Step-by-step guide to preparing for your first Hong Kong statutory audit

Preparing for Your First Hong Kong Statutory Audit: A Step-by-Step Guide

Every Hong Kong incorporated company must have its financial statements audited annually by a practising certified public accountant registered with the HKICPA. Only a registered practice unit holding a practising certificate may sign a Hong Kong statutory audit report. The process can feel unfamiliar. A structured approach reduces stress and avoids delays.

Hong Kong First Audit Checklist

Before fieldwork begins, get clear on what is required. A Hong Kong first audit checklist covers these milestones:

• Confirm the company’s accounting reference date and ensure the financial year end is correctly set. Changes are notified to the Registrar on Form NAC4.
• Engage a HKICPA-registered practice unit at least three months before the financial year end. Early engagement allows the auditor to plan the scope and request documents in stages.
• Prepare the accounting records for the full period. The Companies Ordinance (Cap. 622) requires records to be kept for seven years. Records may be kept outside Hong Kong, but accounts and returns sufficient to disclose the financial position must be sent to and kept in Hong Kong.
• Draft the financial statements in the format required by Schedule 4 of the Companies Ordinance. The directors’ report must accompany the statements.
• Assemble the audit pack , the documents the auditor will request.

Hong Kong Audit Preparation Documents

The auditor issues a prepared-by-client (PBC) list. This is the set of Hong Kong audit preparation documents you must supply. A typical PBC list includes the trial balance and general ledger for the financial year. It also covers bank confirmations and bank reconciliation statements for all accounts, accounts receivable and payable ageing schedules, a fixed asset register with depreciation calculations, inventory listing and valuation working papers, revenue and cost of sales breakdowns, directors’ loan account schedules, related party transaction disclosures, minutes of board meetings and shareholders’ resolutions, and tax computations and correspondence with the Inland Revenue Department.

The auditor may also request supporting invoices, contracts, and correspondence for material transactions. Organise these documents in a logical order before the audit begins.

Hong Kong Statutory Audit Requirements

The statutory audit must comply with Hong Kong Standards on Auditing issued by the HKICPA. The key Hong Kong statutory audit requirements:

• The auditor must be independent of the company and hold a practising certificate.
• The audit must cover the financial statements as a whole, including the directors’ report.
• The auditor’s report must state whether the financial statements give a true and fair view and comply with the Companies Ordinance.
• The directors must lay the audited financial statements before the members, or send them to members where the annual general meeting is dispensed with.

A first-time audit may involve additional procedures to verify opening balances and the consistency of accounting policies.

Choosing Your Auditor and the Audit Pack

Selecting the right practice unit is critical. The auditor must be a certified public accountant registered with the HKICPA. For a first audit, consider a practice unit that understands SME-FRS and the reporting exemption. Once engaged, the auditor provides a detailed audit pack. The audit pack includes a request for the trial balance and supporting schedules, a confirmation of the accounting framework used (HKFRS, HKFRS for Private Entities, or SME-FRF and SME-FRS), a request for the directors’ report draft, and a request for the management representation letter. The auditor will also confirm the audit timeline and the expected date for the auditor’s report.

Financial Statements and the Directors’ Report

The financial statements must follow the format in Schedule 4 of the Companies Ordinance. They include a statement of comprehensive income, a statement of financial position, a statement of changes in equity, a statement of cash flows (if required by the framework), and notes to the financial statements.

The directors’ report must contain a fair review of the business, a description of principal risks, and details of directors’ interests. For a first audit, the auditor reviews the directors’ report for consistency with the financial statements.

Reporting Exemption and Section 359

A company that qualifies under section 359 of the Companies Ordinance may prepare financial statements under the reporting exemption. Reporting-exempt companies apply the SME Financial Reporting Framework and Standard (SME-FRF and SME-FRS) rather than full HKFRS. Disclosure requirements are reduced. The exemption does not remove the audit requirement. To use the reporting exemption, the company must meet the size criteria set out in section 359. The auditor confirms eligibility during the planning stage.

The Auditor’s Report and What to Expect

At the conclusion of the audit, the auditor issues an auditor’s report. The report may be unmodified , a clean opinion , or modified. A modified opinion arises if the auditor identifies material misstatements or cannot obtain sufficient evidence. It takes one of three forms: qualified, adverse, or disclaimer. The auditor discusses any issues early to allow corrections. The auditor also assesses going concern. If there is material uncertainty, the auditor includes an emphasis of matter paragraph.

After the Audit

Once the auditor signs the report, the directors must file the audited financial statements with the Companies Registry as part of the annual return (Form NAR1). The financial statements must be delivered within the prescribed period after the accounting reference date. The directors must also ensure the accounting records are retained for seven years.

A first statutory audit is a learning process. Work closely with your practice unit, complete the audit efficiently, and meet all Hong Kong statutory audit requirements.