Audit Report FAQs: A Limited Company Financial Audit Guide That SME Owners. Must Read!
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From opening a business bank account to handling audit and tax matters, limited and unlimited companies face different procedures and requirements1. Limited companies’ audit process must be carried out by an appointed auditor annually in order to file a Profits Tax return with the Inland Revenue Department (“IRD”)1. Before preparing for the audit report, what should SME owners and start-ups need to take note of? The following are some frequently asked questions, and answers, during audit process:
What Is an Audit Report?
Financial statements, when audited, could be considered important documentation that details the financial performance of a company. Some of the most common types of financial statements include balance sheets, cash flow statements, income statements, statements of owner’s equity etc., which offers a complete picture of a company’s financial situation. An audit report is a summary report after the audit process, which evaluates whether the company has applied with generally accepted accounting principles (“GAAP”) in preparing the financial statements2.
An auditor’s opinion of the audit report can be categorised into four types: "Unmodified Opinion", "Qualified Opinion", "Adverse Opinion", and "Disclaimer of Opinion"3. These auditor’s opinions are conclusions given by independent qualified accountants in regard to whether the data in the financial statements are free from fraud or errors and whether there have been sufficient reviews of material misstatements. Audit reports serve a variety of purposes, e.g., when investors review the financial statements, they can evaluate the risks and potential problems a company faces, while considering all other information, in order to make smart and informed investment decisions3.
Why Is an Audit Report Necessary?
Having a complete audit report in place early can streamline the tax returns filing process and, as a result, avoid unnecessary administrative costs for your company. The following are some other common purposes of an audit report:
- For Listed Companies: The submission of an independently audited financial statement enhances the investors’ confidence in the financial situation, allowing investors and other stakeholders to make informed decisions4.
- For Non-Governmental Organisations (“NGOs”): Organisations who often accept aid from government departments and other NGOs are required to submit annual returns with audit reports to ensure proper use of the funding and good governance. In this way, sponsors and the general public will be able to know how the funds are used5.
- For Owners' Corporations: If you live in a building with more than 50 apartments, you may be familiar with owners’ corporations. Owners’ corporations are required to submit an audit report in the annual general meeting to ensure compliance and transparency in property management and financial operations6.
- For Schools: Schools that receive education subventions or subsidies and kindergartens under the Kindergarten Education Scheme (“Scheme-KGs”) need to submit audit reports annually to the Education Bureau to ensure the proper use of educational resources7.
When Is an SME Required to Have an Audit Report?
(i) Newly incorporated companies in Hong Kong: the first Profits Tax returns will normally be issued about 18 months after the date of commencement of the business or the date of incorporation of the corporation8.
(ii) After 18 months of incorporation in Hong Kong, the annual arrangement thereafter is as follows: generally should be completed within the financial year-end date; the filing deadline is normally within one month upon receiving the tax returns9. The Profits Tax returns are issued on the first working day of April each year10.
When Should I Submit a Company Tax Return?
In general, the deadline for filing tax returns is usually within one month from the date of issue9. The profits tax returns are issued on the first working day of April each year10. Under the Block Extension Scheme, businesses can apply for an extension for filing tax returns11. Companies with 31st December as the financial year-end are normally required to submit Profits Tax returns by mid-August, while for companies whose financial year-end is set on the 31st March, the deadline for filing their tax returns is mid-November11. At the beginning of every year, the IRD publishes a circular letter on the IRD website (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.ird.gov.hk/eng/ese/bes.htm) to all tax representatives, detailing the arrangements of the Block Extension Scheme and the procedures for applying for Block Extensions12.
Can I Do My Own Accounting and Audit Report?
If you have accounting and tax knowledge to prepare clear income statements, balance sheets, and general ledgers etc., you may consider managing your company’s business accounts on your own13. For limited companies that meet the following criteria, you may opt for a more simplified standard when preparing for financial reports, directors’ reports, and auditor’s reports14. More details can be found here (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.cr.gov.hk/en/faq/companies-ordinance/co-account-audit.htm):
● A small private company which meets two of the following criteria14 in one financial year:
- Total revenue does not exceed HK$100 million
- Total assets do not exceed HK$100 million
- Employees number does not exceed 100
● Other private companies (not being a member of a corporate group) with unanimous written agreement from members14
● A small guarantee company, whose total revenue does not exceed HK$25 million in one financial year14
● An eligible private company/ holding company of a group of eligible private companies which meets higher size criteria need to fulfil two of the following criteria14 in one financial year:
- Total revenue / aggregate total revenue does not exceed HK$200 million,
- Total assets / aggregate total assets do not exceed HK$200 million,
- Employee / total number of employees is not more than 100,
- Receive a 75% approval from members of the holding company, without any member voting against the resolution.
● a holding company of a group of companies comprising one or more small private companies / eligible private companies and one or more small guarantee companies (mixed group) provided that the holding company and all its subsidiaries meet the prescribed size criteria and (where any member of the group is an eligible private company but not qualified as a small private company) with 75% approval from members of the holding company and no member votes against the resolution14.
Both sole-proprietorship businesses and partnership businesses basically have to abide by the same reporting requirements, but the relevant tax returns are different15:
- Sole proprietors are required to declare the profit/loss in Part 5 of the Tax Return - Individuals (BIR60) (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.ird.gov.hk/eng/tax/ind_ctr.htm)15.
- For a partnership business, the precedent partner should complete and sign a Profits Tax Return - Persons Other Than Corporations (BIR 52) (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.gov.hk/en/residents/taxes/taxfiling/filing/types/profitstax.htm)15.
- When there is a change from sole-proprietorship to partnership during the accounting year or vice versa, the profit/loss for the full year should be reported in the Profits Tax Return - Persons Other Than Corporations (BIR 52) (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.gov.hk/en/residents/taxes/taxfiling/filing/types/profitstax.htm)15.
What Type of Companies May Be Exempted From Filing Limited Company Audit Reports?
Where the trade, profession or business has not commenced or has ceased and not recommenced, or where the trade, profession or business carried on does not give rise to assessable profits, are these companies still required to audit and file tax returns? According to the IRD, these companies will not be required by the IRD to file Profits Tax returns every year16. However, it should be noted that if the IRD suspects a taxpayer has potential tax liabilities upon examination, they will issue a Profits Tax return, upon which the taxpayers are required to fill in and file in accordance with the requirements16. Unless otherwise specified, irrespective of the amount of their gross income, all corporations and businesses are required to furnish their returns together with all the supporting documents16. Starting from 1st April, 2003, small corporations and businesses with gross income not exceeding HK$2,000,000 will no longer be exempted from furnishing supporting documents when filing their Profits Tax returns17.
Apart from companies that are incorporated in a jurisdiction whose laws do not require financial statements to be audited and an auditor’s report has not been prepared, all corporations must submit audited financial statements alongside their tax returns17.
What Are the Consequences of an Audit Report Delay?
A late filing of Profits Tax returns may expose you to penalities18. The IRD will impose a surcharge in the case of a late tax payment. Currently, a 5% surcharge on the total amount of overdue tax is imposed in default, including the second instalment amount being deemed to be immediately due19. If the overdue tax is still not paid after the expiry of 6 months from the due date, the IRD will further impose a 10% on all unpaid amount19.
Create Efficient Accounting Processes by Opening an SME-dedicated Bank Account
SMEs collaborate closely with professional accounting departments and auditors during audit preparation, providing necessary bank records and supporting documents. SMEs can take advantage of the features and merits of a business bank account to establish a highly efficient accounting process.
DBS SME Banking’s online banking platform IDEAL offers personalised information, real-time notifications and access to account statements to meet your business financing and other financial management needs, making it easy for you to run your business. Click here to open a Business Account with DBS now!
The above information is only for your reference. For detailed information, please refer to the sources and seek professional advice if necessary.
Article Published on 18 October, 2023
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*** Account opening can be completed in as fast as 1 working day for Hong Kong-incorporated entities with all shareholder/director/sole proprietor/partner holding a Hong Kong Permanent Identity Card. For Hong Kong-incorporated entities with at least 1 shareholder/ director/ sole proprietor/ partner holding the People’s Republic of China Resident Identity Card, account opening can be completed in as fast as 5 working days. Subject to eligibility and conditions.
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