Audit and Compliance in Hong Kong
Audit and Compliance in Hong Kong
When conducting business in Hong Kong, a comprehensive understanding of the relevant accounting, bookkeeping, and auditing standards is essential, as it helps to mitigate the risk of errors.
The Hong Kong Institute of Certified Public Accountants (HKICPA) is the only body in Hong Kong authorized to register and certify accountants. The Institute issues the "Hong Kong Standards on Auditing, Quality Control, Assurance and Related Services," which serve as the professional standards for conducting statutory audits and other assurance engagements under the Companies Ordinance (Cap. 622).
Members of the HKICPA are obligated to comply with these accounting and auditing standards.
Regarding Hong Kong’s auditing regulations, companies incorporated in Hong Kong are required to have their financial statements audited by a certified public accountant.
Which entities in Hong Kong are required to undergo a financial audit?
Under the Hong Kong Companies Ordinance (CO), all companies are required to have their financial statements audited annually. This requirement applies even to companies that qualify for specific reporting exemptions or are eligible for simplified reporting procedures; however, it does not apply to "dormant companies." The audit process must adhere to the disclosure requirements stipulated in the Companies Ordinance.
In addition to the annual statutory audit, the Inland Revenue Ordinance (IRO) requires businesses to submit audited financial statements and an auditor’s report as supplementary documentation when filing their Profits Tax Return (PTR). As of April 1, 2023, small companies with a total annual income of less than HK$2 million (approximately US$250,000) are also required to submit audited financial statements alongside their Profits Tax Return.
Please note:
All required supplementary forms and other relevant documents must be submitted electronically. While tax returns and their supporting documents may be submitted in paper format, a signed supplementary form—the "Control List"—must also be uploaded.
For dormant companies, companies incorporated in jurisdictions that do not require audited financial statements, and Hong Kong branches of foreign companies, there is no requirement to submit audited financial statements or an auditor’s report when filing a Profits Tax Return (PTR).
However, please be aware that for a Hong Kong branch of a foreign company to qualify for this exemption (i.e., the waiver from submitting audited financial statements and an auditor’s report), the following information must be provided at the time of filing the tax return:
The jurisdiction in which the foreign company is incorporated;
Whether the laws of that jurisdiction require a statutory audit of the company’s global financial statements;
Whether such an audit has been conducted; and
A brief overview of the financial and accounting records maintained by the Hong Kong branch.
Audit Requirements for Hong Kong Companies | ||
|---|---|---|
| Requirements under the Companies Ordinance (CO) | Requirements under the Inland Revenue Ordinance (IRO) |
Type of Audit | Annual statutory audit | Statutory audit report submitted alongside the Profits Tax Return (PTR) |
Submission Method | Presented to company members at the Annual General Meeting (AGM) or another general meeting of shareholders | Submitted to the Inland Revenue Department (IRD) of Hong Kong together with the Profits Tax Return (PTR) |
Submission Deadline | Private companies: Within nine months after the end of the company’s financial year | August 15 (for companies with a financial year-end of December 31); or November 15 (for companies with a financial year-end of March 31). |
Scope of Application | All companies, excluding: Dormant companies. | All corporations, excluding:
|
Auditing and Assurance Standards
The auditing and assurance standards currently in effect in Hong Kong are collectively referred to as the "Hong Kong Standards on Quality Control/Management, Auditing, Assurance and Related Services."
The introduction to these standards outlines the objectives established by the Institute Council for the "Hong Kong Standards on Quality Control/Management, Auditing, Assurance and Related Services," as well as the relevant established procedures.
The term "Hong Kong Standards on Quality Control, Auditing, Assurance and Related Services" encompasses the following:
Standards | Description |
|---|---|
Hong Kong Standards on Quality Control/Management (HKSQCs/HKSQMs) | Hong Kong Standards on Quality Control (HKSQCs) and Hong Kong Standards on Quality Management (HKSQMs) establish fundamental principles and essential procedures, and provide guidance regarding the responsibilities of firms for quality control and management in the context of engagements conducted under the Hong Kong Standards on Assurance and Related Services (collectively referred to as the "Hong Kong Engagement Standards"). |
Hong Kong Framework for Assurance Engagements | Hong Kong Standards on Auditing (HKSAs), Hong Kong Standards on Review Engagements (HKSREs), Hong Kong Standards on Assurance Engagements (HKSAEs), Hong Kong Standards on Investment Circular Reporting Engagements (HKSIRs), and Hong Kong Standards on Related Services (HKSRSs) are collectively referred to as the "Hong Kong Engagement Standards." |
Hong Kong Standards on Auditing (HKSAs) | Hong Kong Standards on Auditing (HKSAs) apply to audits of historical financial information. |
Hong Kong Standards on Review Engagements (HKSREs) | Hong Kong Standards on Review Engagements (HKSREs) apply to reviews of historical financial information. |
Hong Kong Standards on Assurance Engagements (HKSAEs) | Hong Kong Standards on Assurance Engagements (HKSAEs) apply to assurance engagements involving subject matters other than historical financial information. |
Hong Kong Standards on Investment Circular Reporting Engagements (HKSIRs) | Hong Kong Standards on Investment Circular Reporting Engagements (HKSIRs) apply to engagements related to reporting on investment circulars. |
Hong Kong Standards on Related Services (HKSRSs) | Hong Kong Standards on Related Services (HKSRSs) apply to engagements involving the compilation of financial information, the performance of agreed-upon procedures regarding information, and other related services. |
Bookkeeping Requirements
Under Part 9 of the Companies Ordinance of Hong Kong, companies incorporated in Hong Kong are required to maintain proper accounting records and fulfill statutory audit requirements on an annual basis.
Specifically, the bookkeeping requirements are as follows:
Companies must maintain accounting records that meet the following standards:
The accounting records must be sufficient to show and explain the company’s transactions, disclose the company’s financial position and operating results with reasonable accuracy, and enable the directors to ensure that the financial statements comply with the requirements of the Companies Ordinance.
In particular, the accounting records must include:
Daily records of all receipts and payments, as well as the matters to which these receipts and payments relate; and
Details of the company’s assets and liabilities.
Location of accounting records:
A company’s accounting records must be kept at its registered office or at such other place as the directors deem appropriate. They must be available for inspection by the directors at any time, free of charge. Furthermore,
If a company’s accounting records are kept outside Hong Kong, the relevant accounts and statements must be sent to a location within Hong Kong. These accounts and statements must be sufficient to disclose the financial position of the relevant business with reasonable accuracy at intervals not exceeding six months.
Retention period for accounting records:
Companies must retain accounting records for seven years from the end of the financial year to which the last entry relates.
Penalties for non-compliance with bookkeeping requirements:
It is an offense for a company’s directors to fail to take all reasonable steps to ensure that the company complies with bookkeeping requirements; such an offense is punishable by a fine of HK$300,000 (approximately US$38,370). Under Section 51C of the Inland Revenue Ordinance, failure to maintain adequate business records for seven years is also an offense, punishable by a maximum fine of HK$100,000.
Financial Reporting Requirements
Companies incorporated in Hong Kong are required to prepare statutory reports on an annual basis. These reports must include audited financial statements for the current year, along with corresponding figures from the previous year. The financial statements should comprise a statement of financial position, a statement of profit or loss and other comprehensive income, and a statement of cash flows. Such audited financial statements must be prepared and signed by a Certified Public Accountant (Practising) to provide a basis for financial accountability to stakeholders and other interested parties, and to ensure the accuracy of the financial data.
Companies incorporated outside Hong Kong that maintain a place of business within Hong Kong must register with the Companies Registry as a "non-Hong Kong company" (i.e., a foreign company). If such a company is required to publish its financial statements under the laws or regulations of its place of incorporation, it must also submit these financial statements to the Companies Registry when filing its annual return.
For non-Hong Kong companies with securities publicly traded on The Stock Exchange of Hong Kong, financial statements may be prepared in accordance with Hong Kong Financial Reporting Standards (HKFRS) or International Financial Reporting Standards (IFRS). Under specific conditions, other financial reporting frameworks—such as China’s Accounting Standards for Business Enterprises (ASBE) or United States Generally Accepted Accounting Principles (US GAAP)—may also be used.
Both the Companies Ordinance (CO) and the Inland Revenue Ordinance (IRO) mandate that companies maintain adequate accounting records to "show and explain" all transactions and to disclose their financial position with reasonable accuracy. To facilitate the preparation of financial statements, the following types of original supporting documents should generally be retained:
Supporting Documentation for Financial Statements (Categorized by Transaction Type) | |
|---|---|
Transaction Type | Records to be Retained |
Sales | Sales invoices |
Return notes | |
Receipt vouchers | |
Daily collection records | |
Purchases | Purchase invoices |
Petty cash vouchers | |
Payment vouchers | |
Cheque stubs | |
Statements of account | |
General Expenses | Expense invoices |
Payment receipts | |
Cheque stubs | |
Payroll records | |
Banking Transactions | Bank statements |
Bank deposit slips and related collection details | |
Cheque stubs and copies | |
Tangible Assets | Purchase and sale agreements |
Invoices and receipts | |
Cheque stubs and copies | |
Inventory | Purchase and sale agreements |
Invoices and receipts | |
Cheque stubs and copies | |
Inventory lists (including quantities and unit costs for each item) | |
Obsolete or slow-moving inventory | |
Investments | Securities transaction confirmation notes |
Purchase and sale agreements | |
Capital verification reports (applicable to investments within China) | |
Note: Section 51C of the Inland Revenue Ordinance provides a more detailed list of the records that must be retained. | |
Auditing process
Auditors must be certified public accountants registered with HKICPA. The audit involves planning, testing, evaluating internal controls, analyzing results, and reporting.
Steps in the Audit Process
Planning
Understand the company's business and risks.
Formulate an audit plan with scope, objectives, and procedures.
Testing
Obtain and evaluate audit evidence.
Test internal controls.
Verify the accuracy and completeness of financial information.
Conduct analytical procedures.
Internal Controls Evaluation
Assess the effectiveness of internal controls.
Test design and implementation.
Evaluate operating effectiveness.
Analysis and Opinion
Analyze audit results.
Issue an opinion on financial statements:
Unqualified (reliable).
Qualified (significant errors found).
Adverse (material misrepresentations).
Reporting
Report internal control deficiencies.
Help improve internal controls.
Additional Steps
Management prepares financial statements and supporting documents.
Auditors review company activities and industry factors.
Identify uncertainties or errors in significant transactions.
Estimate the steps taken to ensure accuracy.
Create audit reports and opinions.
Directors sign the audit report.
Auditors prepare tax computations and submit documents to the government.
IRD reviews audit reports and financial statements and sends tax schedules (if applicable).
The audit process requires time and effort. Prepare the required financial statements and documents to save time.
What is an audit report?
An audit report is a document issued by an auditor after their examination of a company's financial records. It serves to communicate the auditor's findings and opinion regarding the accuracy and reliability of the financial statements. The primary purpose of the audit report is to assure stakeholders, such as shareholders, investors, and creditors, about the financial health and transparency of the audited entity.
There are two main types of audit reports:
Unqualified Report (Clean Report): An unqualified audit report is issued when the auditor concludes that the financial statements are free from material misstatements. In other words, the auditor has not identified any significant errors or irregularities that would impact the overall fairness and accuracy of the financial statements. An unqualified report is considered favorable and indicates that the financial statements provide a true and fair view of the company's financial position.
Qualified Report: A qualified audit report is issued when the auditor has identified certain issues or limitations in the financial statements. While the auditor believes the financial statements are generally accurate, there may be specific areas or transactions where material misstatements exist. The auditor will detail these concerns in the report, explaining the nature and extent of the issues that led to the qualification. A qualified report indicates that users of the financial statements should exercise caution and pay special attention to the qualified areas.
The audit report is critical for stakeholders as it provides an independent assessment of the company's financial statements and helps them make informed decisions about the entity's financial health and performance.
The IRD mandates the inclusion of a statutory audit audit review of a company's accounts and financial statements in Hong Kong to prevent any inaccuracies or fraudulent audit reviews.
Auditing process
Auditors must be certified public accountants registered with HKICPA. The audit involves planning, testing, evaluating internal controls, analyzing results, and reporting.
Steps in the Audit Process
Planning
Understand the company's business and risks.
Formulate an audit plan with scope, objectives, and procedures.
Testing
Obtain and evaluate audit evidence.
Test internal controls.
Verify the accuracy and completeness of financial information.
Conduct analytical procedures.
Internal Controls Evaluation
Assess the effectiveness of internal controls.
Test design and implementation.
Evaluate operating effectiveness.
Analysis and Opinion
Analyze audit results.
Issue an opinion on financial statements:
Unqualified (reliable).
Qualified (significant errors found).
Adverse (material misrepresentations).
Reporting
Control deficiencies are communicated in a management letter or to those charged with governance (HKSA 265).
Tax computations and tax returns are management’s responsibility or may be outsourced to tax representatives.
Did You Know
Due to the audit independence, auditors do not prepare tax returns.
In practice, the auditor (tax rep) will help clients to submit the relevant tax filing documents to IRD. The audit process requires time and effort. Prepare the required financial statements and documents to save time.
Renewal of Business Registration Certificate
All business registrants under Cap. 310 need to renew the business registration one month before its expiry. The renewal can be done annually or once every three years, depending on whether the certificate is valid for one year or three years. The Business Registration Office of the Inland Revenue Department will send a renewal demand note to registered businesses approximately in the middle of the month preceding the commencement month of the renewal Business Registration Certificate.
Holding an annual general meeting
Every company incorporated in Hong Kong must hold an annual general meeting (AGM) once per year.
First AGM: Must be held within 18 months from the date of incorporation.
Private companies: Must hold the AGM within 9 months after the financial year-end.
Public companies (and their subsidiaries): Must hold the AGM within 6 months after the financial year-end.
Shareholders must receive at least 21 days’ notice before the AGM. Under the amended Companies Ordinance (Cap.622), companies can conduct AGMs virtually or in hybrid formats, making compliance with the AGM requirement more flexible and convenient.
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