Hong Kong Audit: Process, Timeline and What Drives Cost

At a glance

Actual time and fees depend on company size, industry and the state of the records, and are set by each auditor case by case.

The five stages: what actually happens

① Closing the books. Posting the year’s transactions in full, reconciling the bank, calculating depreciation and accruals, confirming inventory and intercompany balances. This stage is not done by the auditor — it is done by you or your bookkeeper.

② Engagement. Agreeing the scope and signing the engagement letter. A first engagement or changing auditor adds a few steps.

③ Information requests and confirmations. The auditor requests documents and sends confirmations to banks and major customers or suppliers. Bank confirmations depend on a reply, which is outside your control and the auditor’s — allow several weeks in practice.

④ Substantive testing. Sampling, testing, analysis. Questions come back to you. How fast this stage goes depends largely on how fast you answer.

⑤ Finalisation. A draft is issued, you and the directors review it, adjustments are confirmed, the management representation letter is signed, the directors sign the financial statements, and the auditor issues the report.

Which stage blows up most often?

① and ③.

Stage ① blows up because plenty of companies only start sorting a year’s documents after the year end. That is not a slow audit — that is the bookkeeping not having started.

Stage ③ blows up because confirmations depend on external replies. And if your bank details are incomplete or the contact is wrong, the confirmation cannot even be sent.

Stage ④ is rarely the bottleneck — unless the auditor’s questions go unanswered.

Why do fees vary so much?

Two companies of the same size can be quoted several times apart. The main reason is not that one firm is more expensive. It is how complete what you hand over is.

An auditor’s work splits into two kinds:

• Auditing — you have a complete set of books and they verify it. The time is estimable.
• Tidying up — you hand over a bag of receipts and they have to categorise, reconcile and chase. The time is not estimable.

The second is inevitably more expensive, and stays more expensive, because it repeats every year.

To bring the fee down, the effective move is not shopping around. It is handing over a complete set of books. How to prepare: what to prepare for your accountant.

When should you start? Work backwards

Work back from the deadline, not forward from today.

Take a 31 December year end, code D (the filing deadline generally extends to mid-August the following year):

• Mid-August — the filing deadline
• By end of July — the audit report issued and signed by the directors
• June — the auditor’s substantive testing
• May — handing over records, sending confirmations
• April or earlier — the books have to be complete

Which means your real start date is about three months after the year end, not a month before the return is due.

And if you keep the books monthly, stage ① is essentially close to done by the year end — and the whole timeline relaxes.

What should you watch on a first audit?

A new company’s first financial statements may cover more than 12 months (from incorporation to the first year end), so there is more work than in later years.

Also prepare:

• Every bank record since the business commenced
• Incorporation documents, the articles of association
• Share issue records
• Director and shareholder particulars

Get the first one right and every year afterwards simply continues from it; get it wrong and you are dealing with carried-forward problems annually.

Three things that genuinely shorten it

1. Start wrapping up a month before the year end. Chase customers to pay, confirm income not yet invoiced, clear the director’s current account.

2. Count the inventory on the year-end date. It cannot be recreated afterwards.

3. Nominate one person to answer the auditor. Answering within a day versus within a week can change the total by a month.

An audit is not “hand it over and forget it”

Plenty of owners assume that handing over the records means waiting for the report. In fact stages ③ to ⑤ all need you — answering questions, confirming figures, signing documents.

Prepared well, the whole thing runs smoothly; prepared badly, it becomes a months-long back-and-forth, and the filing deadline does not wait.

We provide company secretary and accounting services, completing the books, getting the records in order — the statutory audit is performed by a practising CPA; our job is to make their work fast and smooth.

Want someone to lay out the whole timeline for you? Talk to us, or get started.

This article is general information and does not constitute audit or accounting advice. A statutory audit must be performed by a Hong Kong practising CPA; the actual time, fees and procedures are set by each auditor according to the company’s circumstances.