The Statutory Audit: What to Expect

The answer first

Every Hong Kong company must have its annual financial statements audited by a practising Hong Kong certified public accountant (CPA), whatever its size. The only exception is a company that is formally dormant. Small companies may prepare simpler financial statements, but they are still audited.

The audited financial statements are laid before the members (or circulated in place of an AGM) and used to support the Profits Tax Return. The cost and speed of the audit depend mostly on the quality of your bookkeeping and how quickly you can answer the auditor's questions.

At a glance

Is an audit required?: Yes, every year, unless the company is dormant
Who can audit?: A practising CPA or CPA firm in Hong Kong, independent of the company
Who appoints the auditor?: The directors may appoint the first auditor; afterwards the members appoint or reappoint at each AGM or by written resolution
Simpler accounts for small companies?: Yes, qualifying small private companies can use the reporting exemption, but are still audited
When is it needed?: In time for the AGM (within 9 months after year end for a private company) and the Profits Tax Return

Audit exemption and reporting exemption are not the same

	Audit exemption	Reporting exemption
Who qualifies	Dormant companies only (no accounting transactions during the period)	Small private companies and groups that meet size tests (for a private company, broadly two of: revenue up to HK$100 million, total assets up to HK$100 million, up to 100 employees), and certain others with members' consent
What it means	No audit is required	Simpler financial statements and directors' report; an audit is still required

Key takeawayIf someone tells you that a small Hong Kong company does not need an audit, they are mixing up the two exemptions. Plan and budget for an audit from the first financial year.

How an audit works

Stage	What happens	Your role
1. Engagement	The auditor confirms independence and issues an engagement letter	Sign the engagement letter; provide company documents
2. Planning	The auditor reviews the business and identifies risk areas	Explain the business, major contracts and any unusual events
3. Fieldwork	Testing of balances and transactions; bank and debtor confirmations	Provide ledgers, bank statements, invoices and contracts; answer queries promptly
4. Completion	Review of financial statements; directors sign a representation letter	Approve the financial statements and sign the letter
5. Report	Auditor's report signed and financial statements issued	Lay before members; use for the tax return

What auditors usually ask for

General ledger, trial balance and draft financial statements.
Bank statements and bank confirmations for every account, including those outside Hong Kong.
Sales and purchase invoices, contracts and agreements for significant transactions.
Lists of receivables and payables at year end, with supporting documents.
Fixed asset register, stock counts (if relevant) and loan agreements.
Board minutes, shareholder resolutions and statutory registers.

What drives audit cost and time

Quality of the books: clean, reconciled monthly records reduce audit time significantly.
Volume and complexity: number of transactions, currencies, bank accounts and entities.
First-year audits: opening balances and set-up take longer.
Related-party and cross-border transactions: these need more evidence and explanation.
Response time: slow answers to auditor queries extend the timetable and the fee.

Timing riskLeaving the audit until the Profits Tax Return deadline is close is a common mistake. Start the audit soon after the year end, so that the AGM, the tax return and any bank review are not delayed.

How DBMS Global can help

Preparing year-end accounts and audit schedules from your records.
Coordinating with an independent Hong Kong CPA firm, and managing the timetable and queries.
Preparing the AGM papers or written resolutions to approve the audited financial statements and reappoint the auditor.
Using the audited accounts to prepare and file the Profits Tax Return.
Audit fees are charged by the audit firm and shown separately from our own fees in our written proposal.

Official references