Hong Kong Annual Audit Requirement: Who Must Audit and the SME Reporting Exemption
Every Hong Kong company must undergo an annual audit by a HKICPA-certified accountant unless it qualifies for the section 359 SME reporting exemption.
Understanding the Hong Kong Annual Audit Requirement
Every company incorporated under the Companies Ordinance (Cap. 622) must have its financial statements audited each financial year by a practising certified public accountant holding a valid practising certificate issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). This obligation applies unless the company qualifies for a specific exemption. It holds regardless of whether the company has traded, made a profit, or had any turnover during the period.
Hong Kong Annual Audit Requirement for Private Companies
Every Hong Kong incorporated company, including private companies limited by shares, must appoint an auditor and have audited financial statements prepared and filed with the Inland Revenue Department as part of the annual tax return. The audit must be completed within the timeframe set out in the company's articles of association, typically within six months of the financial year end.
A company that fails to appoint an auditor or to have its accounts audited may face penalties under Cap. 622. The auditor must be independent of the company and must hold a practising certificate under the HKICPA's Professional Accountants Ordinance (Cap. 50).
Hong Kong Statutory Audit Private Company
A private company is not exempt from audit simply because it is small or has no business activity. The term "hong kong statutory audit private company" refers to the legal duty imposed on all private companies under Cap. 622 section 406 to have their financial statements audited. The audit must be conducted in accordance with Hong Kong Standards on Auditing (HKSA), which the HKICPA issues. The auditor's report must state whether the financial statements give a true and fair view of the company's affairs and comply with the applicable financial reporting framework. For most private companies, that framework is either Hong Kong Financial Reporting Standards (HKFRS) or, where the company qualifies, the SME-FRF and SME-FRS.
Small Private Company and the Section 359 Reporting Exemption Hong Kong
The section 359 reporting exemption hong kong provides relief for qualifying small private companies. Under section 359 of the Companies Ordinance (Cap. 622), a company may prepare simplified financial statements using the Small and Medium-sized Entity Financial Reporting Framework (SME-FRF) and the Small and Medium-sized Entity Financial Reporting Standard (SME-FRS), rather than full HKFRS.
To qualify, a company must meet two of three criteria in both the current and the preceding financial year:
- Total revenue not exceeding HK$100 million
- Total assets not exceeding HK$100 million
- Average number of employees not exceeding 100
A company that qualifies for the section 359 exemption may also prepare directors' reports and financial statements in a shorter form. The company is still required to have those statements audited unless it meets the dormant company exemption. The exemption under section 359 is a reporting exemption, not an audit exemption.
SME FRF Hong Kong Audit Exemption
The term sme frs hong kong audit exemption is sometimes misunderstood. The SME-FRF and SME-FRS framework reduces the disclosure burden for qualifying companies. It does not remove the audit requirement. A company that uses SME-FRF and SME-FRS must still engage a practising certified public accountant with a valid HKICPA practising certificate to audit the financial statements. The audit itself will be tailored to the simpler framework, but the auditor must still form an opinion on whether the financial statements are properly prepared in accordance with SME-FRS. The exemption from audit is a separate matter, governed by the dormant company provisions of Cap. 622.
Section 359 Reporting Exemption Hong Kong
Section 359 of Cap. 622 is the statutory basis for the simplified reporting regime. A company that meets the size criteria may pass a resolution to adopt the SME-FRF and SME-FRS. Once adopted, the company must prepare its financial statements in accordance with those standards. The financial statements must include a statement that the company is entitled to the reporting exemption under section 359.
The exemption applies only to private companies. Public companies, companies limited by guarantee, and companies that are subsidiaries of a publicly listed entity cannot use the exemption. A company that ceases to qualify must revert to full HKFRS in the following financial year.
HKICPA Practising Certificate Audit
Every auditor of a Hong Kong company must hold a practising certificate issued by the HKICPA. The term hkicpa practising certificate audit refers to the legal requirement that the person conducting the audit be registered as a certified public accountant (practising) under the Professional Accountants Ordinance. Without that certificate, the audit is invalid. The financial statements cannot be accepted by the Companies Registry or the Inland Revenue Department.
The HKICPA maintains a public register of practising certificate holders. Verify the auditor's status before appointment. An auditor who ceases to hold a practising certificate must resign, and the company must appoint a replacement within 21 days. The auditor resignation process is set out in Cap. 622 section 414.
Supporting Vocabulary in Context
- Audit - the examination of financial statements by an independent professional
- Practising certified public accountant - the person licensed to conduct audits in Hong Kong
- HKICPA - the statutory body that regulates the accounting profession
- Practising certificate - the licence required to carry out statutory audits
- Financial statements - the accounts prepared under either HKFRS or SME-FRS
- Section 359 - the relevant section of Cap. 622 for the reporting exemption
- Reporting exemption - the simpler framework available to qualifying small companies
- SME-FRF and SME-FRS - the simplified standards for small and medium-sized entities
- Small private company - a company that meets the section 359 size criteria
- Cap. 622 - the Companies Ordinance
- Accounting records - the underlying books and records that support the financial statements
- Auditor resignation - the procedure when an auditor ceases to act
- Audit pack - the set of information and documentation the auditor requires
- Common audit adjustments - typical corrections auditors identify during the audit
- Going concern - the assumption that the company will continue to operate for the foreseeable future
Summary of Key Deadlines and Requirements
| Requirement | Detail |
|---|---|
| Audit required for | All Hong Kong incorporated companies unless dormant |
| Auditor qualification | Must hold HKICPA practising certificate |
| Reporting exemption | Section 359 for small private companies meeting size criteria |
| Exemption from audit | Only available for dormant companies |
| SME-FRF/SME-FRS | Available to companies meeting section 359 thresholds |
Where to Verify
For the full legislative text and guidance, refer to the Companies Registry at https://www.cr.gov.hk/en/home/index.htm. The HKICPA's website provides the practising certificate register and detailed guidance on the audit requirements for private companies under Cap. 622.
Sources
More on ongoing compliance.