1. Book-keeping (Keeping of Books of Accounts) Requirements
In accordance with the requirements of Section 121 of the Hong Kong Companies Ordinance, every company shall cause to be kept proper books of account with respect to-
(1) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place;
(2) all sales and purchases of goods by the company;
(3) the assets and liabilities of the company.
For the purposes of the above requirements, proper books of account shall not be deemed to be kept with respect to the matters aforesaid if there are not kept such books as are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions.
The books of account shall be kept at the registered office of the company or at such other place as the directors think fit, and shall at all times be open to inspection by the directors: Provided that if books of account are kept at a place outside Hong Kong there shall be sent to, and kept at a place in, Hong Kong and be at all times open to inspection by the directors such accounts and returns with respect to the business dealt with in the books of account so kept as will disclose with reasonable accuracy the financial position of that business at intervals not exceeding 6 months and will enable to be prepared in accordance with this Ordinance the company’s balance sheet, its profit and loss account or income and expenditure account, and any document annexed to any of those documents giving information which is required by this Ordinance and is thereby allowed to be so given.
In addition, any books of account which a company is required by this section to keep shall be preserved by it for 7 years from the end of the financial year to which the last entry made or matter recorded therein relates.
2. Audit of Financial Statements (Preparation of Audited Financial Statements)
(1) Requirement of Audit of Financial Statements
Statutory reports are required annually for companies incorporated in Hong Kong. The reports must contain audited financial statements for the current year, with corresponding amounts for the preceding year, including a balance sheet, profit and loss account, and a cash flow statement. Audited financial statements must be signed off by a certified public accountant.
(2) What are Audited Financial Statements
As part of the financial accountability that most entities provide to investors, board members, and constituents, the use of audited financial statements are common. Essentially, audited financial statements are simply the accounting documents that are prepared by a Certified Public Accountant on behalf of a business or non-profit organization. Here are some basic facts about audited financial statements, and how they are used.
The source documents for the audited financial statements are usually provided by the organization wishing to have an auditor prepare a financial statement. This will often include a wide range of financial documents, such as Accounts Payable and Receivable information, expense reports, budgets, and any other type of financial record that the organization has in its possession. The purpose of the accountant is to take these various financial statements, evaluate and cross-reference them, and provide a professionally prepared audited financial statement that the organization can then present to interested parties.
Audited financial statements usually include a document that is referred to as an opinion. It is the responsibility of the accountant to provide either an unqualified opinion or a qualified opinion. An unqualified opinion basically states that in reviewing the documents submitted by the organization, the accountant is in agreement with the methods used to prepare those documents. In effect, the accountant is stating that the audit is accurate and complete.
By rendering a qualified opinion, the accountant indicates that he or she is not in agreement with the methods used to prepare the supporting financial documents. This does not necessarily mean that the accountant thinks something unethical is happening. It could, however, mean that the accountant found instances where expenses should have been assigned to a different category, or there were some errors found in line items, such as transposed digits.
Once in a great while, an accountant does not feel free to render an opinion. This may mean that the records supplied were insufficient to prepare proper audited financial statements, or that there were a few issues that would have to be addressed before the accountant would be able to evaluate the accuracy of the information provided. Generally, when an accountant declines to issue an opinion, there is a need for an organization to retool their internal accounting procedures, so they can operate according to the usual and proper accounting standards.
Audited financial statements are often prepared on an annual basis and are presented to persons or groups who have an ongoing interest in the organization. For businesses, the audited financial statements are often made available to investors (shareholders), upper level management, and the Board of Directors. Non-profit organizations may choose to share the audited financial statements with members, the operating staff, key departmental managers, and other the members of whatever governing body exists within the organization.
(3) Financial Reports Used to Prepare Audited Financial Statements
Audited financial statements, which have been prepared by an independent Certified Public Accountant (CPA) on behalf of a business or non-profit organization, are used to provide financial accountability and accuracy to a company’s stakeholders and people with a vested interest in the company. In order for an accountant to properly prepare an audited financial statement, the CPA needs certain financial reports from the company. The company needs to provide their income statement, balance sheet, and statement of cash flows along with financial documentation to support these reports.
A company’s income statement can also be called the P&L (Profit and Loss) and Statement of Operations. The income statement demonstrates how revenue earned (the top line) from the sales of products and services before expenses are taken out is transformed into the net income (bottom line), the result after revenue and expenses are accounted for. The income statement documents whether the company made a profit or not during a reported period.
The balance sheet, also called statement of financial position, is a summary of a company’s balances as of a specific date, usually the last day of the fiscal year. The balance sheet is composed of three parts: assets, liabilities, and ownership equity or net worth, with assets in one section and liabilities and net worth in the other, with the two sections balancing. The difference between assets and liabilities is a company’s net worth or equity. A company’s assets also equal their liabilities plus owner’s equity, which will show how the assets were financed, either by borrowing money (liability) or using the owner’s money (owner equity).
The statement of cash flows shows how changes in the balance sheet and income statement affect cash and cash equivalents. It also demonstrates operating, investing, and financing activities. The statement of cash flows helps investors and management determine the short-term viability of a company, specifically their ability to cover expenses.
The CPA examines these three financial statements and their supporting documentation provided by the company and assesses the overall accounting principles used. From this information the CPA creates an audited financial statement which will include an opinion, either qualified or unqualified, about the nature of the financial documents.
An unqualified opinion in an audited financial statement indicates that the CPA is in agreement with the methods used by the company to prepare their financial documents. The audit is found to be accurate, complete and fairly presented to meet the requirements of the GAAP (Generally Accepted Accounting Principles). The audit provides the CPA a reasonable basis for their opinion that the financial statements are free of material misstatements or false/missing information.
A qualified opinion indicates that the CPA is not in agreement with aspects of the financial statements and/or methods used to prepare their financial documents. A qualified opinion indicates that the CPA is not confident that the financial statements are correct or accurate.
Occasionally an opinion will not be given within an audited financial statement. This could be due to the fact that there were insignificant documents available to properly prepare the audit, or there were issues that need to be addressed before evaluating the accuracy of the financial documents. A lack of opinion usually indicates that a company needs to improve their accounting practices so they can meet the requirements of the Hong Kong GAAP (Generally Accepted Accounting Principles) of the specific jurisdiction where the business is incorporated or registered.
3. Accounting Documents Required for Book-keeping and Audit of Financial Statements
For the purpose of ensuring that the books of accounts of a Hong Kong company could be updated regularly and that the resultant financial statements present fairly the financial position of the company, the management of a company should ensure that all accounting documents should be gathered and kept properly. A list of those accounting documents which should be kept is shown in Hong Kong Company Maintenance and Compliance Guide (11) – Keeping Proper Business Records.