By Nick Au
Many business owners assume that their business’ Hong Kong audit and tax obligations are separate and are not related to each other. However, this is not the case. For a business to meet its tax obligations, it must also meet its audit obligations.
In this article, we look to provide insight on how these two subjects are related, and will provide tips on how a business can prepare for the next round of these obligations.
What is an Audit, How is it Performed, and How does it Relate to Tax?
Audits are examinations of a company’s financial reports and are usually performed on an annual basis by independent parties with relevant CPA licenses. In Hong Kong, all Hong Kong incorporated companies are statutorily required to audit their financial reports on a yearly basis.
During an audit, auditors will examine a company’s financial reports and all supporting documentation to determine whether the information presented is fair, accurate, and a complete reflection of the company.
Upon completion of an audit, auditors will prepare a set of audited financial statements and profit tax computations that will be submitted to local tax authorities for review.
The tax authorities will then use these documents to determine a company’s tax obligations for that year. As such, having a successful audit and acquiring audited financials will help a company meet its profits tax obligations.
Use Cloud Accounting Software
Cloud accounting software provides its users with greater transparency of information, and can offer greater control over company’s finances. For instance, platforms such as Xero have automated functions whereby transactions will be automatically recorded as they are made. This eliminates the need to perform manual accounting tasks that often result in errors.
As such, not only do they provide convenience, but they can also produce higher quality information and generate financial reports from this information.
High quality information will not only greatly assist your in-house accountants with their day-to-day responsibilities; it can also facilitate collaboration with auditors. Auditors can obtain access to a company’s financial information via these platforms, decreasing the time required to conduct an audit.
Prepare Your Documents Beforehand
During a Hong Kong audit, auditors will ask a company to provide them with various documentation for inspection, such as trial balances, bank statements, customer contracts, payment contracts, or receipts that give substance to transactions.
In the event that a company is not able to supply its auditors with the requested documentation, there is a potential risk that the auditor may provide an adverse audit opinion.
For a company to make sure that it can provide its auditors with the documentation requested, it should be proactive in 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 minimize any potential errors or mishaps, it’s best to work closely with your auditors before the audit begins, understand what documents they will need to inspect, and prepare them in advance.
Assign the Right Staff to Assisting the Auditors
During an audit, auditors will closely scrutinize all aspects of a company. Besides inspecting supporting documentation, they may interview company staff to clarify any questions they may have arising from the audit.
To create efficiency, facilitate transparency, and minimize any potential mistakes in communication, you should identify which of your staff are best suited to help your auditors understand and evaluate specific aspects of your business.
As your staff will also be preoccupied with their normal day-to-day responsibilities during an audit, make sure that they have adequate resources to assist the auditors and keep up with their work.
Engage an Audit Firm Early
Audits are essential for a company to remain compliant with local laws and regulations – therefore, 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. To summarize, you should look for an audit firm that:
- Is licensed to conduct an audit;
- Understands cloud-accounting solutions;
- Has experience auditing companies of similar industry and size as your firm.
By engaging an audit firm at the last minute, a business is risking non-compliance with local laws, even just on account on being midway through the process when the deadline passes. In addition, last minute engagements can also be costly, as audit firms may charge additional fees to compensate for a constrained timeline.
Conclusion
Hong Kong audits and tax obligations are closely related, as the success of an audit will help ensure a company meets its tax obligations. While these obligations can be intimidating, as long as business owners take steps to prepare for those obligations ahead of time, there is no reason to panic.
About the Author
Nick works in the Business Development team at the FastLane Group, a Hong Kong-based accounting and advisory firm which has a special focus on helping SMEs. Nick graduated from Syracuse University in the United States with honors and received his Bachelor’s degree in International Relations. Nick joined the FastLane Group in 2019 having previously worked at KPMG as an Assistant Manager in their Mergers and Acquisitions and Deal Advisory team.
Header image by StellrWeb on Unsplash
