The rule
Audit of financial statements is required for all companies, including companies falling within the reporting exemption, except dormant companies (section 447)[1]. The directors must prepare financial statements for each financial year, and those statements must be audited (section 405)[1]. There is no turnover threshold below which a company escapes the audit.
What small size changes: the reporting exemption
A small private company can prepare simplified financial statements and directors' reports if it meets two of these three conditions in a financial year[1]:
| Condition | Limit |
|---|---|
| Total revenue | Not exceeding HK$100 million |
| Total assets | Not exceeding HK$100 million |
| Employees | Not exceeding 100 |
A private company that is not a member of a corporate group can also qualify at any size with the written agreement of all its members, and a copy of that agreement is delivered to the Registrar within 15 days[1]. A larger eligible private company meeting two of revenue up to HK$200 million, assets up to HK$200 million and not more than 100 employees qualifies with a resolution of members holding 75% of the voting rights and no member voting against[1].
Within the exemption, the financial statements need not give a true and fair view, the auditor does not give a true and fair view opinion, the directors' report needs no business review, and the statements may follow the HKICPA's Small and Medium-sized Entity Financial Reporting Framework and Standard[1]. The audit itself stays[1].
Who can be the auditor
Only a practice unit, as defined in the Professional Accountants Ordinance (Cap. 50), is eligible for appointment as auditor of a company[2]. An officer or employee of the company, or a partner or employee of such a person, is disqualified[2].
The profits tax return expects it too
For corporations with gross income, the IRD expects audited financial statements with the profits tax return, the exceptions being dormant companies and companies from places whose law does not require an audit[3]. The supporting documents include the statement of financial position, the auditor's report and the profit and loss account, with a tax computation[3].
The dormant exception is narrow
A private company is dormant only once it has delivered to the Registrar a special resolution declaring it[4], and it stops being dormant with its first accounting transaction[4]. A company that has simply stopped trading, without that resolution, is not dormant and still needs the audit.
Keeping a small audit small
- Keep accounting records with daily entries of money received and spent and a record of assets and liabilities, as section 373 requires[2].
- Reconcile every bank account and file invoices and receipts by period, so each entry can be traced.
- Agree the year end timetable and the list of schedules with the auditor before the year closes.
- If you qualify for the reporting exemption on the members' agreement route, deliver the agreement within the 15 days[1].
Rules, forms and figures can change, and the official pages listed below are the authority wherever this summary differs from them.