The statutory audit and Hong Kong tax filing season can be a daunting experience to companies of all sizes. However, proper preparation can minimize the stress often incurred during an audit and increase its efficiency. In this article, we aim to explain what an audit is and some tips that can help entrepreneurs in their future audits.
Audits are examinations of a company’s financial reports, conducted by an independent party for the purpose of complying with the disclosure requirements set out in the Hong Kong Company Ordinance and tax obligations outlined in the Inland Revenue Ordinance.
Persuant to this Ordinance, all Hong Kong incorporated companies are statutorily required to audit their financial reports on a yearly basis. Financial reports will include a balance sheet, an income statement, a statement of changes in equity, and a cash flow statement.
During an audit, auditors will examine a company’s financial reports to determine whether the information presented are a fair and accurate reflection of the company. Upon completion of their audit, your auditors will prepare a set of audited financial statements and profits tax computations to be submitted to Hong Kong’s Inland Revenue Department (“IRD”) for review. The IRD will then use these documents to determine the tax obligations of the company for that financial year. As such, a successful statutory audit will help ensure compliance that their tax obligations can be fulfilled without error.
2.1. Do not wait to perform reconciliations
Reconciliation is vital in business accounting as reconciled accounts help prevent errors in financial statements. Because reconciliations also help ensure that cashflows are properly presented in the financial statements, take time to ensure that they have been completed without error.
Perhaps most importantly, ensure that your accounting treatments reconcile to your trial balances. Ensure that you are able to present related documentation to your auditors to help provide context for any account that looks remotely suspicious.
You can never start preparing for your audit too early given that the audit process is the last place you would like to discover a mistake in your financial statements!
2.2. Prepare your documents before the audit
Before conducting an audit, auditors will ask you to provide a varying list of documents / information they require for inspection. Given that the audit process is often hectic and stressful for all parties involved, and that auditors will most often ask additional questions, there is no such thing as too much preparation.
To help facilitate the audit process, it is recommended to gather all requested documents / information before the audit begins (audit preparation checklist). This way, your auditors can minimize the time spent conducting their tasks, and will have a window of time to ask additional questions if needed. To the extent that your auditors are engaged on a time-cost basis, adequate preparation can lower your estimated audit costs.
2.3. Prepare your trial balances beforehand
Trial balances lists all of a company’s general ledger accounts (both revenue and capital). Trial balances will be prepared periodically by a company to help ensure a company’s bookkeeping entries are accurate. Given their purpose, trial balances are frequently requested by auditors during an audit.
To ensure a successful audit, companies should take steps to routinely prepare trial balances. In the event that your trial balances does not reconcile with your financial statements, additional time and resources will be required during this time sensitive process to rectify any errors identified.
2.4. Use cloud accounting software
Cloud accounting software, like Xero, offers their users simple yet powerful ways to manage their finance. Dedicated accounting software allows greater management of every facet of a business, from bookkeeping to invoicing. Consistent use of such software will ensure that the information presented to your auditors is of the highest quality.
In addition, perhaps one of the more appealing attributes of cloud accounting software is the added convenience in being able to share your information with your advisors. To facilitate the sharing of information, cloud accounting software like Xero allows multiple parties to view and import information as they require. Cloud accounting software thus decreases the amount of time necessary to conduct an audit.
3. What happens when an audit is completed?
When an audit is finished, your auditors will help arrange for your completed audit reports and tax filing of your company to be sent to Hong Kong’s Inland Revenue Department (“IRD”) for review.
Upon receiving your documents, the IRD will review your audit report and tax computations to determine the tax obligations of your company for that particular year of assessment. Once again, a properly completed audit will help ensure that the IRD’s subsequent tax calculations is a fair representation of your company’s tax obligations for that year.
As compliance with Hong Kong audit regulations continues even after the successful submission of an audit report. It is best to familiarize oneself with the full set of requirements and deadlines pertaining to a Hong Kong audit. Please refer to our e-book A Beginners Guide to Hong Kong Taxation for more information regarding the exact audit I requirements in Hong Kong.
We hoped we explained what a successful Hong Kong statutory audit is and some tips that can help your future tax filing. Next, let us learn more about the requirements for audit and tax submission!
FastLane is a licensed Hong Kong CPA firm. With our team of qualified professionals, we can assist clients in their audit and taxation. Whether you need help preparing your financial statements, tax calculations or communicating with the IRD, please consult the FastLane Group for a price quotation!
Blog originated from: https://fastlanepro.hk/2020/tax-filing-statutory-audit-tips/