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It is a common misconception that Hong Kong audit and tax obligations are separate and not related to each other. For a Hong Kong business to adhere to their tax obligations, they must also adhere to their audit obligations. In order for Hong Kong business owners to improve their audit and tax experiences, it’s important to understand how they are connected and what can be done to improve these processes.
What You Will Learn
- What is an audit?
- How are audits performed?
- How do audits relate to tax?
- Why you should prepare your documents beforehand
- The benefits of using cloud accounting software
- Why you should identify staff who can help your auditors
- Why you shouldn’t wait till the last minute to start an audit
What is an Audit?
Audits are the examination of a company’s financial reports and are generally carried out on an annual basis by independent parties with relevant accountancy (“CPA”) licenses. All Hong Kong incorporated companies are statutorily required to audit their financial reports on a yearly basis.
Upon completion of an audit, the auditor will prepare an Audit Report which is to be signed by the company’s directors and the company auditor. Audit Reports are important because they form the basis of calculating the tax liabilities of the company and will provide legitimacy towards the company’s business activities. It includes a written letter from the auditor containing their opinion of whether the company’s financial statements comply with the Hong Kong accounting standards.
How are Audits Performed?
During an audit, auditors will examine a company’s financial reports and supporting documentation to determine whether the financial information the company presents is a fair, accurate, and a complete reflection of the company.
Upon completion of a Hong Kong audit, auditors will prepare a set of audited financial statements and profit tax computations that will be submitted to Hong Kong tax authorities for review.
How Does it Relate to Tax?
The tax authorities will then use the submitted documents to calculate the company’s profits tax obligations for that financial year and will issue a profits tax assessment accordingly. As such, having a successful audit and acquiring the audited financial statements and profits tax computations will help a company meet their profits tax obligations.
Get Your Documents Prepared Beforehand
During an audit, auditors will ask a company to provide them with various documentation for inspection for the purpose of confirming financial information. Requested documents commonly include trial balances, bank statements, customer contracts, payment contracts or receipts that give substance to transactions.
If a company is unable to supply their auditors with the requested documents, the auditor may provide an adverse audit opinion.
For a company to make sure that they can provide their auditors with the documentation requested, they should be proactive in their record keeping. Hong Kong requires all Hong Kong incorporated businesses to maintain records of their transactions for at least seven years from the date the transactions are conducted.
To help facilitate the audit process, and to minimise any potential errors / mishaps, you should work closely with your auditors before the audit begins, and understand what documents they will need to inspect, and prepare them in advance.
Use Cloud Accounting Software to Properly Manage Your Financials
Cloud accounting software provides their users with high levels of transparency over their information, allowing greater control over their company finances. These tools are incredibly useful in creating quality information that will be used in an audit. For instance, platforms such as Xero have automated functions that allow the automatic recording of transactions. This eliminates the need to perform manual, error-prone accounting tasks. This software thus, not only provide convenience, but can also produce high quality information.
High quality information will not only greatly assist your in-house accountants with their day-to-day responsibilities as it can also simplify the audit process. By giving auditors access to a company’s financial information via these platforms, auditors will not need to spend as much time requesting for documents and will less likely come across any accounting errors.
Identify Your Staff Who Can Assist in an Audit
During an audit, auditors will closely examine all aspects of a company. In addition to inspecting documentation that will support the company’s financial statements, they may also interview staff to clarify any questions they may have that arise during the audit.
To create efficiency, encourage transparency and to minimise any potential mistakes in communication, you select the staff best suited to helping your auditors understand and evaluate specific aspects of your business.
As your staff will also be preoccupied with their normal day-to-day responsibilities, make sure that they have adequate resources and support to assist the auditors.
Don’t Wait to Engage an Auditor
Audits are essential for a company to remain compliant with local laws and regulations. As audits take time to complete, they should not be conducted under constrained timelines.
When identifying a potential audit firm, there are several points to consider, specifically:
- Whether the firm is licensed to conduct an audit
- Whether they are familiar with using cloud-accounting solutions
- Whether they have prior experience auditing companies of similar industries and size as your firm.
- In addition, last minute engagements can also be costly as audit firms may charge additional fees to compensate for a constrained timeline.
Conclusion
For a Hong Kong company to meet their local audit and tax obligations, they must understand that these obligations are closely connected. While it can be intimidating to address these tasks, there is no reason to panic. By taking the right steps to prepare for these obligations, business owners can ensure that they will remain compliant with the Hong Kong audit and tax obligations.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.
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