Difference between an audit and a review in Hong Kong

What Is the Difference Between an Audit and a Review

For a Hong Kong company, the fundamental difference is the level of assurance. A statutory audit is a detailed examination of financial statements that gives reasonable assurance to shareholders and the public that the statements present a true and fair view. A review is a less extensive engagement that provides only limited assurance, expressed as a statement that nothing has come to the reviewer's attention to indicate the financial statements are materially misstated. A review does not fulfil the statutory audit requirement under the Companies Ordinance (Cap. 622).

Audit vs Review Hong Kong Company

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 may sign a Hong Kong statutory audit report. The auditor examines evidence, tests internal controls, verifies transactions, and forms an opinion on whether the financial statements comply with HKFRS or, where applicable, SME-FRS. The result is an auditor's report that may be unqualified or, if issues exist, contain a modified opinion or a going concern emphasis.

A review engagement, by contrast, involves inquiry and analytical procedures but not the detailed testing required in an audit. It does not produce an auditor's report and cannot satisfy the statutory audit requirement. Some companies commission a review for internal purposes or to meet a lender's request, but it remains a voluntary engagement.

Statutory Audit vs Review Engagement HK

The statutory audit is mandatory under the Companies Ordinance. Directors must lay audited financial statements before the members each year. A review engagement, sometimes called a review of financial statements, is not a statutory obligation and cannot replace the audit. The HKICPA issues separate standards for review engagements, which are less demanding than auditing standards.

A company that qualifies for the reporting exemption under section 359 may prepare financial statements using the SME-FRF and SME-FRS instead of full HKFRS, reducing disclosure requirements. The reporting exemption does not remove the audit requirement. The company must still engage a practising certified public accountant to perform the statutory audit.

Hong Kong Audit Requirement Review

The audit requirement applies to all Hong Kong companies regardless of size, turnover, or number of shareholders. There is no small company exemption. A private company that has declared itself dormant under the Companies Ordinance is exempt from delivering an annual return and from the audit requirement, provided it has no significant accounting transactions. A dormant company that resumes trading must appoint an auditor and resume the statutory audit.

Failure to appoint an auditor or to have its financial statements audited is a breach of the Companies Ordinance. Directors may be prosecuted and the company may be struck off the register. The auditor's report must be filed with the annual return on Form NAR1, which is due within 42 days after the anniversary of incorporation.