Accounting Principles (US GAAP).
Branch Companies in Hong Kong
Where a foreign company’s head office is outside Hong Kong but it has a branch in Hong Kong, the IRD is generally prepared to accept unaudited branch accounts without the cover of audited world-wide accounts. However, the assessor may request a copy of the audited world-wide accounts if required by circumstances.
Record Keeping requirements
Records must be kept in Hong Kong, either in hard copy or electronic form, for at least seven years under the Inland Revenue Ordinance. Failure to do so is an offence under both the Companies Ordinance and the Inland Revenue Ordinance.
Companies incorporated overseas and carrying on a business in Hong Kong are subject to the same record keeping requirements under the Inland Revenue Ordinance as Hong Kong companies.
A foreign company is required to keep sufficient records – in English or Chinese – to enable its assessable profits to be readily ascertained and the records must be retained for at least seven years after the completion of the relevant transactions.
Sovereign Audit Services and Assurance
Sovereign’s experienced team of accountants and audit professionals will work closely with your company to gather all the necessary records and information, and ensure that they are in a good order as required.
As your trusted partner and advisor, we will understand your needs and provide you with timely, personalised and professional auditing and assurance services that go far beyond basic statutory compliance.
We can further assist clients to arrange non-statutory auditing services, such as company valuations or due diligence reviews, to help identify any issues or under-performing assets.