Hong Kong Audit Requirement Which Companies Must Be Audited

Hong Kong Audit Requirement Which Companies Must Be Audited

Every Hong Kong incorporated company must have its financial statements audited by a practising certified public accountant registered with the Hong Kong Institute of Certified Public Accountants (HKICPA). The Companies Ordinance (Cap. 622) sets this rule. The hong kong audit requirement which companies must be audited applies regardless of size, turnover or number of shareholders, unless a specific exemption is available. Two exemptions exist: dormant company status and the small company reporting exemption under section 359.

Hong Kong Company Audit Mandatory

Section 405 of the Companies Ordinance (Cap. 622) requires every Hong Kong company's directors to prepare financial statements for each financial year. Those financial statements must be audited unless the company qualifies for an exemption. The auditor must hold a practising certificate issued by the HKICPA and be independent of the company.

The audit covers the company's profit and loss account, balance sheet and any group accounts if the company is a holding company. The auditor produces an independent auditor's report stating whether the financial statements give a true and fair view of the company's affairs. That report, with the financial statements and the directors' report, must be laid before the company's members at the annual general meeting. The deadline is nine months of the financial year-end for a private company. For a public company it is six months.

Failing to appoint an auditor or have its accounts audited is an offence under Cap. 622. Every director is liable to a fine and, for continuing default, a daily fine.

Hong Kong Audit Exemption Small Company

The reporting exemption for small private companies is set out in section 359 of the Companies Ordinance (Cap. 622). A company meeting the qualifying conditions may prepare its financial statements under the Small and Medium-sized Entity Financial Reporting Framework (SME-FRF) and the Small and Medium-sized Entity Financial Reporting Standard (SME-FRS) instead of the full Hong Kong Financial Reporting Standards (HKFRS).

To qualify as a small private company for a financial year, the company must satisfy at least two of these three conditions in that year:

• Total revenue of not more than HK$100 million
• Total assets of not more than HK$100 million
• Not more than 100 employees

A company that is a member of a group must also meet the size test on a group basis. If the group exceeds the thresholds, the exemption is not available.

This exemption does not remove the audit requirement. It only allows the company to use a simpler reporting framework. The financial statements must still be audited by a practising certified public accountant and filed with the Companies Registry together with the annual return.

Hong Kong Private Company Audit Requirement

A private company in Hong Kong is defined under section 11 of Cap. 622 as a company whose articles restrict the right to transfer shares, limit the number of members to 50 and prohibit any invitation to the public to subscribe for shares or debentures. All private companies are subject to the same audit requirement as public companies unless they qualify for an exemption.

The key distinction is that a private company may claim the reporting exemption under section 359 if it meets the size thresholds. A public company, a company limited by guarantee or a company that is a subsidiary of a public company cannot claim that exemption.

The audit requirement for a private company applies from the first financial year after incorporation. The directors must appoint an auditor within nine months of incorporation. The auditor holds office until the next annual general meeting.

Hong Kong Dormant Company Audit Exemption

A dormant company is exempt from the audit requirement under section 363 of the Companies Ordinance (Cap. 622). A company is dormant if it has no significant accounting transaction during the financial year. A significant accounting transaction is one that would be required to be entered in the company's accounting records.

The company must pass a special resolution declaring itself dormant and deliver a copy of that resolution to the Companies Registry. The declaration takes effect from the date of the resolution or from an earlier date specified in the resolution.

A dormant company that is a holding company or a subsidiary of another company cannot claim the exemption unless every company in the group is dormant.

This exemption applies only to the audit requirement. A dormant company must still prepare financial statements and deliver an annual return (Form NAR1) to the Companies Registry. The annual return fee for a dormant company is the same as for an active company. The company must also maintain its significant controllers register and comply with all other obligations under Cap. 622.

If a dormant company resumes trading or has a significant accounting transaction, the exemption ceases from the date of that transaction. The company must then appoint an auditor and have its accounts audited for the financial year in which the transaction occurred.

Consequences of Wrongly Claiming an Exemption

A company that claims an audit exemption without meeting the criteria commits an offence under Cap. 622. The directors are personally liable for the default and may be fined up to HK$300,000 and, for continuing default, a daily fine of HK$2,000.

The Companies Registry may also refuse to accept the annual return if the financial statements are not accompanied by an independent auditor's report. In that case the company is treated as having failed to deliver its annual return and is liable to the higher registration fees for late delivery.

A company that is uncertain whether it qualifies for an exemption should seek professional advice from a practising certified public accountant. The accountant can review the company's financial position and advise on the correct reporting framework.

Directors' Report and Financial Statements

Even where an audit exemption applies, the directors must still prepare a directors' report and financial statements for each financial year. The directors' report must contain a business review, a statement of the directors' interests in contracts and particulars of any significant events affecting the company.

The financial statements must give a true and fair view of the company's financial position and performance. If the company uses the SME-FRF and SME-FRS, the statements must comply with those standards.

The directors must lay the financial statements and the directors' report before the company's members within nine months of the financial year-end for a private company. The members may pass a written resolution to dispense with the annual general meeting. The laying requirement remains.

Summary of Key Points

• Every Hong Kong company must be audited unless it qualifies for an exemption.
• The dormant company exemption applies to companies with no significant accounting transactions.
• The small company reporting exemption under section 359 applies to companies meeting the size thresholds.
• A company that wrongly claims an exemption faces penalties and late filing fees.
• The audit must be carried out by a practising certified public accountant holding a practising certificate from the HKICPA.
• The independent auditor's report must be filed with the Companies Registry together with the annual return.