Can a small company skip the audit in Hong Kong

A Small Company Cannot Fully Skip the Audit in Hong Kong

The Hong Kong Companies Ordinance (Cap. 622) requires every incorporated company to have its financial statements audited annually, regardless of size. A small company cannot skip audit in Hong Kong. The audit requirement is universal for all companies, including small and medium-sized enterprises. Qualifying companies may use a reduced financial reporting framework that simplifies the disclosure burden, but the statutory audit itself remains mandatory.

Audit Exemption Small Company HK

There is no audit exemption for small companies in Hong Kong. The legislation provides no turnover, asset or employee threshold that removes the audit requirement. Every company must appoint a practising certified public accountant registered with the Hong Kong Institute of Certified Public Accountants to conduct the statutory audit and issue an auditor's report. The audit is not required only where the company has declared itself dormant under the Companies Ordinance and has no significant accounting transactions, or where the company is a registered non-Hong Kong company that is not trading in Hong Kong.

Hong Kong Small Company Audit

The annual audit requirement applies to every Hong Kong incorporated company, from a single-person company to a large group. Directors must lay audited financial statements before the members or send them to members where the annual general meeting is dispensed with. The audit must cover the financial statements prepared under the applicable accounting framework and must confirm whether the statements give a true and fair view and comply with the Companies Ordinance.

SME Audit Requirement Hong Kong

Small and medium-sized enterprises face the same statutory audit requirement as larger companies. The Companies Ordinance does not distinguish by company size for the audit obligation. SMEs that qualify for the reporting exemption under section 359 of the Companies Ordinance may prepare their financial statements using the SME Financial Reporting Framework and SME-FRS rather than full Hong Kong Financial Reporting Standards. This reduces the volume of disclosure notes in the financial statements but does not remove the need for an auditor to examine those statements and produce a statutory audit report.

Section 359 Audit Exemption

Section 359 of the Companies Ordinance provides a reporting exemption for qualifying companies. A company qualifies if it meets two of the following three conditions in a financial year: total revenue of not more than HK$100 million, total assets of not more than HK$100 million, and no more than 100 employees. The exemption allows the company to apply the SME-FRF and SME-FRS instead of full HKFRS, and the disclosure requirements in the financial statements are significantly reduced. The exemption relates to the financial reporting framework only. It does not exempt the company from the statutory audit requirement. Directors must still prepare audited financial statements, file them with the Companies Registry on the annual return, and submit them with the profits tax return to the Inland Revenue Department.

What the Reporting Exemption Actually Covers

A company that qualifies under section 359 and elects to apply the reporting exemption will prepare financial statements with reduced disclosure requirements compared to full HKFRS. The SME-FRF and SME-FRS require fewer notes on financial instruments, related party transactions and segment reporting. This can reduce the cost and time involved in preparing the financial statements. The company must disclose in the notes that it has applied the reporting exemption.

The Audit Requirement Remains

The distinction between the reporting exemption and the audit requirement is fundamental to understanding Hong Kong compliance. The reporting exemption under section 359 addresses the financial reporting framework and disclosure requirements. The audit requirement under the Companies Ordinance addresses the independent examination of those financial statements. The HKICPA and the Companies Registry both confirm that a section 359 reporting-exempt company must still engage a practising certified public accountant to perform the statutory audit and issue an auditor's report.

Options for Companies Not Trading

A company that has not commenced business or has ceased trading may consider declaring itself dormant. A dormant company with no significant accounting transactions is exempt from delivering an annual return to the Companies Registry. However, the company must still file the annual return for the year in which it declares dormancy if the declaration is made after the 42-day period for filing the return has passed. The directors must formally resolve the dormancy status and record it in the company's minute book.

Practical Steps for Small Companies

A small company concerned about compliance costs should review its eligibility for the reporting exemption under section 359. If it qualifies, it should notify its auditor and accountant so that the financial statements are prepared under SME-FRF and SME-FRS rather than full HKFRS. The company must still budget for the cost of the statutory audit and ensure that the practising certified public accountant holds a valid practising certificate and is registered with the HKICPA as a practice unit. Directors should maintain adequate accounting records for seven years, as required by section 373 of the Companies Ordinance.