Statutory Audit in Hong Kong: Why Every Company Needs One
In brief
•Every company incorporated in Hong Kong must have its financial statements audited each year by an independent certified public accountant — regardless of size. This guide explains who must be audited, who can act as your auditor, how the audit process works, and the consequences of non-compliance under the Companies Ordinance (Cap. 622).
Statutory Audit in Hong Kong
A statutory audit is an independent examination of a company's financial statements, carried out so the auditor can express an opinion on whether they give a true and fair view of the company's financial position and performance. In Hong Kong it is not optional: under section 405 of the Companies Ordinance (Cap. 622), the financial statements of every company incorporated in Hong Kong must be audited every year. Unlike many jurisdictions, Hong Kong grants no exemption based on company size — a small family business and a large corporation are equally required to be audited. The audit must be performed by a practising certified public accountant, and the resulting audited accounts underpin the company's profits tax filing, its banking relationships, and the confidence of investors and regulators.
What Is a Statutory Audit?
Who Must Be Audited
Every Company, Regardless of Size
All companies incorporated in Hong Kong must have their annual financial statements audited (section 405). There is no audit exemption based on turnover, total assets, or number of employees. Whether the company is a one-person private company or a large group, the obligation is the same: prepare financial statements and have them audited for each financial year.
The Only Exception: Dormant Companies
The single exception is a company that has been formally declared dormant under section 5 of the Companies Ordinance, meaning it has had no significant accounting transactions during the financial year. A dormant company is relieved from preparing audited financial statements (section 447) for as long as the dormancy lasts. Simply being inactive is not enough; the company must pass the formal dormancy resolution and make the required filing.
The Reporting Exemption Is Not an Audit Exemption
Small private companies and small guarantee companies can qualify for the reporting exemption, which allows simplified financial statements. A small private company qualifies if it meets at least two of three tests: annual revenue not exceeding HK$100 million, total assets not exceeding HK$100 million, and no more than 100 employees. A small guarantee company qualifies if its annual revenue does not exceed HK$25 million. Crucially, the reporting exemption only reduces disclosure requirements (for example, it removes the need for a business review and certain director disclosures). It does not remove the requirement to be audited: an exempt company must still produce audited financial statements.
Who Can Act as Your Auditor
A statutory audit in Hong Kong can only be signed off by a qualified, independent professional. Your auditor must:
•Hold a valid practising certificate issued by the Hong Kong Institute of Certified Public Accountants (HKICPA).
•Be registered with the Accounting and Financial Reporting Council (AFRC), Hong Kong's independent audit regulator.
•Be independent of the company: the auditor cannot be a director or employee of the company, or otherwise hold a conflict of interest that compromises objectivity.
The Audit Process and Timeline
1. Appointing the Auditor
The directors, or the members at a general meeting, appoint the auditor (section 412). For a newly incorporated company, the first auditor is usually appointed by the directors before the first annual general meeting. The auditor is then reappointed each year unless replaced.
2. The Audit Fieldwork
The auditor plans the audit, assesses risk, and gathers evidence, examining accounting records, bank confirmations, invoices, contracts, and supporting schedules, and testing balances and transactions. The company provides a trial balance, the general ledger, and supporting documentation. Good record-keeping makes this stage faster and cheaper.
3. The Auditor's Report
The auditor issues a report stating whether the financial statements give a true and fair view in accordance with the applicable financial reporting standards (HKFRS or the SME Financial Reporting Standard). Most companies receive an unmodified, or clean, opinion. Where the auditor cannot agree, the report may be modified: qualified, adverse, or a disclaimer of opinion.
4. Laying Before Members and Filing
The audited financial statements, together with the directors' report and the auditor's report, are laid before the members at the annual general meeting (section 388). The audited accounts also support the company's annual Profits Tax Return to the Inland Revenue Department, as Hong Kong companies are generally required to submit audited financial statements with the return.
What Happens If You Do Not Audit
Skipping the statutory audit is not a minor administrative lapse; it exposes the company and its directors to several layers of risk.
Offences and Penalties
Failing to prepare audited financial statements is an offence under the Companies Ordinance (sections 659 to 663). The company and every responsible person, including its directors, can be held liable, facing fines and, for certain breaches, the possibility of further sanctions.
Problems with the Inland Revenue Department
Hong Kong companies are generally required to file audited financial statements with their Profits Tax Return. Without an audit, the company cannot file properly; the Inland Revenue Department may raise estimated assessments, impose penalties, and scrutinise the company more closely.
Banking, Funding, and Trust
Banks, investors, government tender boards, and business counterparties routinely ask for audited accounts. A company that cannot produce them may struggle to open or keep bank accounts, raise finance, or win business, and its directors' credibility suffers.
Conclusion
A statutory audit is a baseline legal obligation for every Hong Kong company, not a discretionary extra. Regardless of size, your company must prepare financial statements and have them audited each year by an independent HKICPA-practising CPA; only a formally dormant company is exempt, and the reporting exemption simplifies disclosures without removing the audit. Beyond compliance, audited accounts are what the Inland Revenue Department, your bank, and your investors rely on. The practical takeaway is to keep clean, complete accounting records throughout the year and engage your auditor early, which makes the audit faster, cheaper, and far less stressful.
Frequently Asked Questions
Yes. Hong Kong has no size-based audit exemption, so even a very small or barely active company must have its financial statements audited. The only way to be relieved of the audit is to formally declare the company dormant under section 5 of the Companies Ordinance, which requires it to have no significant accounting transactions and to pass the proper resolution and filing.
No. The reporting exemption only simplifies the disclosures in your financial statements, for example by removing the business review and some director-related disclosures. It does not remove the requirement to be audited. A company entitled to the reporting exemption still needs audited financial statements every year.
Only a practising certified public accountant who holds a valid HKICPA practising certificate and is registered with the Accounting and Financial Reporting Council (AFRC) may act as auditor. The auditor must also be independent: they cannot be a director or employee of your company or hold a conflicting interest.
It depends on the size and tidiness of your records, but a straightforward first audit for an SME often takes a few weeks once complete records are provided. First audits can take longer because the auditor must also verify opening balances. Well-organised records, such as a clean trial balance, bank confirmations, and supporting schedules, are the biggest factor in a fast, cost-effective audit.
No, they are separate but connected. The audit produces audited financial statements under the Companies Ordinance; the Profits Tax Return is filed with the Inland Revenue Department under the Inland Revenue Ordinance. In Hong Kong the two are linked: companies generally must submit their audited financial statements together with the Profits Tax Return, so the audit normally comes first.
This material has been prepared for general informational purposes only and is not intended to be relied upon as professional advice. Please consult a qualified professional for advice specific to your situation. For personalised assistance, please contact Olive & Vine.
