Table of contents
Accounting records the financial data; auditing (an audit) verifies the statements. A Hong Kong limited company must complete both processes every year. Without an audit, you face risks such as tax penalties, criminal liability for directors and bank account freezes.
Key takeaways
- Accounting: recording data and preparing statements
- Auditing: a third party verifies that the statements are true
- A limited company must complete both accounting and auditing every year as required by law; neither can be skipped
- In principle, bookkeeping and auditing must be carried out by different people
Can't tell auditing and accounting apart?
Accounting: the company's financial record-keeper
Accountants organise the company's financial information, including income, expenses, assets and liabilities, such as invoices, receipts and bank transaction records. They consolidate these scattered records into complete financial statements, such as the balance sheet and the profit and loss account, helping management understand clearly the company's cash flow and overall operating position.
Auditing: the inspector of financial statements
The main duty of an audit is to check that the financial statements are true and complete, and to make sure the accounts comply with accounting standards and Hong Kong regulations. Based on the results of the audit, the auditor issues an “auditor's report” with legal effect, giving shareholders, banks and investors confidence in the company's financial position.
Does a Hong Kong company have to do both an audit and accounting?
Under Hong Kong's “Companies Ordinance, the annual financial statements of a limited company must be audited. If only accounting is done without an audit, in the eyes of the Inland Revenue Department and banks the statements are merely an “internal company document”, lacking credibility and legal effect.
4 key differences between accounting and auditing
To help you understand the difference between accounting and auditing more intuitively, we have put together the following comparison table:
| Comparison item | Accounting | Audit / auditing |
| Main function | Recording and organising financial data | Checking and verifying financial statements |
| Frequency | Ongoing: daily, monthly or quarterly | Periodic: usually once a year (aligned with tax filing) |
| Legal basis | Accounting standards | Companies Ordinance, tax rules |
| Output documents | Financial statements | Audit report |
What are the consequences of doing accounting but not an audit?
Tax: profits tax return rejected, or risk of back tax
If a company submits only its tax return without an audit report, the Inland Revenue Department may question the truthfulness of the financial statements and adopt an “estimated assessment”, i.e. calculating the tax payable on estimated profit, which is usually far higher than the company's actual profit.
In addition, late submission of the tax return or the audit report may also carry the risk of a fine of up to three times the amount.
Legal: liability and penalties for breaching the Companies Ordinance
Under the Hong Kong Companies Ordinance, the directors of a limited company have a statutory duty to keep proper accounting records and to present audited financial statements at the annual general meeting each year.
If this requirement is not complied with, the company's directors may face civil penalties and, in serious cases, even criminal liability.
Practical: bank accounts, financing and annual reviews get held up
Under anti-money laundering (AML) and customer due diligence (KYC) regulatory requirements, banks must regularly update customers' financial information.
An audit report is an important document proving that the company is operating normally. If it is not submitted on time, the bank has the right to take risk control measures, including suspending online banking services and even freezing or closing the account.
FAQ
Can the same person do both the bookkeeping and the audit?
In principle, no. To ensure independence and compliance, accounting and auditing should be handled by different professionals.
How often is an audit usually done?
Usually once a year. Some large or listed companies may need half-yearly or quarterly internal audits.
What types of company must be audited?
Every limited company registered under the Companies Ordinance must undergo a statutory audit each year. Unlimited companies (such as sole proprietorships and partnerships) only need to keep books and file tax returns, and generally do not need an audit.
What does an audit report contain?
It usually includes the auditor's report, the balance sheet, the profit and loss account, the statement of changes in equity, the cash flow statement, and the related notes to the accounts.
Can we do the audit in-house?
An internal check of the books is fine, but not one used for tax filing. The law requires the work to be completed, and the documents signed, by a third-party licensed auditor for them to have legal effect.
Want to reduce audit risk and time costs? Talk to SetupHK
Faced with tedious bookkeeping and complex regulatory requirements, the SetupHK team provides professional audit and accounting services, from organising the accounts and reconciling the financial statements to assessing potential tax and banking risks. We check every step to keep your company lawful and compliant, helping you reduce operating risk and save time so you can focus on the company's continued growth.
Further reading: “Must a Hong Kong company be audited? Audit services explained: scope, fees and recommended audit firms”
Further reading: “Hong Kong accounting services guide: services, process, fees and points to note”
