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An audit report is the examination of the financial report of an organisation. As presented in the annual report by an independent of the organisation. The report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.

What is the purpose of an audit report?

The purpose of an audit is as follows:

• To enhance the degree of confidence of intended users towards the financial statements. However, the company is ultimately responsible for the preparation of the company’s financial statements and supporting documents.
• Ensure that the information and documents ultimately submitted to the IRD are accurate, with no internal bias.

In Hong Kong, every company have the obligation to submit the audit report to fulfil requirement of the Companies Ordinance (CO) and the Inland Revenue Ordinance (IRO).

Once an auditor has completed an audit, the auditor will prepare an Audit Report. Then the report needed to be signed by company’s director and the auditor. The Report is important because they form the basis of calculating the tax liabilities of the company and will provide legitimacy towards the company’s business activities.

The IRD will refer to these documents to determine the company’s tax obligations for that financial year of assessment. It is not uncommon that the IRD will raise questions about the audited financial statements and tax computation, however, a well-completed Audit Report with an Unqualified Opinion will have fewer chances of being questioned.

During the audit, it is necessary to work with the auditor closely to provide them with the accounting records and supporting documents in order to complete the Audit Report. Finally, the IRD will only accept the original hard copy of the signed Audit Report from the company directors.

For further information, please contact us.

You may want to read: HOW TO DEAL WITH YOUR FIRST AUDIT IN HONG KONG?

Balance Sheet is a snapshot of your business’s financial condition at a single point in time. It shows what you own (your assets) vs what you owe (your liabilities). The difference between the two is often used as a starting point for valuing a business.

Types of Assets

Current Assets

Current assets have a lifespan of one year or less, meaning they can be converted easily into cash. Such asset classes include cash and cash equivalents, accounts receivable, and inventory.

Non-Current Assets

Non-current assets are assets that are not turned into cash easily and have a lifespan of more than a year. Then, they can refer to tangible assets, such as machinery, computers, buildings, and land. Also, non-current assets can be intangible assets, such as goodwill, patents, or copyrights. While these assets are not physical in nature. However, they are often the resources that can make or break a company—the value of a brand name. For instance, should not be underestimated.

Types of Liabilities

On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term.

Current Liabilities

Current liabilities are the company’s liabilities that will come due, or must be paid, within one year. This includes both shorter-term borrowings, such as accounts payables (AP), which are the bills and obligations that a company owes over the next 12 months

Non-current Liabilities

Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet. For instance, a company may issue bonds that mature in several years’ time.

Shareholders’ Equity

Shareholders’ equity is the initial amount of money invested in a business. If at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the Profit & Loss statement onto the balance sheet and into the shareholder’s equity account.

What can you see in a Balance Sheet?

Balance sheets give an at-a-glance view of the assets and liabilities of the company and how they relate to one another. Furthermore, the balance sheet can help answer questions such as:

• Is the company having a positive net worth?
• whether it has enough cash and short-term assets to cover its obligations
• whether the company is highly indebted relative to its peers.

In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders’ equity on the other side. That is:

Total Assets = Total Liabilities + Shareholders’ Equity

Yet, a balance sheet is just a snapshot of the company’s financial position at a single point in time.

For further information, please contact us.

You may want to read: MANAGING YOUR INVENTORY AND ACCOUNTING WORK

A profit and loss statement is a financial report that shows how much your business has spent and earned over a specified time. It also shows whether you’ve made a profit or a loss over that time – hence the name.

A profit and loss statement might also be called a P&L or an income statement. The statement can cover any period of time, although it’s most commonly prepared at the end of a month, a quarter, or a year.

What is including in a P&L?

A profit and loss statement summarises all the activity recorded in your income and expenses accounts over the specified time. Income typically includes sales while expenses might cover things like payroll, advertising, rent and insurance. Your P&L statement will include all sales, including credit sales that your customers might not have paid yet. It will also include bills for expenses that you have incurred but not paid.

What information you should look for?

Your total profit or loss is what you’ve earned minus what you’ve spent. If this amount is positive, it’s called a net profit. If it’s negative it’s called a net loss.

A P&L statement can also help you calculate profit margins, which show how good the business is at converting revenue into profits.

For further information, please contact us

You may want to read: STEP 4 OF ACCOUNTING PROCESSES IN HK: INCOME STATEMENT AND BALANCE SHEET

Everybody has heard of a management account, many of them may see a few of management accounts in the past. So, what is a management account? Management accounts are financial reports that track various financial figures and metrics, and provide insight into the current financial health of a business. In principle they are similar to Year End accounts but are less formal and are personalised to the user’s requirements.

Why is a Management Account Used?

Management Accounts are used for day-to-day or long-term strategic decision making.

Helping Grow a Business

To grow a business, it needs accurate, quality and up-to-date information.

Better Control Cash Flows

Management accounts provide the latest cash flow information for business owners to quickly identify trends in revenue and costs. This can help a business avoid any identified crisis situations that can be potentially costly.

To Assist with Tax Planning

Accountants often rely on management accounts when predicting a company’s potential tax liabilities. For instance, in Hong Kong, tax representatives will often utilize management accounts to determine whether Hong Kong tax authorities have accurately calculated a company’s profits tax liabilities.

Improve the Audit Process

Auditors will often request for documentation that can support a company’s financial statements and will frequently refer to management accounts. So, properly maintaining management accounts in a routine manner can help identify accounting issues as they arise. Also, allowing businesses to act promptly, rather than trying to correct all errors as they are identified during an audit. Thus, management accounts are the must for the audit checklist.

For further information, please contact us.

You may want to read: Checklist for Accounting and Auditing in Hong Kong

Submitting a year end audit is a company’s obligation. As an entrepreneur in Hong Kong, you have no option to avoid to prepare your audit report. Preparing a report seems to be headache. However, if you plan ahead, then the auditing is an essential tool to help you know better of your company’s financial status.

Documents required for Audit

The following information is required for a Hong Kong Statutory Audit:

• Annual financial statements will include a balance sheet, an income statement, a statement of changes in equity, and a cash flow statement
• All sales/service agreements, employment contracts, tenancy agreements for the assessed period
• All sales invoices, purchase invoices and expenses receipts for the assessed period
• Bank statements
• Complete list of affiliated companies and affiliated persons
• Audited financial statements of subsidiary companies
• Copies of any special licences, if applicable
• Copy of company’s registration documents:
  • Updated Business Registration Certificate
  • Incorporation Certificate
  • Articles of Association
  • Annual Return

Under the Companies Ordinance, a company director is required to prepare a financial year statement that complies with the requirements of the Companies Ordinance. These financial statements must be provided to third-party auditors in the auditing process to form the annual statutory audit reports.

As you can see there are specific requirements for an audit. While there are many things you need to pay attention. In order to well prepare an audit, keeping a complete record is a key.

For further information, please contact us.

You may want to read: Checklist for Accounting and Auditing in Hong Kong

The Ministry of Finance and the State Administration of Taxation announced on 1 Aug 2023, value-added tax (VAT) will be deducted. Thus, the government aimed to support the SME to further develop of business and to lessen the burden of individual. The act is valid till end of 2027.

The announcement is as follows:

Value-added tax on Small Scale SME businesses and Individuals

Monthly sales amount for small businesses under CNY100,000 are exempt from VAT.

Individuals taxable levy VAT rate is reduced from 3% to 1%

For further information, please contact us.

You may want to read: China Taxation System Highlight for Investors from Overseas