Hong Kong Audit Requirements: Who Needs One, and What Drives the Cost

At a glance

Eligibility, the scope of exemptions and penalties are governed by the Companies Ordinance, the Inland Revenue Ordinance and the relevant regulators’ latest published guidance.

”My company didn’t trade. Do I still need an audit?”

Yes.

This is the most common question and the one most often answered wrongly. As long as the company sits on the Companies Registry, it must keep accounting records, be audited and file a tax return — trading or not.

The one exception is dormant status. This is a formal status under the Companies Ordinance: it requires a special resolution passed by the members and delivered to the Companies Registry within 15 days, and it is only available where the company has no accounting transactions at all for the period. Once the status is in place, the obligations to keep accounting records and to be audited fall away.

Be clear about what that means, though: dormant status is something you apply for. It does not arrive automatically because business is quiet. See putting a company on ice.

”My company is tiny. Can I be exempted?”

No. Hong Kong has no size-based audit exemption.

The confusion almost always comes from mistaking the reporting exemption for an audit exemption. The s.359 reporting exemption lets a qualifying small private company prepare its financial statements in a simplified form and apply the SME Financial Reporting Standard — but the audit still happens. On the difference and the qualifying thresholds, see can a small company skip the audit.

How does the process run, and how long does it take?

Roughly five stages: close the books → engage the auditor → provide records and confirmations → substantive testing → finalise and issue the report.

The bottleneck is almost never the auditor working slowly. It is when your books are ready. Work the timetable backwards from your filing deadline rather than forwards from year end.

What drives the fee?

Four factors, and the second one dominates:

1. Transaction volume. Number of bank accounts, number of transactions a month.

2. How tidy the books are. This is the big variable. Hand over a complete set of accounts and the auditor is auditing; hand over a bag of receipts and the auditor first has to build the accounts. The second is inevitably more expensive — and it repeats every year. On what to hand over, and on the extra items an auditor asks for (bank confirmations, stocktake records, the representation letter), see what to prepare for your accountant and what auditors ask for.

3. Complexity. Multiple currencies, inventory, related-party transactions and offshore claims all add work.

4. When you engage. Peak months after common year-end dates are busy, and pricing reflects that.

Our audit coordination service is tiered by annual turnover, starting in the low thousands and varying with the factors above; the statutory audit itself is performed by a practising CPA. For an accurate quote, talk to us.

What do you need to prepare?

Eight categories: bank, income, expenses, payroll, fixed assets, inventory, intercompany balances, and company documents.

Auditors will also request things you might not expect — bank confirmations, stocktake records, and a management representation letter.

One item cannot be recovered after the fact: inventory must be counted on the year-end date itself. Miss it and the auditor has no way to verify quantities.

What kinds of audit opinion are there?

A qualified opinion does not mean you did something wrong, but it does affect bank lending and valuation. On the categories, the common reasons and how to get one removed the following year, see what a qualified audit opinion means. And if you are thinking of changing firm, the procedure and deadlines are in how to change auditor.

What happens if you skip it?

1. You cannot file. The profits tax return must be submitted with audited financial statements. No audit, no filing.

2. Estimated assessment. The Inland Revenue Department can assess tax on its own estimate of your profits — and that estimate will not include the deductions you were entitled to, or your brought-forward losses.

3. Penalties and additional tax.

4. Director exposure. This is not only the company’s problem; directors can be pursued personally — see a director’s personal liability.

How should you choose an auditor?

Four things, in order of importance:

1. They must be a practising CPA. This is a legal requirement, not a preference.

2. Sector experience. An auditor who knows your industry asks sharper questions and wastes less of your time.

3. Transparent pricing. Ask what the quote covers and what triggers an additional fee.

4. Responsiveness. You will be asked a lot of questions during fieldwork. A slow counterpart stretches the whole timetable.

The one thing that actually matters

Roughly eighty per cent of your audit fee and timeline is decided by how complete the books are when you hand them over.

For a company that keeps its books monthly, the year-end audit is handing over work already done. For a company that does it once a year, year end is when the reconstruction begins — and that is the expensive version, every year.

We handle bookkeeping and company secretarial work: closing your books, getting the records in order and dealing with the auditor’s requests. The statutory audit itself is performed by a practising CPA.

Get started, or talk to us first.

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; audit requirements, exemptions and penalties are governed by the Companies Ordinance, the Inland Revenue Ordinance and the relevant regulators’ latest published guidance.